-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GRiabMXmu93V8QF5ha8lpepkdV9O9EnPTWjRd4tmNLNBdSTfgHf0W/3n51KcB/fh A/Y1R0HVGpdm73T/INOfIg== 0001193125-08-129604.txt : 20080606 0001193125-08-129604.hdr.sgml : 20080606 20080606153706 ACCESSION NUMBER: 0001193125-08-129604 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20080606 DATE AS OF CHANGE: 20080606 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ING VARIABLE PORTFOLIOS INC CENTRAL INDEX KEY: 0001015965 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 333-05173 FILM NUMBER: 08885632 BUSINESS ADDRESS: STREET 1: ING FUNDS SERVICES STREET 2: 7337 E. DOUBLETREE RANCH ROAD CITY: SCOTTSDALE STATE: AZ ZIP: 85258 BUSINESS PHONE: 480-477-3000 MAIL ADDRESS: STREET 1: ING FUNDS SERVICES STREET 2: 7337 E. DOUBLETREE RANCH ROAD CITY: SCOTTSDALE STATE: AZ ZIP: 85258 FORMER COMPANY: FORMER CONFORMED NAME: AETNA VARIABLE PORTFOLIOS INC DATE OF NAME CHANGE: 20020322 FORMER COMPANY: FORMER CONFORMED NAME: ING VARIABLE PORTFOLIOS INC DATE OF NAME CHANGE: 20020320 FORMER COMPANY: FORMER CONFORMED NAME: AETNA VARIABLE PORTFOLIOS INC DATE OF NAME CHANGE: 19960604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ING VARIABLE PORTFOLIOS INC CENTRAL INDEX KEY: 0001015965 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-07651 FILM NUMBER: 08885633 BUSINESS ADDRESS: STREET 1: ING FUNDS SERVICES STREET 2: 7337 E. DOUBLETREE RANCH ROAD CITY: SCOTTSDALE STATE: AZ ZIP: 85258 BUSINESS PHONE: 480-477-3000 MAIL ADDRESS: STREET 1: ING FUNDS SERVICES STREET 2: 7337 E. DOUBLETREE RANCH ROAD CITY: SCOTTSDALE STATE: AZ ZIP: 85258 FORMER COMPANY: FORMER CONFORMED NAME: AETNA VARIABLE PORTFOLIOS INC DATE OF NAME CHANGE: 20020322 FORMER COMPANY: FORMER CONFORMED NAME: ING VARIABLE PORTFOLIOS INC DATE OF NAME CHANGE: 20020320 FORMER COMPANY: FORMER CONFORMED NAME: AETNA VARIABLE PORTFOLIOS INC DATE OF NAME CHANGE: 19960604 0001015965 S000023081 ING Global Equity Option Portfolio C000067263 Service Class S000023082 ING Russell Global Large Cap Index 85% Portfolio C000067264 Adviser Class C000067265 Class I C000067266 Service Class 485APOS 1 d485apos.htm 485APOS FOR ING VARIABLE PORTFOLIOS 485APOS for ING Variable Portfolios

As filed with the Securities and Exchange Commission on June 6, 2008

Securities Act File No. 333-05173

Investment Company Act File No. 811-07651

 

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-1A

 

Registration Statement Under The Securities Act Of 1933    x  
Pre-Effective Amendment No.    ¨  
Post-Effective Amendment No. 41    x  
and/or   
Registration Statement Under The Investment Company Act Of 1940    x  
Amendment No. 42    x  
(Check appropriate box or boxes)   

ING VARIABLE PORTFOLIOS, INC.

(Exact Name of Registrant Specified in Charter)

7337 E. Doubletree Ranch Road

Scottsdale, AZ 85258

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: (800) 992-0180

 

Huey P. Falgout, Jr., Esq

ING Investments, LLC

7337 E. Doubletree Ranch Road

Scottsdale, AZ 85258

(Name and Address of Agent for Service)

  

With copies to:

Philip H. Newman, Esq.

Goodwin Procter, LLP

Exchange Place

53 State Street

Boston, MA 02109

 

 

It is proposed that this filing will become effective (check appropriate box):

 

¨    Immediately upon filing pursuant to paragraph (b)    ¨    On (date) pursuant to paragraph (a)(1)
¨    On (date) pursuant to paragraph (b)    ¨    75 days after filing pursuant to paragraph (a)(2)
¨    60 days after filing pursuant to paragraph (a)(1)   

x    on August 20, 2008, pursuant to paragraph (a)(2) of Rule     485.

If appropriate, check the following box:

 

¨ This post-effective amendment designated a new effective date for a previously filed post-effective amendment.

 

 

 


ING VARIABLE PORTFOLIOS, INC.

Contents of Registration Statement

This Registration Statement consists of the following papers and documents:

 

   

Cover Sheet

 

   

Contents of Registration Statement

 

   

ING Global Equity Option Portfolio Service Class Prospectus dated August 20, 2008

 

 

 

ING RussellTM Global Large Cap Index 85% Portfolio Adviser Class Prospectus dated August 20, 2008

 

 

 

ING RussellTM Global Large Cap Index 85% Portfolio Class I Prospectus dated August 20, 2008

 

 

 

ING RussellTM Global Large Cap Index 85% Portfolio Service Class Prospectus dated August 20, 2008

 

   

ING Global Equity Option Portfolio Statement of Additional Information for Service Class shares dated August 20, 2008

 

 

 

ING RussellTM Global Large Cap Index 85% Portfolio Statement of Additional Information for Adviser Class, Class I, and Service Class shares dated August 20, 2008

 

   

Part C

 

   

Signature Page


Explanatory Note

This Post-Effective Amendment No. 41 to the Registration Statement (“Amendment”) on Form N-1A for ING Variable Portfolios, Inc. (“Registrant”) is being filed under Rule 485(a) under the Securities Act of 1933, as amended, for the purpose of registering two new series to the Registrant – ING Global Equity Option Portfolio and ING RussellTM Global Large Cap Index 85% Portfolio.




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PROSPECTUS

Prospectus

AUGUST 20, 2008

Service Class

ING GLOBAL EQUITY OPTION PORTFOLIO

This Prospectus contains important information about investing in Service Class
shares of ING Global Equity Option Portfolio. You should read it carefully
before you invest and keep it for future reference. Please note that your
investment: is not a bank deposit, is not insured or guaranteed by the Federal
Deposit Insurance Corporation ("FDIC"), the Federal Reserve Board

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or any other government agency, and is affected by market fluctuations. There is
no guarantee that the Fund will achieve its investment objective. As with all
mutual funds, the U.S. Securities and Exchange Commission ("SEC") has not
approved or disapproved these securities nor has the SEC judged whether the
information in this Prospectus is accurate or adequate. Any representation to
the contrary is a criminal offense.
- -------------------------------------------------------------------------------




                                                                  WHAT'S INSIDE
- --------------------------------------------------------------------------------

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       INVESTMENT
       OBJECTIVE
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       PRINCIPAL
       INVESTMENT
       STRATEGIES
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       RISKS

Risk is the potential that your
investment will lose money or
not earn as much as you hope.
All mutual funds have varying
degrees of risk, depending on
the securities in which they
invest. Please read this
Prospectus carefully to be sure
you understand the principal
investment strategies and risks
associated with the Portfolio.
You should consult the
Statement of Additional
Information ("SAI") for a
complete list of the investment
strategies and risks.
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       WHAT YOU
       PAY TO
       INVEST

The Portfolio is intended to be the funding vehicle for variable annuity
contracts and variable life insurance policies ("Variable Contracts") to be
offered by the separate accounts of certain life insurance companies
("Participating Insurance Companies") and qualified pension or retirement plans
("Qualified Plans").

Individual Variable Contract holders are not "shareholders" of the Portfolio.
The Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Variable Contract holders. Shares of the Portfolio are not
offered directly to the general public.
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If you have any questions about the Fund, please call your investment
professional or us at 1-800-992-0180.

These pages contain a description of the Fund included in this Prospectus,
including the Portfolio's investment objective, principal investment strategies
and risks.

You'll also find:

WHAT YOU PAY TO INVEST. A list of the fees and expenses you pay - both directly
and indirectly - when you invest in the Fund.

INTRODUCTION                                   1
ING Global Equity Option Portfolio             3

WHAT YOU PAY TO INVEST                         5
INFORMATION FOR INVESTORS                     11
MANAGEMENT OF THE PORTFOLIO                   14
MORE INFORMATION ABOUT RISKS                  15
DIVIDENDS, DISTRIBUTIONS AND TAXES            20
PERFORMANCE OF THE UNDERLYING FUNDS           21
FINANCIAL HIGHLIGHTS                          23
TO OBTAIN MORE INFORMATION            Back Cover




INTRODUCTION
- --------------------------------------------------------------------------------

AN INTRODUCTION TO THE PORTFOLIO

The Portfolio's investment objective is long-term growth of capital. The
Portfolio seeks to achieve its investment objective by investing in other ING
Funds ("Underlying Funds") and uses asset allocation strategies to determine
how much to invest in the Underlying Funds. In addition, the Portfolio will
write call options on securities. The Portfolio is designed to meet the needs
of investors who wish to seek exposure to various types of global securities
through a single diversified investment.

The Portfolio invests primarily in a combination of the Underlying Funds that,
in turn, invest directly in a wide range of global securities. Although an
investor may achieve the same level of diversification by investing directly in
a variety of the Underlying Funds, the Portfolio provides investors with a
means to simplify their investment decisions by investing in a single
diversified portfolio. For more information about the Underlying Funds, please
see "More Information on Investment Strategies" and "Description of the
Investment Objectives, Main Investments and Risks of the Underlying Funds"
section in this Prospectus.

Although the Portfolio is designed to serve as a diversified investment
portfolio, no single mutual fund can provide an appropriate investment program
for all investors. You should evaluate the Portfolio in the context of your
personal financial situation, investment objectives and other investments.

This Prospectus explains the investment objective, principal investment
strategies and risks of the Portfolio. Reading this Prospectus will help you to
decide whether the Portfolio is the right investment for you. You should keep
this Prospectus for future reference.

AN INTRODUCTION TO OPTION WRITING

The Portfolio will also seek to secure gains and enhance the stability of
returns over a market cycle by writing (selling) call options ("Call Options")
on selected indices and exchange traded funds (each, an "Index" and
collectively, the "Indices"). The performance of each Index that is the subject
of a Call Option is expected to correlate closely with the performance of one or
more Underlying Funds. The Sub-Adviser believes that a strategy of owning
shares of Underlying Funds and writing (selling) Call Options on Indices whose
performance closely correlates with the performance of these Underlying Funds
will provide investors with opportunities to realize reasonable returns with
less price volatility than would otherwise occur without this strategy. The
Sub-Adviser further believes that this strategy is likely to enhance the
Portfolio's returns in down-trending, flat and moderately rising equity markets
but reduce returns in more strongly rising equity markets.

When writing a Call Option, the Portfolio will receive cash (the premium) from
the purchaser of the Call Option and the buyer will receive the right, upon
exercise of the Call Option, to receive from the Portfolio a cash payment
reflecting any appreciation in the value of the Index referenced by the Call
Option above a fixed price (the exercise price) until a specified date in the
future (the option expiration date). Because the performance of the Index is
expected to correlate closely with the performance of one or more Underlying
Funds, the Portfolio will be effectively giving up, during the term of the Call
Option, all or a portion of the benefits it would otherwise realize from a
potential increase in the value of such Underlying Funds. At the same time, the
premium received in connection with the sale of the Call Option will hedge the
risk to the Portfolio of a potential decline in the value of the Underlying
Funds. Thus, writing Call Options will generally cause the Portfolio to
underperform  in periods of rising markets, particularly in periods of strongly
rising markets, and outperform in periods of stable or declining markets
relative, in each instance, to the performance that would otherwise be achieved
in the absence of this strategy.

As noted above, the Portfolio will seek to write Call Options on Indices with
price movements, taken in the aggregate, that are closely correlated with the
price movements of Underlying Funds. To the extent there is a lack of
correlation between the performance of the Indices and the Underlying Funds,
there is a risk that the strategy of writing Call Options will not produce the
intended results or benefits for the Portfolio. For example, if the Portfolio
were to write a Call Option on an Index that is expected to perform during the
term of the Option in accordance with the performance of a particular Underlying
Fund, and if such Index were to increase in price materially more than the value
of such Underlying Fund, then the Portfolio might realize losses upon the
exercise of the Call Option that are not fully offset by the increase in value
of the Underlying Fund.

The Sub-Adviser expects initially to write (sell) Call Options for the Portfolio
primarily with shorter maturities (typically ten days to three months until
expiration) generally at-the-money or near-the-money and in the over-the-counter
markets with major international banks, broker-dealers and financial
institutions. The Sub-Adviser expects the Portfolio to write Call Options
initially that correspond to approximately 50% of the value of the Underlying
Funds held in the Portfolio. Depending on the Portfolio's cash flow
requirements and on the Sub-Adviser's assessment of market conditions, this
percentage may vary, although it is generally expected to be between 40% and 60%
of the value of the Underlying Funds.

1    Introduction




INTRODUCTION
- --------------------------------------------------------------------

AN INTRODUCTION TO THE ASSET ALLOCATION PROCESS

ING Investments, LLC ("ING Investments" or "Adviser") is the investment adviser
of the Portfolio and ING Investment Management Co. ("ING IM" or "Sub-Adviser")
is the sub-adviser. ING Investments and ING IM are indirect, wholly-owned
subsidiaries of ING Groep, N.V. ("ING Groep") (NYSE: ING).

ING Investments and ING IM, working together, have designed the Portfolio that
will be constructed and managed in accordance with the following process:

ING IM uses an asset allocation process to determine the Portfolio's investment
mix. This asset allocation process can be described as follows:

1. In the first stage, the mix of global asset classes that is likely to
   produce the optimal return for the Portfolio is estimated. This estimate is
   made with reference to an investment model that incorporates historical and
   expected returns, standard deviations and correlation coefficients of
   global asset classes as well as other financial variables. The mix of
   global asset classes arrived at for the Fund is called the "Target
   Allocation." ING IM will review the Target Allocation at least annually.

2. ING IM determines the Underlying Funds in which the Portfolio invests to
   attain its Target Allocation. In choosing an Underlying Fund, ING IM
   considers, among other factors, the degree to which the Underlying Fund's
   holdings or other characteristics correspond to the desired Target
   Allocation.

3. ING IM, at any time, may change the Underlying Funds in which the Portfolio
   invests, may add or drop Underlying Funds, and may determine to make
   tactical changes in the Portfolio's Target Allocation depending on market
   conditions.

4. ING Investments supervises the determination of Target Allocation and
   selection of Underlying Funds by ING IM.

ING IM will have authority over the asset allocations, investments in
particular Underlying Funds (including any Underlying Funds organized in the
future) and the Target Allocation for the Portfolio, including determining the
transition pattern of the Portfolio in a timely but reasonable manner based
upon market conditions at the time of allocation changes. The pre-defined mixes
will be reviewed at least annually and analyzed for consistency with current
market conditions and industry trends.

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                          If you have any questions, please call 1-800-992-0180.

                                                               Introduction    2




                                                                        ADVISER
                                                            ING Investments, LLC

                                                                     SUB-ADVISER
                                                   ING Investment Management Co.
ING GLOBAL EQUITY OPTION PORTFOLIO
- --------------------------------------------------------------------------------

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INVESTMENT OBJECTIVE

The Portfolio's investment objective is to seek long-term growth of capital.
The Portfolio's investment objective is not fundamental and may be changed
without a shareholder vote.

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PRINCIPAL  INVESTMENT STRATEGIES
The Portfolio invests in a combination of Underlying Funds that in turn invest
in equity securities located in a number of different countries, one of which
is the United States. The Sub-Adviser seeks to diversifify the Portfolio's
holdings by including Underlying Funds that invest in companies of all market
capitalizations and that invest using a growth, value, or core style of
investing. The Portfolio also expects to employ a strategy of writing (selling)
call options on equity indices, baskets of securities and exchange-traded funds
("Option Strategy") in an attempt to generate gains and enhance the stability
of returns.

The Portfolio expects to write/sell call options primarily with shorter
maturities (typically ten days to three months until expiration) generally
at-the-money or near-the-money and in the over-the-counter markets with major
international banks, broker-dealers and financial institutions. The value of
the securities underlying the Option Strategy will generally be between 40% and
60% of the Portfolio's net asset value. The extent of the Portfolio's Option
Strategy will depend upon market conditions and the Sub-Adviser's ongoing
assessment of the attractiveness of writing (selling) call options on equity
indices.

The Portfolio's current approximate Target Allocation (expressed as a
percentage of its net assets) among the Underlying Funds is set out below. As
this is a Target Allocation, the actual allocation of the Portfolio's assets
may deviate from the percentages shown.

ING VP Growth and Income Portfolio                                         50%
ING VP MidCap Opportunities Portfolio                                       5%
ING VP Small Company Portfolio                                              5%
ING VP International Value Portfolio                                       20%
ING International Growth Opportunities Portfolio                           20%

The Portfolio may be rebalanced periodically to return to the Target Allocation
and inflows and outflows may be managed to attain the Target Allocation. The
Target Allocation may be changed, at any time, as described under "An
Introduction to the Asset Allocation Process."

- --------------------------------------------------------------------------------

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RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:

AFFILIATED FUNDS - in managing the Portfolio, ING Investments will have
authority to select and substitute Underlying Funds. ING Investments may be
subject to potential conflicts of interest in selecting Underlying Funds
because the fees paid to it by some Underlying Funds are higher than fees paid
by other Underlying Funds. However, ING Investments is a fiduciary to the
Portfolio and is legally obligated to act in the Portfolio's best interests
when selecting Underlying Funds.

ASSET ALLOCATION - assets will be allocated among funds and markets based on
judgments made by the Adviser or Sub-Adviser. There is a risk that the
Portfolio may allocate assets to an Underlying Fund or market that
underperforms other asset classes. For example, the Portfolio may be
underweighted in assets or a market that is experiencing significant returns or
overweighted in assets or a market with significant declines.

CONVERTIBLE SECURITIES - the value of convertible securities may fall when
interest rates rise. Convertible securities with longer maturities tend to be
more sensitive to changes in interest rates, usually making them more volatile
than convertible securities with shorter maturities. The Portfolio could lose
money if the issuer of a convertible security is unable to meet its financial
obligations or goes bankrupt.

CREDIT - the Portfolio could lose money if the issuer of a security is unable
to meet its financial obligations or goes bankrupt. This is especially true
during periods of economic uncertainty or economic downturns.

DERIVATIVES - derivatives are subject to the risk of changes in the market
price of the underlying securities, credit risk with respect to the
counterparty to the derivative instruments and the risk of loss due to changes
in interest rates. The use of certain derivatives may also have a leveraging
effect which may increase the volatility of the Portfolio and may reduce its
returns.

FOREIGN INVESTING - the Portfolio allocates assets to Underlying Funds that
invest in foreign investments. Foreign investments may be riskier than U.S.
investments for many reasons, including: changes in currency exchange rates;
unstable political and economic conditions; a lack of adequate company
information; differences in the way securities markets operate; less secure
foreign banks or securities depositories than those in the United States; less
standardization of accounting standards and market regulations in certain
foreign countries and varying foreign controls on investments. Foreign
investments may also be affected by administrative difficulties, such as delays
in clearing and settling transactions. Additionally, securities of foreign
companies may be denominated in foreign currencies. Exchange rate fluctuations
may reduce or eliminate gains or create losses. Hedging strategies intended to
reduce this risk may not perform as expected. These factors may make foreign
investments more volatile and potentially less liquid than U.S. investments. To
the extent an Underlying Fund invests in countries with emerging securities
markets, the risks of foreign investing may be greater, as these countries may
be less politically and economically stable than other countries. It may also
be more difficult to buy and sell securities in countries with emerging
securities markets.

MARKET TRENDS - from time to time, the stock market may not favor growth or
value oriented securities in which an Underlying Fund invests. Rather, the
market could favor securities to which an Underlying Fund is not exposed, or
may not favor equities at all.

OPTIONS - There are special risks associated with uncovered call option writing
which expose the investor to potentially significant loss. The Portfolio, when
writing uncovered call options, is in a risky position and may incur large
losses if the value of the underlying instrument increases above the exercise
price. If a secondary market in options were to become unavailable, the
Portfolio could not engage in closing transactions and, as the option writer,
would remain obligated until expiration or assignment. The Portfolio, when
writing a U.S. option is subject to being assigned an exercise at any time
after the Portfolio has written the option until the option expires. By
contrast, the Portfolio, when writing a European option, is subject to exercise
assignment only during the exercise period. The use of the Options Strategy may
cause the Portfolio to underperform an equivalent equity-only portfolio without
a call option overlay in periods of rising markets and will likely cause
underperformance in periods of strongly rising markets.

OTHER INVESTMENT COMPANIES - the main risk of investing in other investment
companies, including ETFs, is the risk that the value of the underlying
securities might decrease. Because the Portfolio invests in other investment
companies, you will pay a proportionate share of the expenses of that other
investment company (including management fees, administration fees, and
custodial fees) in addition to the expenses of the Portfolio.

PRICE VOLATILITY - the value of the Portfolio changes as the prices of the
Underlying Funds' investments go up or down. Equity securities face market,
issuer and other risks, and their values may fluctuate, sometimes rapidly and
unpredictably. Market risk is the risk that securities may decline in value due
to factors affecting securities markets generally or particular industries.
Issuer risk is the risk that the value of a security may decline for reasons
relating to the issuer, such as changes in the financial condition of the
issuer. While equities may offer the potential for greater long-term growth
than most debt securities, they generally have higher volatility.

The Portfolio may invest in Underlying Funds that invest in small- and
mid-sized companies, which may be more susceptible to greater price volatility
than larger companies because they typically have fewer financial resources,
more limited product and market diversification and may be dependent on a few
key managers.

PORTFOLIO TURNOVER - a high portfolio turnover rate involves greater expenses
to the Portfolio including brokerage commissions and other transaction costs,
which may have an adverse impact on performance.

If you would like additional information regarding the Portfolio's investment
strategies and risks or the Underlying Funds' investment strategies and risks
please see "More Information on Investment Strategies", "Description of the
Investment Objectives, Main Investments and Risks of the Underlying Funds," and
"More Information About Risks" sections later in this Prospectus.

3  ING Global Equity Option Portfolio




                                             ING GLOBAL EQUITY OPTION PORTFOLIO
- --------------------------------------------------------------------------------

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HOW THE PORTFOLIO
HAS PERFORMED

                Since ING Global Equity Option Portfolio had not commenced
                operations as of December 31, 2007, there is no performance
                information included in this Prospectus. Please visit the
                Portfolio's website at www.ingfunds.com to obtain performance
                information once it is available.

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                          If you have any questions, please call 1-800-992-0180.

                                           ING Global Equity Option Portfolio  4




WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------

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      The table that follows shows the estimated fees and operating expenses
      paid each year by the Portfolio. Shareholders of the Portfolio will
      indirectly bear the expenses of an Underlying Fund based upon the
      percentage of the Portfolio's assets that is allocated to the Underlying

      Fund. Because the fees and annual net operating expenses of the
      Underlying Funds and the Portfolio's allocation to the Underlying Funds
      may vary from year to year, the fees and expenses paid by the Portfolio
      may vary from year to year.

      Your Variable Contract or Qualified Plan is a contract between you and
      the issuing life insurance company or plan provider. The Portfolio is not
      a party to your Variable Contract or Qualified Plan but is merely an
      investment option made available to you by your insurance company or plan
      provider under your Variable Contract or Qualified Plan. The table does
      not reflect expenses and charges that are, or may be, imposed under your
      Variable Contract or Qualified Plan. For information on these charges or
      expenses, please refer to the applicable Variable Contract prospectus,
      prospectus summary, or disclosure statement. If you hold shares of the
      Portfolio that were purchased through an investment in a Qualified Plan,
      you should consult your administrator for more information regarding
      additional expenses that may be assessed in connection with your plan.
      The fees and expenses of the Portfolio are not fixed or specified under
      the terms of your Variable Contract or Qualified Plan.

SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT).
Not applicable.

OPERATING EXPENSES PAID EACH YEAR BY THE PORTFOLIO(1)
(as a % of average net assets)

                                               SHAREHOLDER SERVICE
                                  MANAGEMENT     AND DISTRIBUTION       OTHER
PORTFOLIO                            FEES          (12B-1) FEES      EXPENSES(2)
- ---------------------------      ------------ --------------------- -------------
 ING Global Equity Option    %         0.10              0.25              0.20

                                 ACQUIRED
                               (UNDERLYING)      TOTAL                            NET
                                  FUNDS        PORTFOLIO      WAIVERS AND      PORTFOLIO
                                   FEES        OPERATING     REIMBURSEMENTS    OPERATING
PORTFOLIO                    AND EXPENSES(3)    EXPENSES   AND RECOUPMENT(4)   EXPENSES
- --------------------------- ----------------- ----------- ------------------- ----------
 ING Global Equity Option            0.77          0.55             0.00           1.32

- --------------------------------------------------------------------------------

(1)      This table shows the estimated operating expenses for the Portfolio by
         class as a ratio of expenses to average daily net assets. The
         Portfolio had not commenced operations as of December 31, 2007,
         therefore, Other Expenses are estimated for the current fiscal year.

(2)      ING Funds Services, LLC receives an annual administrative fee equal to
         0.10% of the Portfolio's average daily net assets which is reflected
         in Other Expenses. Also includes an estimated 0.01% of non-recurring
         offering expenses and excluding this amount, Total Portfolio Operating
         Expenses would have been 1.31%.

(3)      The Portfolio's Acquired (Underlying) Funds Fees and Expenses are
         based on a weighted average of the fees and expenses of the Underlying
         Funds in which it invests. The amount of fees and expenses of the
         Underlying Funds borne by the Portfolio will vary based on the
         Portfolio's allocation of assets to, and the annualized net expenses
         of, the particular Underlying Funds during the Portfolio's fiscal
         year.

(4)      ING Investments, LLC has entered into a written expense limitation
         agreement with the Portfolio under which it will limit expenses of the
         Portfolio excluding interest, taxes, brokerage and extraordinary
         expenses, and Acquired (Underlying) Funds Fees and Expenses, subject
         to possible recoupment by ING Investments within three years. The
         amount of the Portfolio's expenses proposed to be waived or reimbursed
         during the current fiscal year by ING Investments, LLC adjusted for
         contractual changes, if any, is shown under the heading Waivers and
         Reimbursements. The expense limits will continue through at least May
         1, 2010. The expense limitation agreement is contractual and shall
         renew automatically for one-year terms unless ING Investments, LLC
         provides written notice of the termination of the expense limitation
         agreement within 90 days of the end of the then-current term or upon
         termination of the investment management agreement. For more
         information on the expense limitation agreement, please see the SAI.

5  What You Pay to Invest




                                                         WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------

             ACQUIRED (UNDERLYING) FUNDS ANNUAL OPERATING EXPENSES
                 (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)

Because we use a weighted average in calculating expenses attributable to the
Portfolio, the amount of the fees and expenses of the Class I shares of the
Underlying Funds indirectly borne by the Portfolio will vary based on the
Portfolio's allocation of assets to, and the annualized net operating expenses
of, the particular Underlying Funds during the Portfolio's fiscal year. The
following are the annual net expense ratios (as an annual percentage of average
daily net assets) for each Underlying Fund.

CLASS I

                                                      NET OPERATING
UNDERLYING FUND                                          EXPENSES
- --------------------------------------------------  -----------------
 ING International Growth Opportunities Portfolio              1.01%
 ING VP Growth and Income Portfolio                            0.59%
 ING VP International Value Portfolio                          1.01%
 ING VP MidCap Opportunities Portfolio                         0.64%
 ING VP Small Company Portfolio                                0.85%

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                                                       What You Pay to Invest  6




WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------

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      EXAMPLE(1)

      The Example is intended to help you compare the cost of investing in
      Service Class shares of the Portfolio, including the costs of the
      Underlying Funds, with the cost of investing in other mutual funds. The
      Example assumes that you invest $10,000 in Service Class shares of the
      Portfolio for the time periods indicated and then redeem all of your
      shares at the end of those periods. The Example also assumes that your
      investment has a 5% return each year, that all dividends and
      distributions are reinvested, and that the Service Class shares of the
      Portfolio's net operating expenses remain the same. The Example does not
      reflect expenses which are, or may be, imposed by a Variable Contract or
      Qualified Plan that may use the Portfolio as its underlying investment
      option. If such expenses were reflected, the expenses indicated would be
      higher. Although your actual cost may be higher or lower, the Example
      shows what your costs would be based on these assumptions. Keep in mind
      that this is an estimate. Actual expenses and performance may vary.

PORTFOLIO                                       1 YEAR    3 YEARS
- ------------------------------------           --------  --------
 ING Global Equity Option Portfolio    $

7  What You Pay to Invest




MORE               INFORMATION ON INVESTMENT STRATEGIES
- --------------------------------------------------------------------

MORE ON THE ASSET ALLOCATION PROCESS

As described earlier in this Prospectus, the Portfolio pursues its investment
objective by investing in a combination of the Underlying Funds. Subject to the
supervision of ING Investments, ING IM determines the mix of Underlying Funds
and sets the appropriate Target Allocations and ranges for investments in those
Underlying Funds.

Periodically, based upon a variety of quantitative and qualitative factors, ING
IM uses economic and statistical methods to determine the optimal Target
Allocations and ranges for the Portfolio, the resulting allocations to the
Underlying Funds, and whether any Underlying Funds should be added or removed
from the mix.

The factors considered may include the following:

(i)        the investment objective of the Portfolio and each of the Underlying
           Funds;

(ii)       economic and market forecasts;

(iii)      proprietary and third-party reports and analysis;

(iv)       the risk/return characteristics, relative performance, and
           volatility of Underlying Funds; and

(v)        the correlation and covariance among Underlying Funds.

As market prices of the Underlying Funds' portfolio securities change, the
Portfolio's actual allocations will vary somewhat from the Target Allocations,
although the percentages generally will remain within an acceptable range of
the Target Allocation percentages. If material changes are made, those changes
will be reflected in the Prospectus. However, it may take some time to fully
implement the changes. ING IM will implement the changes over a reasonable
period of time while seeking to minimize disruptive effects and added costs to
the Portfolio and the Underlying Funds.

ING IM intends to rebalance the Portfolio on a periodic basis to attain the
Target Allocation investment allocations. When the Portfolio receives new
investment proceeds or redemption requests, depending on the Portfolio's
current cash reserves, ING IM may determine to purchase additional shares or
redeem shares of Underlying Funds. In making those purchases or redemptions,
ING IM will attempt to rebalance the Fund's holdings of Underlying Funds to
bring them more closely in line with the Portfolio's Target Allocations. If ING
IM believes it is in the best interests of the Portfolio and its shareholders
to deviate from the Target Allocations, it may rebalance more frequently, limit
the degree of rebalancing or avoid rebalancing altogether, pending further
analysis and more favorable market conditions.

INVESTMENT OBJECTIVES, MAIN INVESTMENTS AND RISKS OF THE UNDERLYING FUNDS

The Portfolio seeks to meet its investment objective by allocating its assets
among the Underlying Funds. Because the Portfolio invests in the Underlying
Funds, shareholders will be affected by the investment strategies of each
Underlying Fund. Information is provided below on each Underlying Fund,
including its investment objective, main investments, main risks, investment
adviser, and sub-adviser. This information is intended to provide potential
investors in the Portfolio with information that they may find useful in
understanding the investment history and risks of the Underlying Funds. Please
refer to the section entitled "More Information About Risks" later in this
Prospectus for an expanded discussion of the risks listed below for a
particular Underlying Fund.

You should note that over time the Portfolio will alter its allocation of
assets among the Underlying Funds, and may add or delete Underlying Funds that
are considered for investment. Therefore, it is not possible to predict the
extent to which the Portfolio will be invested in each Underlying Fund at any
one time. As a result, the degree to which the Portfolio may be subject to the
risks of a particular Underlying Fund will depend on the extent to which the
Portfolio has invested in the Underlying Fund.

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                          If you have any questions, please call 1-800-992-0180.

                                  More Information on Investment Strategies    8




MORE INFORMATION ON INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------

         DESCRIPTION OF THE INVESTMENT OBJECTIVES, MAIN INVESTMENTS AND
                         RISKS OF THE UNDERLYING FUNDS

                                  UNDERLYING      INVESTMENT
 INVESTMENT ADVISER/SUB-ADVISER      FUND          OBJECTIVE            MAIN INVESTMENTS                       MAIN RISKS
INVESTMENT ADVISER:              ING             Long-term        Invests at least 65% of its net       Call risk, convertible
Directed Services LLC            International   growth of        assets in equity securities of        securities risk, credit
                                 Growth          capital.         issuers located in a number of        risk, currency risk, debt
SUB-ADVISER:                     Opportunities                    different countries outside the       securities risk, derivatives
ING Investment Management Co.    Portfolio                        United States. Invests primarily      risk, emerging markets risk,
                                                                  in companies with a large market      equity securities risk,
                                                                  capitalization, but may also          foreign  investment risk,
                                                                  invest in mid- and small-sized        growth investing risk,
                                                                  companies. Generally invests in       inability to sell securities
                                                                  common and preferred stocks,          risk, interest rate risk,
                                                                  warrants and convertible              liquidity risk, market and
                                                                  securities. May invest in             company risk, market
                                                                  companies located in countries        capitalization risk,
                                                                  with emerging securities              portfolio turnover risk,
                                                                  markets. May invest in                securities lending risk,
                                                                  government debt securities of         small-capitalization company
                                                                  developed foreign countries.          risk, and sovereign debt
                                                                  May invest up to 35% of its           risk.
                                                                  assets in securities of U.S.
                                                                  issuers including investment grade
                                                                  government and corporate debt
                                                                  securities. May invest in
                                                                  derivatives, including futures and
                                                                  other investment companies,
                                                                  including exchange traded funds
                                                                  ("ETFs") to the extent permitted
                                                                  under the Investment Company
                                                                  Act of 1940, as amended ("1940
                                                                  Act"). May employ currency
                                                                  hedging strategies to protect the
                                                                  portfolio from adverse effects on
                                                                  the U.S. dollar.

INVESTMENT ADVISER:              ING VP Growth   Maximize total   Invests at least 65% of its total     Convertible securities
ING Investments, LLC             and Income      return.          assets in common stocks believed      risk, derivatives risk,
                                 Portfolio                        to have significant potential for     foreign investment risk,
SUB-ADVISER:                                                      capital appreciation or income        market trends risk, other
ING Investment Management Co.                                     growth or both. Emphasizes            investment companies risk,
                                                                  stocks of larger companies. May       portfolio turnover risk,
                                                                  invest up to 25% in foreign           price volatility risk, and
                                                                  securities. May invest in             securities lending risk.
                                                                  derivatives, including but not
                                                                  limited to, put and call options.
                                                                  May invest in other investment
                                                                  companies to the extent
                                                                  permitted under the 1940 Act.

9  More Information on Investment Strategies




  MORE INFORMATION ON INVESTMENT STRATEGIES
- --------------------------------------------------------------------

                                   UNDERLYING      INVESTMENT
 INVESTMENT ADVISER/SUB-ADVISER       FUND         OBJECTIVE              MAIN INVESTMENTS                      MAIN RISKS
INVESTMENT ADVISER:              ING VP           Long-term       Invests at least 65% of its assets   Convertible securities risk,
ING Investments, LLC             International    capital         in equity securities of issuers      debt securities risk,
                                 Value Portfolio  appreciation.   located in a number of different     derivatives risk, emerging
SUB-ADVISER:                                                      countries outside the United         markets risk, foreign
ING Investment Management Co.                                     States. Invests primarily in         investment risk, inability to
                                                                  companies with a large market        sell securities risk, market
                                                                  capitalization, but may also         trends risk, other investment
                                                                  invest in small-and mid-sized        companies risk, portfolio
                                                                  companies. Generally invests in      turnover risk, price
                                                                  common and preferred stocks,         volatility risk, securities
                                                                  warrants, and convertible            lending   risk, and value
                                                                  securities. May invest in            investing risk.
                                                                  emerging markets countries.
                                                                  May invest in government debt
                                                                  securities of developed foreign
                                                                  countries. May invest up to 35%
                                                                  of assets in securities of U.S.
                                                                  issuers, including investment
                                                                  grade government and
                                                                  corporate debt securities. May
                                                                  invest in derivative instruments
                                                                  including futures, options, and
                                                                  swaps. May invest in other
                                                                  investment companies, including
                                                                  ETFs, to the extent permitted
                                                                  under the 1940 Act.

INVESTMENT ADVISER:              ING VP MidCap    Long-term       Invests at least 80% of its net      Derivatives risk, foreign
ING Investments, LLC             Opportunities    capital         assets (plus borrowings for          investment risk, inability to
                                 Portfolio        appreciation.   investment purposes) in common       sell securities risk, market
SUB-ADVISER:                                                      stocks of mid-sized U.S.             trends risk, mid-
ING Investment Management Co.                                     companies (defined as those          capitalization company risk,
                                                                  whose market capitalizations fall    other investment companies
                                                                  within the range of companies in     risk, portfolio turnover
                                                                  the Russell MidCap(Reg. TM) Growth   risk, price volatility risk,
                                                                  Index) believed to have growth       and securities lending risk.
                                                                  potential. May also invest in
                                                                  derivatives and foreign securities.
                                                                  May invest in other investment
                                                                  companies to the extent
                                                                  permitted under the 1940 Act.

INVESTMENT ADVISER:              ING VP Small     Growth of       Invests at least 80% of its net      Derivatives risk, foreign
ING Investments, LLC             Company          capital.        assets (plus borrowings for          investment risk, market
                                 Portfolio                        investment purposes) in common       trends risk, other investment
SUB-ADVISER:                                                      stocks of small-capitalization       companies risk, portfolio
ING Investment Management Co.                                     companies (defined as those          turnover risk, price
                                                                  included in the S&P SmallCap 600     volatility risk, securities
                                                                  Index or the Russell 2000(Reg. TM)   lending risk, and small-
                                                                  Index or, if not included in         capitalization company risk.
                                                                  either index, have market
                                                                  capitalizations between $66 million
                                                                  and $3.66 billion). May invest in
                                                                  derivatives and foreign securities.
                                                                  May invest in other investment
                                                                  companies to the extent permitted
                                                                  under the 1940 Act.

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                                   More Information on Investment Strategies  10




INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------

ABOUT YOUR INVESTMENT

Shares of the Portfolio are offered for purchase by separate accounts to serve
as an investment option under Variable Contacts, to Qualified Plans, to certain
other investment companies, and to other investors as permitted to satisfy the
diversification and other requirements under Section 817(h) of the Internal
Revenue Code of 1986, as amended, ("Code") and under federal tax regulations,
revenue rulings or private letter rulings issued by the Internal Revenue
Service.

You do not buy, sell, or exchange shares of the Portfolio. You choose it as an
investment option through your Variable Contract or Qualified Plan.

The insurance company that issued your Variable Contract is responsible for
investing in the Portfolio according to the investment options you've chosen.
You should consult your Variable Contract prospectus, prospectus summary or
disclosure statement for additional information about how this works. The
Portfolio assumes no responsibility for such prospectus, prospectus summary or
disclosure statement.

ING Funds Distributor, LLC, ("Distributor") the distributor for the Portfolio
also offers directly to the public, other ING Funds that have similar names,
investment objectives, and strategies as those of the Portfolio offered by this
Prospectus. You should be aware that the Portfolio is likely to differ from
these other ING Funds in size and cash flow pattern. Accordingly, the
performance of the Portfolio can be expected to vary from those of the other
funds.

The Portfolio currently does not foresee any disadvantages to investors if the
Portfolio serves as an investment option for Variable Contracts, offers its
shares directly to Qualified Plans or offers its shares to other permitted
investors. However, it is possible that the interests of owners of Variable
Contracts and and Qualified Plans for which the Portfolio serves as an
investment option and other permitted investors might, at some time, be in
conflict because of differences in tax treatment or other considerations. The
Portfolio's Board of Directors ("Board") directed ING Investments, LLC to
monitor events to identify any material conflicts between Variable Contract
owners, Qualified Plans, and other permitted investors and would have to
determine what actions, if any, should be taken in the event of such a
conflict. If such a conflict occurred, an insurance company participating in
the Portfolio might be required to redeem the investment of one or more of its
separate accounts from the Portfolio, a pension plan, investment company or
other permitted investor which might force the Portfolio to sell securities at
disadvantageous prices.

The Portfolio may discontinue offering shares at any time. If the Portfolio is
discontinued, any allocation to the Portfolio will be allocated to another
portfolio that the Board believes is suitable as long as any required
regulatory standards are met (which may include SEC approval).

FREQUENT TRADING - MARKET TIMING

The Portfolio is intended for long-term investment and not as a short-term
trading vehicle. Accordingly, organizations or individuals that use market
timing investment strategies should not purchase shares of the Portfolio.
Shares of the Portfolio are primarily sold through omnibus account arrangements
with financial intermediaries as an investment option for Variable Contracts
issued by insurances companies and as an investment option for Qualified Plans.
Omnibus accounts generally do not identify customers' trading activity on an
individual basis. The Portfolio's administrator has agreements which require
such intermediaries to provide detailed account information, including trading
history, upon request of the Portfolio.

The Portfolio relies on the financial intermediaries to monitor frequent,
short-term trading within the Portfolio by their customers. You should review
the materials provided to you by your financial intermediary including, in the
case of a Variable Contract, the prospectus that describes the contract or, in
the case of a Qualified Plan, the plan documentation for its policies regarding
frequent, short-term trading. Such policies may be more or less restrictive
than the Portfolio's policy. With trading information received as a result of
these agreements, the Portfolio may make a determination that certain trading
activity is harmful to the Portfolio and its shareholders even if such activity
is not strictly prohibited by the intermediaries' excessive trading policy. As
a result, a shareholder investing directly or indirectly in the Portfolio may
have their trading privileges suspended without violating the stated excessive
trading policy of the intermediary. The Portfolio reserves the right, in its
sole discretion and without prior notice, to reject, restrict or refuse
purchase orders whether directly or by exchange including purchase orders that
have been accepted by a financial intermediary, if the Portfolio determines
that such purchase order is not to be in the best interest of the Portfolio.
The Portfolio seeks assurances from the financial intermediaries that they have
procedures adequate to monitor and address frequent, short-term trading. There
is, however, no guarantee that the procedures of the financial intermediaries
will be able to curtail frequent, short-term trading activity.

The Portfolio believes that market timing or frequent, short-term trading in
any account, including a Variable Contract or Qualified Plan account, is not in
the best interest of the Portfolio or its shareholders. Due to the disruptive
nature of this activity, it can adversely impact the ability of the Adviser or
the Sub-Adviser to invest assets in an orderly, long-term manner. Frequent
trading can disrupt the management of the Portfolio and raise its expenses
through: increased trading and transaction costs; forced and unplanned
portfolio turnover; lost opportunity costs; and large asset swings that
decrease the Portfolio's ability to provide maximum investment return to all
shareholders. This in turn can have an adverse effect on the Portfolio's
performance.

The Underlying Funds that invest in foreign securities may present greater
opportunities for market timers and thus be at a greater risk for excessive
trading. If an event occurring after the

11    Information for Investors




                                         INFORMATION FOR INVESTORS
- --------------------------------------------------------------------

close of a foreign market, but before the time an Underlying Fund computes its
current net asset value ("NAV"), causes a change in the price of the foreign
security and such price is not reflected in the Underlying Fund's current NAV,
investors may attempt to take advantage of anticipated price movements in
securities held by the Underlying Funds based on such pricing discrepancies.
This is often referred to as "price arbitrage." Such price arbitrage
opportunities may also occur in Underlying Funds which do not invest in foreign
securities. For example, if trading in a security held by an Underlying Fund is
halted and does not resume prior to the time the Underlying Fund calculates its
NAV, such "stale pricing" presents an opportunity for investors to take
advantage of the pricing discrepancy. Similarily, Underlying Funds that hold
thinly-traded securities, such as certain small-capitalization securities, may
be exposed to varying levels of pricing arbitrage. The Underlying Funds have
adopted fair valuation policies and procedures intended to reduce the
Underlying Funds' exposure to price arbitrage, stale pricing, and other
potential pricing discrepancies. However, to the extent that an Underlying
Fund's NAV does not immediately reflect these changes in market conditions,
short-term trading may dilute the value of Underlying Fund shares, which
negatively affects long-term shareholders.

Although the policies and procedures known to the Portfolio that are followed
by the financial intermediaries that use the Portfolio and the monitoring by
the the Portfolio are designed to discourage frequent, short-term trading, none
of these measures can eliminate the possibility that frequent, short-term
trading activity in the Portfolio will occur. Moreover, decisions about
allowing trades in the Portfolio may be required. These decisions are
inherently subjective, and will be made in a manner that is in the best
interest of the Portfolio's shareholders.

SERVICE FEES

The Company has entered into a Shareholder Services and Distribution Plan (the
"Plan") for the Service Class shares of the Portfolio. The Plan allows ING
Funds Distributor, the distributor, to use payments under the Plan for the
provision of shareholder services and/or account maintenance services to direct
or indirect beneficial owners of Service Class Shares of the Portfolio.
Services that may be provided under the Plan include, among other things,
providing information about the Portfolio and delivering Portfolio documents.
Under the Plan, the Portfolio makes payments to ING Funds Distributor at an
annual rate of up to 0.25% of the Portfolio's average daily net assets
attributable to its Service Class shares.

HOW ING COMPENSATES ENTITIES OFFERING ITS PORTFOLIO AS AN INVESTMENT OPTION IN
ITS INSURANCE PRODUCTS

ING mutual funds may be offered as investment options in Variable Contracts by
affiliated and non-affiliated insurance companies. In addition to paying fees
under the Portfolio's Distribution Plan, the Portfolio's Adviser or Distributor
(collectively "ING"), out of its own resources and without additional cost to
the Portfolio or its shareholders, may pay additional compensation to these
insurance companies. The amount of the payment is based upon an annual
percentage of the average net assets held in the Portfolio by those companies.
The Portfolio's Adviser and Distributor may make these payments for
administrative, record keeping, or other services that insurance companies
provide to the Portfolio. These payments may also provide incentive for
insurance companies to make the Portfolio available through the Variable
Contracts issued by the insurance company, and thus they may promote the
distribution of the shares of the Portfolio.

The distributing broker-dealer for the Portfolio is ING Funds Distributor. ING
Funds Distributor has entered into such agreements with non-affiliated
insurance companies. Fees payable under these arrangements are at annual rates
that range from 0.15% to 0.25%. This is computed as a percentage of the average
aggregate amount invested in the Portfolio by contract holders through the
relevant insurance company's Variable Contracts. As of the date of this
Prospectus, the Adviser has entered in such arrangements with the following
insurance companies: Z\)rich Kemper Life Insurance Company; Symetra Life
Insurance Company; and First Fortis Life Insurance Company.

The Adviser also has entered into similar agreements with affiliated insurers
including, but not limited to:

ING Life Insurance and Annuity Company; ReliaStar Life Insurance Company;
ReliaStar Life of New York; Security Life of Denver; and ING USA Annuity and
Life Insurance Co. ING uses a variety of financial and accounting techniques to
allocate resources and profits across the organization. These methods may take
the form of cash payments to affiliates. These methods do not impact the costs
incurred when investing in the Portfolio. Additionally, if the Portfolio is not
sub-advised or is sub-advised by an ING Entity, ING may retain more revenue
than on those portfolios it must pay to have sub-advised by non-affiliated
entities. Management personnel of ING may receive additional compensation if
the overall amount of investments in the Portfolio advised by ING meets certain
target levels or increases over time.

The insurance companies through which investors hold shares of the Portfolio
may also pay fees to third parties in connection with distribution of Variable
Contracts and for services provided to contract owners. The Portfolio, the
Adviser, and the Distributor are not a party to these arrangements. Investors
should consult the prospectus and statement of additional information for their
Variable Contracts for a discussion of these payments.

Ultimately, the agent or broker selling the Variable Contract to you could have
a financial interest in selling you a particular product to increase the
compensation they receive. Please make sure you read fully each prospectus and
discuss any questions you have with your agent or broker.

NET ASSET VALUE

The NAV per share of the Portfolio is determined each business day as of the
close of regular trading ("Market Close") on the New York Stock Exchange
("NYSE") (normally 4:00 p.m. Eastern time unless otherwise designated by the
NYSE). The Portfolio is

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                                                 Information for Investors    12




INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------

open for business every day the NYSE is open. The NYSE is closed on all
weekends and on all national holidays and Good Friday. Portfolio shares will
not be priced on those days. The NAV per share of each class of the Portfolio
is calculated by taking the value of the Portfolio's assets attributable to
that class, subtracting the Portfolio's liabilities attributable to that class,
and dividing by the number of shares of that class that are outstanding.

The NAV of the Portfolio is generally based upon the NAVs of the Underlying
Funds. In general, assets of the Underlying Funds are valued based on actual or
estimated market value, with special provisions for assets not having readily
available market quotations and short-term debt securities, and for situations
where market quotations are deemed unreliable. Investments in securities
maturing in 60 days or less are valued at amortized cost, which, when combined
with accrued interest, approximates market value. Securities prices may be
obtained from automated pricing services. Shares of investment companies held
by the Underlying Funds will generally be valued at the latest NAV reported by
those investment companies. The prospectuses for those investment companies
explain the circumstances under which they will use fair value pricing and the
effects of using fair value pricing.

Trading of foreign securities may not take place every day the NYSE is open.
Also, trading in some foreign markets and on some electronic trading networks
may occur on weekends or holidays when the Portfolio's or an Underlying Fund's
NAV is not calculated. As a result, the NAV of the Portfolio may change on days
when shareholders will not be able to purchase or redeem the Portfolio's
shares.

When market quotations are not available or are deemed unreliable, a
sub-adviser to an Underlying Fund will use a fair value for the security that
is determined in accordance with procedures adopted by an Underlying Fund's
Board. The types of securities for which such fair value pricing might be
required include, but are not limited to:

o  Foreign securities, where a foreign security whose value at the close of the
   foreign market on which it principally trades likely would have changed by
   the time of the close of the NYSE, or the closing value is otherwise deemed
   unreliable;

o  Securities of an issuer that has entered into a restructuring;

o  Securities whose trading has been halted or suspended;

o  Fixed-income securities that have gone into default and for which there are
   no current market value quotations; and

o  Securities that are restricted as to transfer or resale.

Options that are traded over-the-counter will be valued using one of three
methods: (1) dealer quotes, (2) industry models with objective inputs, or (3)
by using a benchmark arrived at by comparing prior-day dealer quotes with the
corresponding change in the underlying security or index. Exchange traded
options will be valued using the last reported sale. If no last sale is
reported, exchange traded options will be valued using an industry accepted
model such as "Black Scholes." Options on currencies purchased by the Portfolio
are valued at their last bid price in the case of listed options or at the
average of the last bid prices obtained from dealers in the case of
over-the-counter options.

Each Underlying Fund's Adviser or sub-adviser may rely on the recommendations
of a fair value pricing service approved by an Underlying Fund's Board in
valuing foreign securities. Valuing securities at fair value involves greater
reliance on judgment than valuing securities that have readily available market
quotations. The Adviser makes such determinations in good faith in accordance
with procedures adopted by an Underlying Fund's Board. Fair value
determinations can also involve reliance on quantitative models employed by a
fair value pricing service. There can be no assurance that an Underlying Fund
could obtain the fair value assigned to a security if it were to sell the
security at approximately the time at which an Underlying Fund determines its
NAV per share. Please refer to the prospectus for each Underlying Fund for an
explanation of the circumstances under which an Underlying Fund will use fair
pricing and the effect of fair pricing.

When an insurance company's Variable or Qualified Plan is buying shares of the
Portfolio, it will pay the NAV that is next calculated after the order from the
insurance company's Variable Contract holder or Qualified Plan participant is
received in proper form. When an insurance company's Variable Contract or
Qualified Plan is selling shares, it will normally receive the NAV that is next
calculated after the order from the insurance company's Variable Contract
holder or Qualified Plan participant is received in proper form.

PORTFOLIO HOLDINGS DISCLOSURE POLICY

A description of the policies and procedures with respect to the disclosure of
the Portfolio's portfolio securities is available in the SAI. The Fund posts
its portfolio holdings schedule on its website on a month-end basis and makes
it available 30 days after the end of the previous calendar month. The
portfolio holdings schedule is as of the last day of the calendar month. The
Portfolio's portfolio holdings schedule will, at a minimum, remain available on
the Portfolio's website until the next calendar month or until the Fund files a
Form N-CSR or Form N-Q with the SEC for the period that includes the date as of
which the website information is current. The Portfolio's website is located at
www.ingfunds.com.

13    Information for Investors




ADVISER AND SUB-ADVISER             MANAGEMENT OF THE PORTFOLIO
- --------------------------------------------------------------------

ADVISER

ING INVESTMENTS, LLC ("ING INVESTMENTS" OR "ADVISER"), an Arizona limited
liability company, serves as the investment adviser to the Portfolio. ING
Investments has overall responsibility for the management of the Fund. ING
Investments oversees all investment advisory and portfolio management services
for the Fund.

ING Investments is registered with the SEC as an investment adviser. ING
Investments is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING
Groep") (NYSE: ING). ING Groep is a global financial institution of Dutch
origin offering banking, investments, life insurance, and institutional clients
in more than 50 countries. With a diverse work force of about 125,000 people,
ING Groep comprises a broad spectrum of pominent companies that increasingly
serve their clients under the ING brand. ING Investments became an investment
management firm in April, 1995.

As of June 30, 2008, ING Investments managed approximately $__ billion in
assets.

The principal address of ING Investments is 7337 East Doubletree Ranch Road,
Scottsdale, Arizona 85258.

ING Investments receives a monthly fee for its services based on the average
daily net assets of the Portfolio.

ING Investments will receive a management fee of 0.10%. Because the Portfolio
had not commenced operations as of the fiscal year ended December 31, 2007, the
management fee for the Portfolio reflects the current contract rate.

For information regarding the basis for the Board's approval of the Portfolio's
investment advisory and investment sub-advisory relationships, please refer to
the Portfolio's annual shareholder report that will be dated December 31, 2008.

SUB-ADVISER

ING Investments has engaged a sub-adviser to provide the day-to-day management
of the Portfolio's portfolio. The sub-adviser is an affiliate of ING
Investments.

ING Investments acts as a "manager-of-managers" for the Portfolio. ING
Investments delegates to the sub-adviser of the Portfolio the responsibility
for investment management, subject to ING Investments' oversight. ING
Investments is responsible for monitoring the investment program and
performance of the sub-adviser of the Portfolio.

From time to time, ING Investments may also recommend the appointment of
additional sub-advisers or replacement of sub-advisers to the Portfolio's
Board. It is not expected that ING Investments would normally recommend
replacement of affiliated sub-advisers as part of its oversight
responsibilities. The Portfolio and ING Investments have received exemptive
relief from the SEC to permit ING Investments, with the approval of the
Portfolio's Board, to appoint additional non-affiliated sub-advisers or to
replace an existing sub-adviser with a non-affiliated sub-adviser as well as
change the terms of a contract with a non-affiliated sub-adviser, without
submitting the contract to a vote of the Portfolio's shareholders. The
Portfolio will notify shareholders of any change in the identity of the
sub-adviser of the Portfolio. In this event, the name of the Portfolio and its
principal investment strategies may also change.

Under the terms of the sub-advisory agreement, the agreement can be terminated
by either ING Investments or the Portfolio's Board. In the event the
sub-advisory agreement is terminated, the sub-adviser may be replaced subject
to any regulatory requirements or ING Investments may assume day-to-day
investment management of the Fund.

ING INVESTMENT MANAGEMENT CO.

ING Investment Management Co. ("ING IM" or "Sub-Adviser"), a Connecticut
corporation, serves as the Sub-Adviser to the Portfolio. ING IM is responsible
for managing the assets of the Portfolio in accordance with the Portfolio's
investment objective and policies, subject to oversight by ING Investments and
the Portfolio's Board.

Founded in 1972, ING IM is registered with the SEC as an investment adviser.
ING IM has acted as adviser or sub-adviser to mutual funds since 1994 and has
managed institutional accounts since 1972. ING IM is an indirect, wholly-owned
subsidiary of ING Groep and is an affiliate of ING Investments. As of June 30,
2008, ING IM managed approximately $____ billion in assets. The principal
office of ING IM is 230 Park Avenue, New York, NY 10169.

The following individual is responsible for the day-today management of the
Portfolio:

Paul Zemsky, Portfolio Manager, has managed the Portfolio since its inception.
Mr. Zemsky is head of ING's Multi-Asset Strategies & Solutions Group. He joined
ING IM in 2005 as Head of Derivative Strategies. Prior to assuming his role at
ING, Mr. Zemsky spent 18 years at J.P. Morgan Investment Management, where he
held a number of key position, including having responsibility for asset
allocation for the firm's fixed-income business and handling option trading in
both the exchange-traded and over-the-counter markets.

ADDITIONAL INFORMATION REGARDING PORTFOLIO MANAGER

The SAI provides additional information about the portfolio manager's
compensation, other accounts managed by the portfolio manager and the portfolio
manager's ownership of securities in the Fund.

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All mutual funds involve risk - some more than others - and there is always the
chance that you could lose money or not earn as much as you hope. The
Portfolio's risk profile is largely a factor of the principal securities in
which the Underlying Funds invest and investment techniques that they use. The
following pages discuss the risks associated with certain of the types of
securities in which an Underlying Fund may invest and certain of the investment
practices that an Underlying Fund may use. For more information about these and
other types of securities and investment techniques that may be used by the
Underlying Funds, see the SAI.

ASSET ALLOCATION IS NO GUARANTEE AGAINST LOSS

Although asset allocation seeks to optimize returns given various levels of
risk tolerance, you still may lose money and experience volatility. Market and
asset class performance may differ in the future from the historical
performance and the assumptions used to form the asset allocations for the
Portfolio. Furthermore, ING IM's allocation of the Portfolio's assets may not
anticipate market trends successfully. For example, weighting Underlying Funds
that invest in common stocks too heavily during a stock market decline may
result in a failure to preserve capital. Conversely, investing too heavily in
Underlying Funds that invest in fixed-income securities during a period of
stock market appreciation may result in lower total return.

There is a risk that you could achieve better returns by investing in an
Underlying Fund or other mutual funds representing a single asset class than in
the Portfolio.

Assets will be allocated among funds and markets based on judgments made by ING
IM. There is a risk that the Portfolio may allocate assets to an asset class or
market that underperforms other funds. For example, the Portfolio may be
underweighted in assets or a market that is experiencing significant returns or
overweighted in assets or a market with significant declines.

PERFORMANCE OF THE UNDERLYING FUNDS WILL VARY

The performance of the Portfolio depends upon the performance of the Underlying
Funds, which are affected by changes in the economy and financial markets. The
value of the Portfolio changes as the asset values of the Underlying Funds it
holds go up or down. The value of your shares will fluctuate and may be worth
more or less than the original cost. The timing of your investment may also
affect performance.

TEMPORARY DEFENSIVE POSITIONS

The Portfolio or an Underlying Fund may depart from its principal investment
strategies by temporarily investing for defensive purposes when adverse market,
economic, political or other conditions affect the Portfolio or Underlying
Fund. Instead, the Portfolio or Underlying Fund may invest in securities
believed to present less risk, such as cash items, government securities and
short term paper. While the Portfolio or an Underlying Fund invests
defensively, it may not be able to pursue its investment objective. The
Portfolio's or Underlying Fund's defensive investment position may not be
effective in protecting its value.

CONFLICT OF INTEREST

In making decisions on the allocation of the assets of the Portfolio among the
Underlying Funds, ING Investments is subject to several conflicts of interest
because it serves as the investment adviser to the Portfolio and to the
Underlying Funds. These conflicts could arise because some Underlying Funds pay
advisory fees that are higher than others, and some Underlying Funds may have a
sub-adviser that is affiliated with the Adviser, while others do not. ING
Investments may also subsidize the expenses of some of the Underlying Funds,
but does not subsidize others. Further, ING Investments may believe that a
redemption from an Underlying Fund will be harmful to that fund or to ING
Investments or an affiliate or may believe that an Underlying Fund may benefit
from additional assets. Therefore, ING Investments may have incentives to
allocate and reallocate in a fashion that would advance its own interests or
the interests of an Underlying Fund rather than the Portfolio.

ING Investments has informed the Portfolio's Board that it has developed an
investment process that it believes will ensure that the Portfolio is managed
in the best interests of the shareholders of the Portfolio. Nonetheless,
investors bear the risk that ING Investments' allocation decisions may be
affected by its conflicts of interest.

PRINCIPAL RISKS

The Portfolio is also affected by other kinds of risks, depending on the types
of securities held or strategies used by an Underlying Fund.

For certain of these Underlying Funds, the risk associated with the strategy is
a principal risk. Other Underlying Funds may engage, to a lesser extent, in
these strategies, and when so engaged are subject to the attendant risks.
Please see the SAI for a further discussion of the principal and other
investment strategies employed by each Underlying Fund.

CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security, and as such is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. An Underlying Fund may be required to redeem or convert a
convertible security before the holder would otherwise choose.

CURRENCY. Underlying Funds that invest directly in foreign currencies or in
securities denominated in or that trade in foreign (non-U.S.) currencies are
subject to the risk that those currencies will decline in value relative to the
U.S. dollar or, in the case of hedging positions, that the U.S. dollar will
decline in value relative to the currency being hedged.

Currency rates may fluctuate significantly over short periods of time. Currency
rates may be affected by changes in interest rates, intervention (or the
failure to intervene) by U.S. or foreign governments, central banks or
supranational entities such as the

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International Monetary Fund, by the imposition of currency controls, or other
political or economic developments in the United States or abroad. As a result,
an Underlying Fund's investments in foreign currency-denominated securities may
reduce the value on an Underlying Fund's assets.

DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the
performance of an underlying asset or assets. Some derivatives are
sophisticated instruments that typically involve a small investment of cash
relative to the magnitude of risks assumed. These may include swap agreements,
options, forwards and futures. Derivative securities are subject to market
risk, which could be significant for those that have a leveraging effect.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform, and any deterioration in the counterparty's
creditworthiness could adversely affect the instrument. In addition,
derivatives and their underlying securities may experience periods of
illiquidity, which could cause the Underlying Fund to hold a security it might
otherwise sell or could force the sale of a security at inopportune times or
for prices that do not reflect current market value. A risk of using
derivatives is that the Adviser or Sub-Adviser might imperfectly judge the
market's direction. For instance, if a derivative is used as a hedge to offset
investment risk in another security, the hedge might not correlate to the
market's movements and may have unexpected or undesired results, such as a loss
or a reduction in gains.

EMERGING MARKETS INVESTMENTS. Because of less developed markets and economies
and, in some countries, less mature governments and governmental institutions,
the risks of investing in foreign securities can be intensified in the case of
investments in issuers domiciled or doing substantial business in countries
with an emerging securities market. These risks include: high concentration of
market capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high concentration of
investors and financial intermediaries; political and social uncertainties;
over-dependence on exports, especially with respect to primary commodities,
making these economies vulnerable to changes in commodity prices; overburdened
infrastructure and obsolete or unseasoned financial systems; environmental
problems; less developed legal systems; and less reliable custodial services
and settlement practices.

EQUITY SECURITIES. The Underlying Funds may invest in equity securities. Equity
securities include common, preferred, and convertible stock and securities with
values that are tied to the price of the stock, such as rights, warrants and
convertible debt securities. Common and preferred stock represents equity
ownership in a company. Stock markets are volatile. The price of equity
securities will fluctuate and can decline and reduce the value of an investment
in equities. The price of equity securities fluctuates based on changes in a
company's financial condition and overall market and economic conditions. The
value of equity securities purchased by an Underlying Fund could decline if the
financial condition of the companies decline or if overall market and economic
conditions deteriorate. Even investment in high quality or "blue chip" equity
securities or securities of established companies with large market
capitalizations (which generally have strong financial characteristics) can be
negatively impacted by poor overall market and economic conditions. Companies
with large market capitalizations may also have less growth potential than
smaller companies and may be able to react less quickly to a change in the
marketplace.

FOREIGN INVESTMENTS. There are certain risks in owning foreign securities,
including those resulting from: fluctuations in currency exchange rates;
devaluation of currencies; political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions; reduced availability of public information concerning issuers;
accounting, auditing and financial reporting standards or other regulatory
practices and requirements that are not uniform when compared to those
applicable to domestic companies; settlement and clearance procedures in some
countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices more volatile than those of
domestic companies. With certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the
use or removal of funds or other assets of Underlying Funds, including the
withholding of dividends.

Each Underlying Fund may enter into foreign currency transactions either on a
spot or cash basis at prevailing rates or through forward foreign currency
exchange contracts in order to have the necessary currencies to settle
transactions, to help protect Underlying Fund assets against adverse changes in
foreign currency exchange rates, or to provide exposure to a foreign currency
commensurate with the exposure to securities from that country. Such efforts
could limit potential gains that might result from a relative increase in the
value of such currencies, and might, in certain cases, result in losses to the
Underlying Fund. The risks of investing in foreign securities may be greater
for countries with an emerging securities market.

GROWTH INVESTING. Growth-oriented stock typically sells at relatively high
valuations as compared to other types of securities. Securities of growth
companies may be more volatile than other stock because they are more sensitive
to investor perceptions of the issuing company's growth potential, they usually
invest a high portion of earnings in their business, and they may lack the
dividends of value stock that can cushion stock prices in a falling market. The
market may not favor growth-oriented stock or may not favor equities at all. In
addition, earnings disappointments often lead to sharply falling prices because
investors buy growth stock in anticipation of superior earnings growth.
Historically, growth-oriented stock have been more volatile than value-oriented
stock.

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INABILITY TO SELL SECURITIES. Certain securities generally trade in lower
volume and may be less liquid than securities of large established companies.
These less liquid securities could include securities of small- and mid-sized
U.S. companies, high-yield securities, convertible securities, unrated debt and
convertible securities, securities that originate from small offerings, and
foreign securities, particularly those from companies in countries with an
emerging securities market. An Underlying Fund could lose money if it cannot
sell a security at the time and price that would be most beneficial to the
Underlying Fund.

LIQUIDITY. Liquidity risk exists when particular investments are difficult to
purchase or sell. Even publicly traded securities can experience periods of
less liquidity. An Underlying Fund's investments in illiquid securities may
reduce the returns of an Underlying Fund because it may be unable to sell the
illiquid securities at an advantageous time or price. Further, the lack of an
established secondary market may make it more difficult to value illiquid
securities, which could vary from the amount that an Underlying Fund could
realize upon disposition. Underlying Funds with principal investment strategies
that involve foreign securities, small companies, derivatives, or securities
with substantial market and/or credit risk tend to have the greatest exposure
to liquidity risk.

MARKET AND COMPANY. The price of a security held by an Underlying Fund may fall
due to changing economic, political, or market conditions, or disappointing
earnings or losses. Stock prices in general may decline over short or even
extended periods. The stock market tends to be cyclical, with periods when
stock prices generally rise and periods when stock prices generally decline.
Further, even though the stock market is cyclical in nature, returns from a
particular stock market segment in which an Underlying Fund invests may still
trail returns from the overall stock market.

MARKET CAPITALIZATION. Stock falls into three broad market capitalization
categories - large, mid and small. Investing primarily in one category carries
the risk that, due to current market conditions, that category may be out of
favor with investors. If valuations of large-capitalization companies appear to
be greatly out of proportion to the valuations of small- or mid-capitalization
companies, investors may migrate to the stock of small- and mid-sized companies
causing an Underlying Fund that invests in these companies to increase in value
more rapidly than an Underlying Fund that invests in larger, fully-valued
companies. Investing in small- and mid-capitalization companies may be subject
to special risks associated with narrower product lines, more limited financial
resources, smaller management groups, and a more limited trading market for
their stock as compared with larger companies. As a result, stock of small- and
mid-capitalization companies may decline significantly in market downturns.

MARKET TRENDS. Different types of stock tend to shift into and out of favor
with stock market investors depending on market and economic conditions. For
instance, from time to time, the stock market may not favor growth-oriented
securities. Rather, the market could favor value-oriented securities or may not
favor equity securities at all. Accordingly, the performance of an Underlying
Fund may at times be better or worse than the performance of funds that focus
on other types of stock, or that have a broader investment style.

MID-CAPITALIZATION COMPANIES. Investments in mid-capitalization companies
involve greater risk than is customarily associated with larger, more
established companies due to the greater business risks of small size, limited
markets and financial resources, narrow product lines and the frequent lack of
depth of management. The securities of smaller companies are often traded
over-the-counter and may not be traded in volume typical on a national
securities exchange. Consequently, the securities of smaller companies may have
limited market stability and may be subject to more abrupt or erratic market
movements than securities of larger, more established growth companies or the
market averages in general.

OTHER INVESTMENT COMPANIES. An Underlying Fund may invest in other companies to
the extent permitted by the 1940 Act and the rules thereunder. These may
include exchange-traded funds ("ETFs") and Holding Company Depositary Receipts
("HOLDRs"), among others. ETFs are exchange-traded investment companies that
are designed to provide investment results corresponding to an equity index and
include, among others, Standard & Poor's Depositary Receipts ("SPDRs"),
PowerShares QQQTM("QQQQ"), Dow Jones Industrial Average Tracking Stocks
("Diamonds") and iShares exchange-traded funds ("iShares"). The main risk of
investing in other investment companies (including ETFs) is that the value of
the underlying securities held by the investment company might decrease. The
value of the underlying securities can fluctuate in response to activities of
individual companies or in response to general market and/or economic
conditions. Because an Underlying Fund may invest in other investment
companies, you will pay a proportionate share of the expenses of those other
investment companies (including management fees, administration fees and
custodial fees). Additional risks of investments in ETFs include: (i) an active
trading market for an ETF's shares may not develop or be maintained or (ii)
trading may be halted if the listing exchange's officials deem such action
appropriate, the shares are delisted from the exchange, or the activation of
market-wide "circuit-breakers" (which are tied to large decreases in stock
prices) halts trading generally. Because HOLDRs concentrate in the stocks of a
particular industry, trends in that industry may have a dramatic impact on
their value.

To seek to achieve a return on uninvested cash or for other reasons, an
Underlying Fund may invest its assets in ING Institutional Prime Money Market
Fund and/or one or more other money market funds advised by ING affiliates
("ING Money Market Funds"). An Underlying Fund's purchase of shares of an ING
Money Market Fund will result in the Underlying Fund paying a proportionate
share of the expenses of the ING Money Market Fund. The Underlying Fund's
Adviser will waive its fee in an amount equal to the advisory fee received by
the adviser of

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the ING Money Market Fund in which the Underlying Fund invests resulting from
the Underlying Fund's investment into the ING Money Market Fund.

PORTFOLIO TURNOVER. Certain Underlying Funds are generally expected to engage
in frequent and active trading of portfolio securities to achieve their
respective investment objective. A high portfolio turnover rate involves
greater expenses to an Underlying Fund, including brokerage commissions and
other transaction costs, and is likely to generate more taxable short-term
gains for shareholders, which may have an adverse effect on the performance of
the Underlying Fund.

PREPAYMENT. The Underlying Funds may invest in mortgage-related securities,
which can be paid off early if the borrowers on the underlying mortgages pay
off their mortgages sooner than scheduled. If interest rates are falling, an
Underlying Fund will be forced to reinvest its money at lower yields.

PRICE VOLATILITY. The value of an Underlying Fund changes as the prices of its
investments go up or down. Equity and debt securities face market, issuer, and
other risks, and their values may fluctuate, sometimes rapidly and
unpredictably. Market risk is the risk that securities may decline in value due
to factors affecting the securities markets generally or particular industries.
Issuer risk is the risk that the value of a security may decline for reasons
relating to the issuer, such as changes in the financial condition of the
issuer. While equities may offer the potential for greater long-term growth
than most debt securities, they generally have higher volatility.

SECURITIES LENDING. An Underlying Fund may lend securities to financial
institutions that provide cash or securities issued or guaranteed by the U.S.
government as collateral. Securities lending involves the risk that the
borrower may fail to return the securities in a timely manner or at all. As a
result, an Underlying Fund may lose money and there may be a delay in
recovering the loaned securities. An Underlying Fund could also lose money if
it does not recover the securities and/or the value of the collateral falls,
including the value of instruments made with cash collateral. These events
could trigger adverse tax consequences to the Underlying Fund. Engaging in
securities lending could have a leveraging effect, which may intensify the
market risk, credit risk, and other risks associated with investments by the
Underlying Fund. When an Underlying Fund lends its securities, it is
responsible for investing the cash collateral it receives from the borrower of
the securities and the Underlying Fund could incur losses in connection with
the investment of such cash collateral.

SMALL-CAPITALIZATION COMPANIES. Investments in securities of small companies
may entail greater risk than investments in larger, more established companies.
Smaller companies may have limited product lines and market diversification,
fewer financial resources, and may be dependent on a few key managers. Their
securities may trade less frequently and in more limited volume than the
securities of larger companies. Consequently, the prices of small company stock
tends to rise and fall in value more than other stock and/or may be less
liquid. When selling a large quantity of a particular stock, an Underlying Fund
may have to sell at a discount from quoted prices or may have to make a series
of small sales over an extended period of time due to the more limited trading
volume of smaller company stock. Although investing in small companies offers
potential for above-average returns, the companies may not succeed and the
value of stock shares could decline significantly. Securities of smaller
companies tend to be more volatile and less liquid than stocks of larger
companies. These companies are also likely to have more limited product lines,
capital resources, management depth and their securities trade less frequently
and in more limited volumes than securities of larger companies.

U.S. GOVERNMENT SECURITIES AND OBLIGATIONS. Obligations issued by some U.S.
government agencies, authorities, instrumentalities or sponsored enterprises,
such as the Government National Mortgage Association, are backed by the full
faith and credit of the U.S. Treasury while obligations issued by others, such
as the Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation and Federal Home Loan Banks, are backed solely by the entity's own
resources or by the ability of the entity to borrow from the U.S. Treasury. No
assurance can be given that the U.S. government will provide financial support
to U.S. government agencies, authorities, instrumentalities or sponsored
enterprises if it is not obliged to do so by law.

VALUE INVESTING. Certain Underlying Funds invest in "value" stock. A
sub-adviser to an Underlying Fund may be wrong in its assessment of a company's
value and the stock the Underlying Fund holds may not reach what the
sub-adviser believes are their full values. A particular risk of an Underlying
Fund's value approach is that some holdings may not recover and provide the
capital growth anticipated or a stock judged to be undervalued may actually be
appropriately priced. Further, because the prices of value-oriented securities
tend to correlate more closely with economic cycles than growth-oriented
securities, they generally are more sensitive to changing economic conditions,
such as changes in interest rates, corporate earnings, and industrial
production. The market may not favor value-oriented stock and may not favor
equities at all. During those periods, an Underlying Fund's relative
performance may suffer.

OTHER RISKS

BORROWING. An Underlying Fund may borrow subject to certain limits. Borrowing
may exaggerate the effect of any increase or decrease in the value of portfolio
securities or the NAV of an Underlying Fund, and money borrowed will be subject
to interest costs. Interest costs on borrowings may fluctuate with changing
market rates of interest and may partially offset or exceed the return earned
on borrowed funds. Under adverse market conditions, an Underlying Fund might
have to sell portfolio securities to meet interest or principal payments at a
time when fundamental investment considerations would not favor such sales.

INTERESTS IN LOANS. Certain Underlying Funds may invest in participation
interests or assignments in secured variable or floating rate loans which
include participation interests in lease

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financings. Loans are subject to the credit risk of nonpayment of principal or
interest. Substantial increases in interest rates may cause an increase in loan
defaults. Although the loans will generally be fully collateralized at the time
of acquisition, the collateral may decline in value, be relatively illiquid, or
lose all or substantially all of its value subsequent to an Underlying Fund's
investment. Many loans are relatively illiquid and may be difficult to value.

MANAGEMENT. Each Underlying Fund is subject to management risk because it is an
actively managed investment portfolio. The Adviser, the sub-adviser or each
individual portfolio manager will apply investment techniques and risk analyses
in making investment decisions for the Underlying Funds, but there can be no
guarantee that these will produce the desired results.

Many sub-advisers of equity funds employ styles that are characterized as
"value" or "growth." However, these terms can have different application by
different managers. One sub-adviser's value approach may be different from
another, and one sub-adviser's growth approach may be different from another.
For example, some value managers employ a style in which they seek to identify
companies that they believe are valued at a more substantial or "deeper
discount" to a company's net worth than other value managers. Therefore, some
funds that are characterized as growth or value can have greater volatility
than other funds managed by other managers in a growth or value style.

PAIRING-OFF TRANSACTIONS. A pairing-off transaction occurs when an Underlying
Fund commits to purchase a security at a future date, and then the Underlying
Fund pairs-off the purchase with a sale of the same security prior to or on the
original settlement date. Whether a pairing-off transaction on a debt security
produces a gain depends on the movement of interest rates. If interest rates
increase, then the money received upon the sale of the same security will be
less than the anticipated amount needed at the time the commitment to purchase
the security at the future date was entered and the Underlying Fund will
experience a loss.

RESTRICTED AND ILLIQUID SECURITIES. If a security is illiquid, an Underlying
Fund may not be able to sell the security at a time when the Adviser or
Sub-Adviser might wish to sell, and the security could have the effect of
decreasing the overall level of the Underlying Fund's liquidity. Further, the
lack of an established secondary market may make it more difficult to value
illiquid securities, which could vary from the amount the Underlying Fund could
realize upon disposition. Restricted securities, i.e., securities subject to
legal or contractual restrictions on resale, may be illiquid. However, some
restricted securities may be treated as liquid, although they may be less
liquid than registered securities traded on established secondary markets.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. A reverse repurchase agreement
or dollar roll involves the sale of a security, with an agreement to repurchase
the same or substantially similar securities at an agreed upon price and date.
Whether such a transaction produces a gain for an Underlying Fund depends upon
the costs of the agreements and the income and gains of the securities
purchased with the proceeds received from the sale of the security. If the
income and gains on the securities purchased fail to exceed the costs, an
Underlying Fund's NAV will decline faster than otherwise would be the case.
Reverse repurchase agreements and dollar rolls, as leveraging techniques, may
increase an Underlying Fund's yield; however, such transactions also increase
an Underlying Fund's risk to capital and may result in a shareholder's loss of
principal.

SHORT SALES. A "short sale" is the sale by an Underlying Fund of a security
which has been borrowed from a third party on the expectation that the market
price will drop. If the price of the security rises, the Underlying Fund may
have to cover its short position at a higher price than the short sale price,
resulting in a loss.

INVESTMENT BY FUNDS-OF-FUNDS. Each of the Underlying Funds' shares may be
purchased by other investment companies. In some cases, an Underlying Fund may
experience large inflows or redemptions due to allocations or rebalancings.
While it is impossible to predict the overall impact of these transactions over
time, there could be adverse effects on portfolio management. The Adviser will
monitor transactions by the Fund and will attempt to minimize any adverse
effects on the Underlying Funds and the Fund as a result of these transactions.
So long as an Underlying Fund accepts investments by other investment
companies, it will not purchase securities of other investment companies,
except to the extent permitted by the 1940 Act or under the terms of an
exemptive order granted by the SEC.

PERCENTAGE AND RATING LIMITATIONS. Unless otherwise stated, the percentage and
rating limitations in this Prospectus apply at the time of investment.

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DIVIDENDS,                                     DISTRIBUTIONS AND TAXES
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DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

The Portfolio declares and pays dividends and capital gains distributions, if
any, on an annual basis usually in June. To comply with federal tax
regulations, the Portfolio, may also pay an additional capital gains
distribution, usually in June.

TAX MATTERS

Holders of Variable Contracts should refer to the prospectus for their
contracts for information regarding the tax consequences of owning such
contracts and should consult their tax advisers before investing.

The Portfolio intends to qualify as a regulated investment company ("RIC") for
federal income tax purposes by satisfying the requirements under Subchapter M
of the Code, including requirements with respect to diversification of assets,
distribution of income and sources of income. As a RIC, the Portfolio generally
will not be subject to tax on its net investment company taxable income and net
realized capital gains. The Portfolio also intends to comply with the
diversification requirements of Section 817(h) of the Code and the underlying
regulations for Variable Contracts so that owners of these contracts should not
be subject to federal tax on distributions of dividends and income from the
Portfolio to the insurance company's separate accounts.

Since the sole shareholders of the Portfolio will be separate accounts or other
permitted investors, no discussion is included herein as to the federal income
tax consequences at the shareholder level. For information concerning the
federal income tax consequences to purchasers of the policies, see the attached
prospectus for the policy.

See the SAI for further information about tax matters.

THE TAX STATUS OF YOUR INVESTMENT IN THE PORTFOLIO DEPENDS UPON THE FEATURES OF
YOUR VARIABLE CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE PROSPECTUS
FOR THE VARIABLE CONTACT.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                        Dividends, Distributions and Taxes    20




PERFORMANCE OF THE UNDERLYING FUNDS
- --------------------------------------------------------------------------------

The Portfolio seeks to achieve its investment objective by investing in
Underlying Funds and uses asset allocation strategies to determine how much to
invest in Underlying Funds. You may be interested in the performance of the
Underlying Funds or related performance attained by the sub-advisers of the
Underlying Funds. In analyzing this performance it is important to understand
that because the Portfolio will invest in multiple Underlying Funds the
Portfolio's future performance will be based on a blend of the performance of
the Underlying Funds in proportion to the percentage of the Portfolio's assets
invested in them. Therefore, the performance of the Portfolio will not be based
solely on the performance of any single Underlying Fund. The performance of the
Underlying Funds does not reflect the expenses of the Portfolio, including
distribution fees, and would be lower if it did.

PERFORMANCE OF UNDERLYING FUNDS

ING INTERNATIONAL GROWTH OPPORTUNITIES PORTFOLIO

The following table shows the average annual total returns of Class I shares of
ING International Growth Opportunities Portfolio for the 1 Year, 5 years, and
10 Years or Life of Class periods ended December 31, 2007, as well as a
comparison with the performance of a broad measure of market performance - the
Morgan Stanley Capital International - Europe, Australasia, and Far East
GrowthSM Index ("MSCI EAFE GrowthSM Index"). You should not consider the
performance of ING International Growth Opportunities Portfolio as an
indication of future performance of the Portfolio.

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                                                                             10 YEARS
                                              1 YEAR        5 YEARS     (OR LIFE OF CLASS)
                                           ------------  ------------  -------------------
 ING International Growth Opportunities
  Portfolio - Class I Return Before Taxes       18.87%        19.23%           13.16%(1)
 MSCI EAFE GrowthSM Index(2) (reflects
  no deduction for fees, expenses or
  taxes)                                        16.65%        19.85%           12.95%(3)

(1)   Class I shares commenced operations on January 15, 2002.

(2)   The MSCI EAFE GrowthSM Index is an unmanaged index that measures the
      performance in 20 countries within Europe, Australasia, and the Far East
      with a greater-than-average growth orientation. It includes the
      reinvestment of dividends and distributions net of withholding taxes, but
      does not reflect fees, brokerage commissions or other expenses of
      investing.

(3)   The index returns for Class I shares are for the period beginning January
      1, 2002.

ING VP GROWTH AND INCOME PORTFOLIO

The following table shows the average annual total returns of Class I shares of
ING VP Growth and Income Portfolio for the 1 Year, 5 Years, and 10 Years
periods ended December 31, 2007, as well as a comparison with the performance
of a broad measure of market performance - the Standard & Poor's 500(Reg. TM)
Composite Stock Price Index ("S&P 500(Reg. TM) Index"). You should not consider
the performance of ING VP Growth and Income Portfolio as an indication of
future performance of the Portfolio.

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                                                       1 YEAR       5 YEARS       10 YEARS
                                                    -----------  -------------  ------------
 ING VP Growth and Income Portfolio(1)
  - Class I Return Before Taxes                          7.40%         12.62%         2.87%
 S&P 500(Reg. TM) Index(2) (reflects no deduction
  for fees, expenses or taxes)                           5.49%         12.83%         5.91%

(1)   Effective March 1, 2002, ING Investments, LLC began serving as investment
      adviser and ING Investment Management Co., the former investment adviser,
      began serving as sub-adviser to the portfolio.

(2)   The S&P 500(Reg. TM) Index is an unmanaged index that measures the
      performance of securities of approximately 500 of the largest companies
      in the United States.

ING VP INTERNATIONAL VALUE PORTFOLIO

The following table shows the average annual returns of Class I shares of ING
VP International Value Portfolio for the 1 Year, 5 Years, and 10 Years periods
ended December 31, 2007, as well as a comparison with the performance of a
broad measure of market performance - the MSCI EAFE(Reg. TM) Index.

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                                               1 YEAR        5 YEARS        10 YEARS
                                            ------------  -------------  -------------
 ING VP International Value Portfolio(1)
  - Class I Return Before Taxes                  13.44%         19.63%         12.74%
 MSCI EAFE(Reg. TM) Index(2) (reflects no
  deduction for fees, expenses or taxes)         11.17%         21.59%          8.66%

(1)   ING Investments, LLC has been the Portfolio's investment adviser since
      August 8, 1997 and sub-advised by ING Investment Management Co. since
      July 1, 2002. Prior to July 1, 2002, the Portfolio was sub-advised by
      Brandes Investment Partners, L.P.

(2)   The MSCI EAFE(Reg. TM) Index is an unmanaged index that measure the
      performance of securities listed on exchanges in Europe, Australasia and
      the Far East. It includes the reinvestment of dividends and distributions
      net of withholding taxes, but does not reflect fees, brokerage
      commissions or other expenses of investing.

ING VP MIDCAP OPPORTUNITIES PORTFOLIO

The following table shows the average annual returns of Class I shares of ING
VP MidCap Opportunities Portfolio for the 1 Year, 5 Years, and 10 Years or Life
of Class periods ended December 31, 2007, as well as a comparison with the
performance of two broad measures of market performance - the Russell
Midcap(Reg. TM) Growth Index and the Russell Midcap(Reg. TM) Index. You should
not consider the performance of ING VP MidCap Opportunities Portfolio as an
indication of future performance of the Portfolio.

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                                                                                      10 YEARS
                                                       1 YEAR        5 YEARS     (OR LIFE OF CLASS)
                                                    ------------  ------------  -------------------
 ING VP MidCap Opportunities Portfolio
  - Class I Return Before Taxes                          25.74%        17.91%            0.36%(1)
 Russell Midcap(Reg. TM) Growth Index(2) (reflects
  no deduction for fees or expenses)                     11.43%        17.90%            0.83%(3)
 Russell Midcap(Reg. TM) Index(4) (reflects no
  deduction for fees or expenses)                         5.60%        18.21%            8.62%(3)

(1)   Class I shares commenced operations on May 5, 2000.

(2)   The Russell Midcap(Reg. TM) Growth Index is an unmanaged index that
      measures the performance of those companies included in the Russell
      Midcap(Reg. TM) Index with relatively higher price-to-book ratios and
      higher forecasted growth values.

21    Performance of the Underlying Funds




                     PERFORMANCE OF THE UNDERLYING FUNDS
- --------------------------------------------------------------------

(3)   The index returns for Class I shares are for the period beginning May 1,
      2000.

(4)   The Russell Midcap(Reg. TM) Index is an unmanaged index that measures the
      performance of the 800 smallest companies in the Russell 1000(Reg. TM)
      Index, which represents approximately 26% of the total market
      capitalization of the Russell 1000(Reg. TM) Index.

ING VP SMALL COMPANY PORTFOLIO

The following table shows the average annual total returns of Class I shares of
ING VP Small Company Portfolio for the 1 Year, 5 Years, and 10 Years periods
ended December 31, 2007, as well as a comparison with the performance of a
broad measure of market performance - the Russell 2000(Reg. TM) Index. You
should not consider the performance of ING VP Small Company Portfolio as an
indication of future performance of the Portfolio.

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                                                   1 YEAR         5 YEAR       10 YEARS
                                               -------------  -------------  ------------
 ING VP Small Company Portfolio -
  Class I Return Before Taxes                        5.90%          16.48%         9.22%
 Russell 2000(Reg. TM) Index(2) (reflects no
  deduction for fees, expenses or taxes)            (1.57)%         16.25%         7.08%

(1)   Effective March 1, 2002, ING Investments, LLC began serving as investment
      adviser and ING Investment Management Co., the former investment adviser,
      began serving as sub-adviser to the Portfolio.

(2)   The Russell 2000(Reg. TM) Index is an unmanaged index that measures the
      performance of the 2,000 smallest companies in the Russell 3000(Reg. TM)
      Index. The Russell 3000(Reg. TM) Index is an unmanaged index that
      measures the performance of 3,000 U.S. companies based on total market
      capitalization.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                       Performance of the Underlying Funds    22




FINANCIAL
 HIGHLIGHTS
- --------------------------------------------------------------------

Because the Portfolio did not commence operations as of the fiscal year ended
December 31, 2007, financial highlights are not available.

23  Financial Highlights




TO OBTAIN MORE INFORMATION
YOU'LL FIND MORE INFORMATION ABOUT THE FUND IN OUR:

ANNUAL/SEMI-ANNUAL SHAREHOLDER REPORTS
In the Portfolio's annual/semi-annual shareholder reports, when available, you
will find a discussion of the recent market conditions and principal investment
strategies that significantly affected the Portfolio's performance during its
last fiscal year, the financial statements and the independent registered
public accounting firm's reports (in the annual shareholder report only).

STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI contains more detailed information about the Fund. The SAI is legally
part of this Prospectus (it is incorporated by reference). A copy has been
filed with the SEC.

Please write, call or visit our website for a free copy of the current annual/
semi-annual shareholder reports, the SAI or other information.

To make shareholder inquiries contact:

THE ING FUNDS
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258-2034

1-800-992-0180

Or visit our website at WWW.INGFUNDS.COM

This information may also be reviewed or obtained from the SEC. In order to
review the information in person, you will need to visit the SEC's Public
Reference Room in Washington, D.C. or call 202-551-8090 for information on the
operation of the Public Reference Room. Otherwise, you may obtain the
information for a fee by contacting the SEC at:

U.S. SECURITIES AND EXCHANGE COMMISSION
Public Reference Section
100 F Street, N.E.
Washington, D.C. 20549

or at the e-mail address: PUBLICINFO@SEC.GOV

Or obtain the information at no cost by visiting the SEC's Internet website at
WWW.SEC.GOV.

When contacting the SEC, you will want to refer to the Portfolio's SEC file
numbers. The file numbers are as follows:

ING Variable Portfolios, Inc.         811-7651
  ING Global Equity Option Portfolio

PRPRO-GEOS                                                       (0808-082008)
[GRAPHIC APPEARS HERE]

- --------------------------------------------------------------------------------




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PROSPECTUS

Prospectus

AUGUST 20, 2008

Adviser Class

ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO

This Prospectus contains important information about investing in Adviser Class
shares of ING RussellTM Global Large Cap Index 85% Portfolio. You should read it
carefully before you invest and keep it for future reference. Please note that
your investment: is not a bank deposit, is not insured or guaranteed by the
Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve Board or any
other government agency, and is affected

[GRAPHIC APPEARS HERE]

by market fluctuations. There is no guarantee that the Fund will achieve its
investment objective. As with all mutual funds, the U.S. Securities and Exchange
Commission ("SEC") has not approved or disapproved these securities nor has the
SEC judged whether the information in this Prospectus is accurate or adequate.
Any representation to the contrary is a criminal offense.
- -------------------------------------------------------------------------------




                                                                  WHAT'S INSIDE
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
       INVESTMENT
       OBJECTIVE
[GRAPHIC APPEARS HERE]
       PRINCIPAL
       INVESTMENT
       STRATEGIES
[GRAPHIC APPEARS HERE]
       RISKS

Risk is the potential that your
investment will lose money or
not earn as much as you hope.
All mutual funds have varying
degrees of risk, depending on
the securities in which they
invest. Please read this
Prospectus carefully to be sure
you understand the principal
investment strategies and risks
associated with the Portfolio.
You should consult the
Statement of Additional
Information ("SAI") for a
complete list of the investment
strategies and risks.
[GRAPHIC APPEARS HERE]

       WHAT YOU
       PAY TO
       INVEST

The Portfolio is intended to be the funding vehicle for variable annuity
contracts and variable life insurance policies ("Variable Contracts") to be
offered by the separate accounts of certain life insurance companies
("Participating Insurance Companies") and qualified pension or retirement plans
("Qualified Plans").

Individual Variable Contract holders are not "shareholders" of the Portfolio.
The Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Variable Contract holders. Shares of the Portfolio are not
offered directly to the general public.
[GRAPHIC APPEARS HERE]

If you have any questions about the Fund, please call your investment
professional or us at 1-800-992-0180.

These pages contain a description of the Fund included in this Prospectus,
including the Portfolio's investment objective, principal investment strategies
and risks.

You'll also find:

WHAT YOU PAY TO INVEST. A list of the fees and expenses you pay - both directly
and indirectly - when you invest in the Fund.
INTRODUCTION TO THE PORTFOLIO                        1
ING RussellTM Global Large Cap Index 85% Portfolio   2

WHAT YOU PAY TO INVEST                               4
INFORMATION FOR INVESTORS                            6
MANAGEMENT OF THE PORTFOLIO                          9
MORE INFORMATION ABOUT RISKS                        10
DIVIDENDS, DISTRIBUTIONS AND TAXES                  12
PERFORMANCE OF THE INDICES                          13
FINANCIAL HIGHLIGHTS                                16
TO OBTAIN MORE INFORMATION                  Back Cover




INTRODUCTION TO THE PORTFOLIO
- --------------------------------------------------------------------------------

Risk is the potential that your investment will lose money or not earn as much
as you hope. All mutual funds have varying degrees of risk, depending on the
securities in which they invest. Please read this Prospectus carefully to be
sure you understand the principal investment strategies and risks associated
with the Portfolio. You should consult the Statement of Additional Information
("SAI") for a complete list of the investment strategies and risks.
[GRAPHIC APPEARS HERE]


If you have any questions about the Fund, please call your investment
professional or us at 1-800-992-0180.

This Prospectus is designed to help you make informed decisions about your
investments.

GLOBAL EQUITY INDEX PORTFOLIO

 The Portfolio seeks to maximize total return over the long term by allocating
 its assets among stocks, bonds, short-term instruments, and other investments.
     It may be a suitable investment if you:

      o are investing for the long-term - at least several years;
      o are looking for exposure to international markets; and
      o are willing to accept higher risk in exchange for the potential for
        long-term growth.

1   Introduction to the Portfolio




                                                                         ADVISER
                                                            ING Investments, LLC
                                                                     SUB-ADVISER
                                                   ING Investment Management Co.
ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

INVESTMENT OBJECTIVE

The Portfolio seeks to maximize total return over the long term by allocating
its assets among stock, bonds, short-term instruments and other investments.
The Portfolio's investment objective is not fundamental and may be changed
without a shareholder vote.

[GRAPHIC APPEARS HERE]

PRINCIPAL  INVESTMENT STRATEGIES
The Portfolio normally invests 85% of its net assets (plus borrowings for
investment purposes) in equity securities of companies included in the Russell
Global Large Cap(Reg. TM) Index and 15% of its net assets (plus borrowings for
investment purposes) in fixed-income securities included in the Lehman Brothers
U.S. Aggregate Bond Index(Reg. TM), exchange-traded funds ("ETFs"), or other
investment companies that seek investment results that correspond to the price
and yield performance of the Lehman Brothers U.S. Aggregate Bond Index(Reg.
TM). The securities in the Russell Global Large Cap(Reg. TM) Index and the
Lehman Brothers U.S. Aggregate Bond Index(Reg. TM) in which the Portfolio
invests, may include convertible securities that are convertible into stock
included in the indices, ETFs, and other derivatives whose economic returns
are, by design, closely equivalent to the returns of the indices, or its
components. The Portfolio will provide shareholders with at least 60 days'
prior notice of any change in this investment policy.

The Portfolio employs a "passive management" approach designed to track the
performance of the Russell Global Large Cap(Reg. TM) Index and Lehman Brothers
U.S. Aggregate Bond Index(Reg. TM) ("Indices"). The Russell Global Large
Cap(Reg. TM) Index is an unmanaged index that measures the performance of the
largest companies in the Russell Global Index. As of December 31, 2007, the
smallest company in the Russell Global Large Cap(Reg. TM) Index had a market
capitalization of $___ billion and the largest company had a market
capitalization of $___ billion. The Lehman Brothers U.S. Aggregate Bond
Index(Reg. TM) is an unmanaged index that measures the performance of the U.S
investment grade bond market, which includes investment grade U.S. Treasury
bonds, government-related bonds, investment grade corporate bonds, mortgage
pass-through securities, commercial mortgage-backed securities and asset-backed
securities that are publicly offered for sale in the United States. The
securities in the Lehman Brothers U.S. Aggregate Bond Index(Reg. TM) have $250
million or more of outstanding face value and have at least one year remaining
to maturity. In addition, the securities must be denominated in U.S. dollars
and must be fixed-rate and non-convertible.

The Portfolio may not always hold all of the same securities as the Indices.
The Portfolio may also invest in stock index futures and other derivatives as a
substitute for the sale or purchase of securities in the Indices and to provide
equity exposure to the Portfolio's cash position. Although the Portfolio
attempts to track, as closely as possible, the performance of the Indices, the
Portfolio does not always perform exactly like the Indices. Unlike the Indices,
the Portfolio has operating expenses and transaction costs and therefore, has a
performance disadvantage versus the Indices.

The Portfolio may lend portfolio securities on a short-term or longterm basis,
up to 33 1/3% of its total assets.

The Portfolio may invest in other investment companies to the extent permitted
under the Investment Company Act of 1940, as amended, and the rules,
regulations, and exemptions thereunder.

The Portfolio may engage in frequent and active trading of portfolio securities
to achieve its investment objective.

- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:

CONVERTIBLE SECURITIES - the value of convertible securities may fall when
interest rates rise. Convertible securities with longer maturities tend to be
more sensitive to changes in interest rates, usually making them more volatile
than convertible securities with shorter maturities. The Portfolio could lose
money if the issuer of a convertible security is unable to meet its financial
obligations or goes bankrupt.

DERIVATIVES - derivatives are subject to the risk of changes in the market
price of the underlying securities, credit risk with respect to the
counterparty to the derivative instruments and the risk of loss due to changes
in interest rates. The use of certain derivatives may also have a leveraging
effect which may increase the volatility of the Portfolio and may reduce its
returns.

FOREIGN INVESTING - Foreign investments may be riskier than U.S. investments
for many reasons, including: changes in currency exchange rates; unstable
political and economic conditions; a lack of adequate company information;
differences in the way securities markets operate; less secure foreign banks or
securities depositories than those in the United States; less standardization
of accounting standards and market regulations in certain foreign countries and
varying foreign controls on investments. Foreign investments may also be
affected by administrative difficulties, such as delays in clearing and
settling transactions. Additionally, securities of foreign companies may be
denominated in foreign currencies. Exchange rate fluctuations may reduce or
eliminate gains or create losses. Hedging strategies intended to reduce this
risk may not perform as expected. These factors may make foreign investments
more volatile and potentially less liquid than U.S. investments. To the extent
the Portfolio invests in countries with emerging securities markets, the risks
of foreign investing may be greater, as these countries may be less politically
and economically stable than other countries. It may also be more difficult to
buy and sell securities in countries with emerging securities markets.

INDEX STRATEGY - the Portfolio uses an indexing strategy that does not attempt
to manage market volatility, use defensive strategies, or reduce the effects of
any long-term periods of poor market performance. The correlation between the
Portfolio and index performance may be affected by the Portfolio's expenses and
the timing of purchases and redemptions of the Portfolio's shares.

INTEREST RATE - fixed-income securities are subject to the risk that interest
rates will rise, which generally causes bond prices to fall. Economic and
market conditions may cause issuers to default or go bankrupt. High-yield
instruments are even more sensitive to economic and market conditions than
other fixed-income instruments.

MORTGAGE-RELATED SECURITIES - the prices of mortgage-related securities are
sensitive to changes in interest rates and changes in the prepayment patterns on
the underlying instruments. If the principal on the underlying mortgage notes is
repaid faster than anticipated, the price of the mortgage-related security
may fall.

OTHER INVESTMENT COMPANIES - the main risk of investing in other investment
companies, including ETFs, is the risk that the value of the underlying
securities might decrease. Because the Portfolio invests in other investment
companies, you will pay a proportionate share of the expenses of that other
investment company (including management fees, administration fees, and
custodial fees) in addition to the expenses of the Portfolio.

PREPAYMENT RISK - the Portfolio may invest in mortgage-related securities which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Portfolio will be forced to reinvest this money at lower yields.

PRICE VOLATILITY - the value of the Portfolio changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may fluctuate, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While
equities may offer the potential for greater long-term growth than most debt
securities, they generally have higher volatility.

The Portfolio invests primarily in securities of larger companies, which
sometimes have more stable prices than smaller companies.

U.S. GOVERNMENT SECURITIES AND OBLIGATIONS - some U.S. government securities
are backed by the full faith and credit of the U.S. government and are
guaranteed as to both principal and interest by the U.S. Treasury. These
include direct obligations such as U.S. Treasury notes, bills and bonds, as
well as indirect obligations such as the Government National Mortgage
Association ("GNMA"). Other U.S. government securities are not direct
obligations of the U.S. Treasury, but rather are backed by the ability to
borrow directly from the U.S. Treasury. Still others are supported solely by
the credit of the agency or instrumentality itself and are neither guaranteed
nor insured by the U.S. government. No assurance can be given that the U.S.
government would provide financial support to such agencies if needed. U.S.
government securities may be subject to varying degrees of credit risk and all
U.S. government securities may be subject to price declines due to changing
interest rates. Securities directly supported by the full faith and credit of
the U.S. government have less credit risk.

INABILITY TO SELL SECURITIES - convertible securities may be less liquid than
other investments. The Portfolio could lose money if it cannot sell a security
at the time and price that would be most beneficial to the Portfolio.

SECURITIES LENDING - there is the risk that when lending portfolio securities,
the securities may not be available to the Portfolio on a timely basis and it
may lose the opportunity to sell the securities at a desirable price. Engaging
in securities lending could have a leveraging effect which may intensify the
market risk, credit risk and other risks associated with investments in the
Portfolio.

PORTFOLIO TURNOVER - a high portfolio turnover rate involves greater expenses
to the Portfolio including brokerage commissions and other transaction costs,
which may have an adverse impact on performance.

2    ING RussellTM Global Large Cap Index 85% Portfolio




                             ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

HOW THE PORTFOLIO
HAS PERFORMED

                Since the Portfolio had not commenced operations as of December
                31, 2007, there is no performance information included in this
                Prospectus. However, performance of the Russell Global Large
                Cap(Reg. TM) Index, the Lehman Brothers U.S. Aggregate Bond
                Index, and a composite index consisting of 85% Russell Global
                Large Cap(Reg. TM) Index and 15% Lehman Brothers U.S. Aggregate
                Bond Index are included in this Prospectus in the section
                entitled "Performance of the Indices."

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                           ING RussellTM Global Large Cap Index 85% Portfolio  3




WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

      The table that follows shows the estimated fees and operating expenses
      paid each year by the Portfolio. Actual expenses paid by the Portfolio
      may vary from year to year.

      Your Variable Contract or Qualified Plan is a contract between you and
      the issuing life insurance company or plan provider. The Portfolio is not
      a party to your Variable Contract or Qualified Plan but is merely an
      investment option made available to you by your insurance company or plan
      provider under your Variable Contract or Qualified Plan. The table does
      not reflect expenses and charges that are, or may be, imposed under your
      Variable Contract or Qualified Plan. For information on these charges or
      expenses, please refer to the applicable Variable Contract prospectus,
      prospectus summary, or disclosure statement. If you hold shares of the
      Portfolio that were purchased through an investment in a Qualified Plan,
      you should consult your administrator for more information regarding
      additional expenses that may be assessed in connection with your plan.
      The fees and expenses of the Portfolio are not fixed or specified under
      the terms of your Variable Contract or Qualified Plan.

SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT).
Not applicable.

OPERATING EXPENSES PAID EACH YEAR BY THE PORTFOLIO(1)
(as a % of average net assets)

                                                               DISTRIBUTION   SHAREHOLDER
                                                  MANAGEMENT      (12B-1)       SERVICE
PORTFOLIO                                            FEES          FEES           FEE
- -------------------------------------------      ------------ -------------- -------------
 ING RussellTM Global Large Cap Index 85%    %                       0.25           0.25

                                                               ACQUIRED        TOTAL                            NET
                                                                 FUND        PORTFOLIO      WAIVERS AND      PORTFOLIO
                                                OTHER            FEES        OPERATING     REIMBURSEMENTS    OPERATING
PORTFOLIO                                    EXPENSES(2)   AND EXPENSES(3)    EXPENSES   AND RECOUPMENT(4)   EXPENSES
- ------------------------------------------- ------------- ----------------- ----------- ------------------- ----------
 ING RussellTM Global Large Cap Index 85%

- --------------------------------------------------------------------------------
(1)      This table shows the estimated operating expenses for Adviser Class
         shares of the Portfolio as a ratio of expenses to average daily net
         assets. The Portfolio had not commenced operations as of December 31,
         2007, therefore, Other Expenses are estimated for the current fiscal
         year.

(2)      ING Funds Services, LLC receives an annual administrative fee equal to
         _____% of the Portfolio's average daily net assets which is reflected
         in Other Expenses. Russell Investment Group also receives an annual
         licensing fee of _____% for the Russell Global Large Cap(Reg. TM)
         Index. Also includes an estimated ___% non-recurring offering expenses
         and excluding this amount, Total Portfolio Operating Expenses would
         have been _____%.

(3)      The Acquired Fund Fees and Expenses are not fees and expenses incurred
         by the Portfolio directly. These fees and expenses include the
         Portfolio's pro rata share of the cumulative expenses charged by the
         Acquired Funds in which the Portfolio invests. The fees and expenses
         will vary based on the Portfolio's allocation of assets to, and the
         annualized net expenses of, the particular Acquired Funds. The impact
         of these fees and expenses is shown in Net Portfolio Operating
         Expenses.

(4)      ING Investments, LLC has entered into a written expense limitation
         agreement with the Portfolio under which it will limit expenses of the
         Portfolio excluding interest, taxes, brokerage and extraordinary
         expenses, and Acquired Fund Fees and Expenses, subject to possible
         recoupment by ING Investments within three years. The amount of the
         Portfolio's expenses to be waived during the current fiscal year by
         ING Investments, LLC, is shown under the heading Waivers and
         Reimbursements. The expense limit will continue through at least May
         1, 2009. The expense limitation agreement is contractual and shall
         renew automatically for one-year terms unless ING Investments, LLC
         provides written notice of the termination of the expense limitation
         agreement within 90 days of the end of the then-current term or upon
         termination of the investment management agreement. For more
         information on the expense limitation agreement, please see the SAI.

4  What You Pay to Invest




                                                         WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

      EXAMPLE

      The Example is intended to help you compare the cost of investing in the
      Portfolio with the cost of investing in other mutual funds. The Example
      assumes that you invest $10,000 in the Portfolio for the time periods
      indicated and then redeem all of your shares at the end of those periods.
      The Example also assumes that your investment has a 5% return each year,
      that all dividends and distributions are reinvested, and that the the
      Portfolio's net operating expenses remain the same. The Example does not
      reflect expenses which are, or may be, imposed by a Variable Contract or
      Qualified Plan that may use the Portfolio as its underlying investment
      option. If such expenses were reflected, the expenses indicated would be
      higher. Although your actual cost may be higher or lower, the Example
      shows what your costs would be based on these assumptions. Keep in mind
      that this is an estimate. Actual expenses and performance may vary.

ADV CLASS
PORTFOLIO                                                1 YEAR    3 YEARS
- ---------------------------------------------           --------  --------
 ING RussellTM Global Large Cap Index 85%(1)    $

- --------------------------------------------------------------------------------

(1)   The Example reflects the expense limitation agreement/waivers for the
      one-year period and the first year of the three-year period.

[GRAPHIC APPEARS HERE]


                          If you have any questions, please call 1-800-992-0180.

                                                       What You Pay to Invest  5




INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------

ABOUT YOUR INVESTMENT
Shares of the Portfolio are offered for purchase by separate accounts to serve
as an investment option under Variable Contacts, to Qualified Plans, to certain
other investment companies, and to other investors as permitted to satisfy the
diversification and other requirements under Section 817(h) of the Internal
Revenue Code of 1986, as amended, ("Code") and under federal tax regulations,
revenue rulings or private letter rulings issued by the Internal Revenue
Service.

You do not buy, sell, or exchange shares of the Portfolio. You choose it as an
investment option through your Variable Contract or Qualified Plan.

The insurance company that issued your Variable Contract is responsible for
investing in the Portfolio according to the investment options you've chosen.
You should consult your Variable Contract prospectus, prospectus summary or
disclosure statement for additional information about how this works. The
Portfolio assumes no responsibility for such prospectus, prospectus summary or
disclosure statement.

ING Funds Distributor, LLC, ("Distributor") the distributor for the Portfolio
also offers directly to the public, other ING Funds that have similar names,
investment objectives, and strategies as those of the Portfolio offered by this
Prospectus. You should be aware that the Portfolio is likely to differ from
these other ING Funds in size and cash flow pattern. Accordingly, the
performance of the Portfolio can be expected to vary from those of the other
funds.

The Portfolio currently does not foresee any disadvantages to investors if the
Portfolio serves as an investment option for Variable Contracts, offers its
shares directly to Qualified Plans or offers its shares to other permitted
investors. However, it is possible that the interests of owners of Variable
Contracts and and Qualified Plans for which the Portfolio serves as an
investment option and other permitted investors might, at some time, be in
conflict because of differences in tax treatment or other considerations. The
Portfolio's Board of Directors ("Board") directed ING Investments, LLC to
monitor events to identify any material conflicts between Variable Contract
owners, Qualified Plans, and other permitted investors and would have to
determine what actions, if any, should be taken in the event of such a
conflict. If such a conflict occurred, an insurance company participating in
the Portfolio might be required to redeem the investment of one or more of its
separate accounts from the Portfolio, a pension plan, investment company or
other permitted investor which might force the Portfolio to sell securities at
disadvantageous prices.

The Portfolio may discontinue offering shares at any time. If the Portfolio is
discontinued, any allocation to the Portfolio will be allocated to another
portfolio that the Board believes is suitable as long as any required
regulatory standards are met (which may include SEC approval).

FREQUENT TRADING - MARKET TIMING

The Portfolio is intended for long-term investment and not as a short-term
trading vehicle. Accordingly, organizations or individuals that use market
timing investment strategies should not purchase shares of the Portfolio.
Shares of the Portfolio are primarily sold through omnibus account arrangements
with financial intermediaries as an investment option for Variable Contracts
issued by insurances companies and as an investment option for Qualified Plans.
Omnibus accounts generally do not identify customers' trading activity on an
individual basis. The Portfolio's administrator has agreements which require
such intermediaries to provide detailed account information, including trading
history, upon request of the Portfolio.

The Portfolio relies on the financial intermediaries to monitor frequent,
short-term trading within the Portfolio by their customers. You should review
the materials provided to you by your financial intermediary including, in the
case of a Variable Contract, the prospectus that describes the contract or, in
the case of a Qualified Plan, the plan documentation for its policies regarding
frequent, short-term trading. Such policies may be more or less restrictive
than the Portfolio's policy. With trading information received as a result of
these agreements, the Portfolio may make a determination that certain trading
activity is harmful to the Portfolio and its shareholders even if such activity
is not strictly prohibited by the intermediaries' excessive trading policy. As
a result, a shareholder investing directly or indirectly in the Portfolio may
have their trading privileges suspended without violating the stated excessive
trading policy of the intermediary. The Portfolio reserves the right, in its
sole discretion and without prior notice, to reject, restrict or refuse
purchase orders whether directly or by exchange including purchase orders that
have been accepted by a financial intermediary, if the Portfolio determines
that such purchase order is not to be in the best interest of the Portfolio.
The Portfolio seeks assurances from the financial intermediaries that they have
procedures adequate to monitor and address frequent, short-term trading. There
is, however, no guarantee that the procedures of the financial intermediaries
will be able to curtail frequent, short-term trading activity.

The Portfolio believes that market timing or frequent, short-term trading in
any account, including a Variable Contract or Qualified Plan account, is not in
the best interest of the Portfolio or its shareholders. Due to the disruptive
nature of this activity, it can adversely impact the ability of the Adviser or
the Sub-Adviser to invest assets in an orderly, long-term manner. Frequent
trading can disrupt the management of the Portfolio and raise its expenses
through: increased trading and transaction costs; forced and unplanned
portfolio turnover; lost opportunity costs; and large asset swings that
decrease the Portfolio's ability to provide maximum investment return to all
shareholders. This in turn can have an adverse effect on the Portfolio's
performance.

Because the Portfolio invests in foreign securities, it may present greater
opportunities for market timers and thus be at a greater risk for excessive
trading. If an event occurring after the close of a

6    Information for Investors




                                         INFORMATION FOR INVESTORS
- --------------------------------------------------------------------
foreign market, but before the time the Portfolio computes its current net
asset value ("NAV"), causes a change in the price of the foreign security and
such price is not reflected in the Portfolio's current NAV, investors may
attempt to take advantage of anticipated price movements in securities held by
the Portfolio based on such pricing discrepancies. This is often referred to as
"price arbitrage." Such price arbitrage opportunities may also occur in
portfolios which do not invest in foreign securities. For example, if trading
in a security held by the Portfolio is halted and does not resume prior to the
time the Portfolio calculates its NAV, such "stale pricing" presents an
opportunity for investors to take advantage of the pricing discrepancy.
Similarily, a portfolio that holds thinly-traded securities, such as certain
small-capitalization securities, may be exposed to varying levels of pricing
arbitrage. The Portfolio has adopted fair valuation policies and procedures
intended to reduce the Portfolio's exposure to price arbitrage, stale pricing,
and other potential pricing discrepancies. However, to the extent that the
Portfolio's NAV does not immediately reflect these changes in market
conditions, short-term trading may dilute the value of Portfolio shares, which
negatively affects long-term shareholders.

Although the policies and procedures known to the Portfolio that are followed
by the financial intermediaries that use the Portfolio and the monitoring by
the the Portfolio are designed to discourage frequent, short-term trading, none
of these measures can eliminate the possibility that frequent, short-term
trading activity in the Portfolio will occur. Moreover, decisions about
allowing trades in the Portfolio may be required. These decisions are
inherently subjective, and will be made in a manner that is in the best
interest of the Portfolio's shareholders.
CLASSES OF SHARES

The Porfolio also offers Class I and Service Class shares. Class I and Service
Class shares are not offered in this Prospectus.

SHAREHOLDER SERVICE AND DISTRIBUTION PLAN FEES

The Company has adopted a shareholder services and distribution plan pursuant
to Rule 12b-1 under the Investment Company Act of 1940, as amended ("1940
Act")("Shareholder Service and Distribution Plan" for the ADV Class shares of
the Portfolio. Under the Shareholder Service and Distribution Plan, the
Distributor, the Portfolio's principal underwriter, is paid an annual
shareholder services fee equal to 0.25% and an annual distribution fee equal to
0.25% in each case computed as a percentage of average daily net assets of the
Adviser Class shares of the Portfolio. The shareholder services fee is paid for
the shareholder services and account maintenance services provided by the
Distributor to the Portfolio and could be used by the Distributor to pay
securities dealers (including the Distributor) and other financial
institutions, plan administrators, and organizations for servicing shareholder
accounts. The distribution fee would be paid for the Distributor's services as
distributor of the Portfolio in connection with any activities or expenses
primarily intended to result in the sale of Adviser Class shares of the
Portfolio. Because these fees are paid out on an ongoing basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.

HOW ING COMPENSATES ENTITIES OFFERING ITS PORTFOLIO AS AN INVESTMENT OPTION IN
ITS INSURANCE PRODUCTS

ING mutual funds may be offered as investment options in Variable Contracts by
affiliated and non-affiliated insurance companies. In addition to paying fees
under the Portfolio's Shareholder Service and Distribution Plan, the
Portfolio's Adviser or Distributor (collectively "ING"), out of its own
resources and without additional cost to the Portfolio or its shareholders, may
pay additional compensation to these insurance companies. The amount of the
payment is based upon an annual percentage of the average net assets held in
the Portfolio by those companies. The Portfolio's Adviser and Distributor may
make these payments for administrative, record keeping, or other services that
insurance companies provide to the Portfolio. These payments may also provide
incentive for insurance companies to make the Portfolio available through the
Variable Contracts issued by the insurance company, and thus they may promote
the distribution of the shares of the Portfolio.

The distributing broker-dealer for the Portfolio is ING Funds Distributor. ING
Funds Distributor has entered into such agreements with non-affiliated
insurance companies. Fees payable under these arrangements are at annual rates
that range from 0.15% to 0.25%. This is computed as a percentage of the average
aggregate amount invested in the Portfolio by contract holders through the
relevant insurance company's Variable Contracts. As of the date of this
Prospectus, the Adviser has entered in such arrangements with the following
insurance companies: Z\)rich Kemper Life Insurance Company; Symetra Life
Insurance Company; and First Fortis Life Insurance Company.

The Adviser also has entered into similar agreements with affiliated insurers
including, but not limited to:

ING Life Insurance and Annuity Company; ReliaStar Life Insurance Company;
ReliaStar Life of New York; Security Life of Denver; and ING USA Annuity and
Life Insurance Co. ING uses a variety of financial and accounting techniques to
allocate resources and profits across the organization. These methods may take
the form of cash payments to affiliates. These methods do not impact the costs
incurred when investing in the Portfolio. Additionally, if the Portfolio is not
sub-advised or is sub-advised by an ING Entity, ING may retain more revenue
than on those portfolios it must pay to have sub-advised by non-affiliated
entities. Management personnel of ING may receive additional compensation if
the overall amount of investments in the Portfolio advised by ING meets certain
target levels or increases over time.

The insurance companies through which investors hold shares of the Portfolio
may also pay fees to third parties in connection with distribution of Variable
Contracts and for services provided to contract owners. The Portfolio, the
Adviser, and the Distributor

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                          If you have any questions, please call 1-800-992-0180.

                                                  Information for Investors    7




INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------

are not a party to these arrangements. Investors should consult the prospectus
and statement of additional information for their Variable Contracts for a
discussion of these payments.

Ultimately, the agent or broker selling the Variable Contract to you could have
a financial interest in selling you a particular product to increase the
compensation they receive. Please make sure you read fully each prospectus and
discuss any questions you have with your agent or broker.
NET ASSET VALUE

The NAV per share of the Portfolio is determined each business day as of the
close of regular trading ("Market Close") on the New York Stock Exchange
("NYSE") (normally 4:00 p.m. Eastern time unless otherwise designated by the
NYSE). The Portfolio is open for business every day the NYSE is open. The NYSE
is closed on all weekends and on all national holidays and Good Friday.
Portfolio shares will not be priced on those days. The NAV per share of each
class of the Portfolio is calculated by taking the value of the Portfolio's
assets attributable to that class, subtracting the Portfolio's liabilities
attributable to that class, and dividing by the number of shares of that class
that are outstanding.

In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations
and short-term debt securities, and for situations where market quotations are
deemed unreliable. Investments in securities maturing in 60 days or less are
valued at amortized cost, which, when combined with accrued interest,
approximates market value. Securities prices may be obtained from automated
pricing services. Shares of investment companies held by the Portfolio will
generally be valued at the latest NAV reported by those investment companies.
The prospectuses for those investment companies explain the circumstances under
which they will use fair value pricing and the effects of using fair value
pricing.

Trading of foreign securities may not take place every day the NYSE is open.
Also, trading in some foreign markets and on some electronic trading networks
may occur on weekends or holidays when the Portfolio's NAV is not calculated.
As a result, the NAV of the Portfolio may change on days when shareholders will
not be able to purchase or redeem the Portfolio's shares.

When market quotations are not available or are deemed unreliable, the
Portfolio will use a fair value for the security that is determined in
accordance with procedures adopted by the Board. The types of securities for
which such fair value pricing might be required include, but are not limited
to:

o  Foreign securities, where a foreign security whose value at the close of the
   foreign market on which it principally trades likely would have changed by
   the time of the close of the NYSE, or the closing value is otherwise deemed
   unreliable;

o  Securities of an issuer that has entered into a restructuring;

o  Securities whose trading has been halted or suspended;

o  Fixed-income securities that have gone into default and for which there are
   no current market value quotations; and

o  Securities that are restricted as to transfer or resale.

The the Adviser or Sub-Adviser may rely on the recommendations of a fair value
pricing service approved the Portfolio's Board in valuing foreign securities.
Valuing securities at fair value involves greater reliance on judgment than
valuing securities that have readily available market quotations. The Adviser
or Sub-Adviser makes such determinations in good faith in accordance with
procedures adopted by the Portfolio's Board. Fair value determinations can also
involve reliance on quantitative models employed by a fair value pricing
service. There can be no assurance that the Portfolio could obtain the fair
value assigned to a security if it were to sell the security at approximately
the time at which the Portfolio determines its NAV per share.

When an insurance company's Variable or Qualified Plan is buying shares of the
Portfolio, it will pay the NAV that is next calculated after the order from the
insurance company's Variable Contract holder or Qualified Plan participant is
received in proper form. When an insurance company's Variable Contract or
Qualified Plan is selling shares, it will normally receive the NAV that is next
calculated after the order from the insurance company's Variable Contract
holder or Qualified Plan participant is received in proper form.
PORTFOLIO HOLDINGS DISCLOSURE POLICY

A description of the policies and procedures with respect to the disclosure of
the Portfolio's portfolio securities is available in the SAI. The Portfolio
posts its portfolio holdings schedule on its website on a calendar-quarter
basis and makes it available on the first day of the second month in the next
quarter. The portfolio holdings schedule is as of the last day of the month
preceding the quarter-end (e.g., the Portfolio will post the quarter ending
June 30 holdings on August 1). The Portfolio's portfolio holdings schedule
will, at a minimum, remain available on the Portfolio's website until the
Portfolio files a Form N-CSR or Form N-Q with the SEC for the period that
includes the date as of which the website information is current. The
Portfolio's website is located at www.ingfunds.com.

8    Information for Investors




ADVISER AND SUB-ADVISER             MANAGEMENT OF THE PORTFOLIO
- --------------------------------------------------------------------
ADVISER
ING INVESTMENTS, LLC ("ING INVESTMENTS" OR "ADVISER"), an Arizona limited
liability company, serves as the investment adviser to the Portfolio. ING
Investments has overall responsibility for the management of the Fund. ING
Investments oversees all investment advisory and portfolio management services
for the Fund.

ING Investments is registered with the SEC as an investment adviser. ING
Investments is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING
Groep") (NYSE: ING). ING Groep is a global financial institution of Dutch
origin offering banking, investments, life insurance, and institutional clients
in more than 50 countries. With a diverse work force of about 125,000 people,
ING Groep comprises a broad spectrum of pominent companies that increasingly
serve their clients under the ING brand. ING Investments became an investment
management firm in April, 1995.

As of June 30, 2008, ING Investments managed approximately $__ billion in
assets.

The principal address of ING Investments is 7337 East Doubletree Ranch Road,
Scottsdale, Arizona 85258.

ING Investments receives a monthly fee for its services based on the average
daily net assets of the Portfolio.

The following table shows the aggregate annual management fees to be apid by
the Portfolio as a percentage of the Portfolio's average daily net assets:

                                             MANAGEMENT
PORTFOLIO                                        FEE
 ING Russell Global Large Cap Index 85%             0.46%

For information regarding the basis for the Board's approval of the investment
advisory and investment sub-advisory relationships, please refer to the
Portfolio's annual shareholder report to be dated December 31, 2008.
SUB-ADVISER

ING Investments has engaged a sub-adviser to provide the day-to-day management
of the Portfolio's portfolio. The sub-adviser is an affiliate of ING
Investments.

ING Investments acts as a "manager-of-managers" for the Portfolio. ING
Investments delegates to the sub-adviser of the Portfolio the responsibility
for investment management, subject to ING Investments' oversight. ING
Investments is responsible for monitoring the investment program and
performance of the sub-adviser of the Portfolio.

From time to time, ING Investments may also recommend the appointment of
additional sub-advisers or replacement of sub-advisers to the Portfolio's
Board. It is not expected that ING Investments would normally recommend
replacement of affiliated sub-advisers as part of its oversight
responsibilities. The Portfolio and ING Investments have received exemptive
relief from the SEC to permit ING Investments, with the approval of the
Portfolio's Board, to appoint additional non-affiliated sub-advisers or to
replace an existing sub-adviser with a non-affiliated sub-adviser as well as
change the terms of a contract with a non-affiliated sub-adviser, without
submitting the contract to a vote of the Portfolio's shareholders. The
Portfolio will notify shareholders of any change in the identity of the
sub-adviser of the Portfolio. In this event, the name of the Portfolio and its
principal investment strategies may also change.

Under the terms of the sub-advisory agreement, the agreement can be terminated
by either ING Investments or the Portfolio's Board. In the event the
sub-advisory agreement is terminated, the sub-adviser may be replaced subject
to any regulatory requirements or ING Investments may assume day-to-day
investment management of the Fund.

ING INVESTMENT MANAGEMENT CO.

ING Investment Management Co. ("ING IM" or "Sub-Adviser"), a Connecticut
corporation, serves as the Sub-Adviser to the Portfolio. ING IM is responsible
for managing the assets of the Portfolio in accordance with the Portfolio's
investment objective and policies, subject to oversight by ING Investments and
the Portfolio's Board.

Founded in 1972, ING IM is registered with the SEC as an investment adviser.
ING IM has acted as adviser or sub-adviser to mutual funds since 1994 and has
managed institutional accounts since 1972. ING IM is an indirect, wholly-owned
subsidiary of ING Groep and is an affiliate of ING Investments. As of June 30,
2008, ING IM managed approximately $____ billion in assets. The principal
office of ING IM is 230 Park Avenue, New York, NY 10169.

The following individuals are jointly responsible for the day-today management
of the Portfolio:

Omar Aguilar, Ph.D. has co-managed the Portfolio since inception. He has been
with ING IM since July 2004 and is Head of Quantitative Equity Research. Dr.
Aguilar previously served as head of Lehman Brothers' quantitative research for
its alternative investment management business since 2002. Prior to that, Dr.
Aguilar was director of quantitative research and a portfolio manager with
Merrill Lynch Investment Management since 1999.

Vincent Costa, has co-managed the Portfolio since its inception. He joined ING
IM in April 2006 as Senior Quantitative Portfolio Manager from Merrill Lynch
Investment Managers where he had been employed since 1999, most recently as
Managing Director and Chief Investment Officer for that firm's Quantitative
Investment strategies.
ADDITIONAL INFORMATION REGARDING PORTFOLIO MANAGERS

The SAI provides additional information about each portfolio manager's
compensation, other accounts managed by each portfolio manager and each
portfolio manager's ownership of securities in the Fund.

[GRAPHIC APPEARS HERE]


                          If you have any questions, please call 1-800-992-0180.

                                                Management of the Portfolio    9




MORE INFORMATION ABOUT RISKS
- --------------------------------------------------------------------------------

All mutual funds involve risk - some more than others - and there is always the
chance that you could lose money or not earn as much as you hope. The
Portfolio's risk profile is largely a factor of the principal securities in
which it invests and investment techniques that it uses. The following pages
discuss the risks associated with certain of the types of securities in which
the Portfolio may invest and certain of the investment practices that the
Portfolio may use. For more information about these and other types of
securities and investment techniques that may be used by the Portfolio, see the
SAI.

Many of the investment techniques and strategies discussed in this Prospectus
and in the SAI are discretionary, which means that the Adviser or Sub-Adviser
can decide whether to use them or not. The Portfolio may invest in these
securities or use these techniques as par of the Portfolio's principal
investment strategy.
PRINCIPAL RISKS

The principal risks of the Portfolio are highlighted below. Please see the SAI
for a further discussion of the principal and other investment strategies
employed by the Portfolio.

CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security and as such, is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. The Portfolio may be required to redeem or convert a
convertible security before the holder would otherwise choose.

DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the
performance of an underlying asset or assets. Some derivatives are
sophisticated instruments that typically involve a small investment of cash
relative to the magnitude of risks assumed. These may include swap agreements,
options, forwards, and futures. Derivative securities are subject to market
risk which could be significant for those that have a leveraging effect.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. In addition, derivatives and their
underlying securities may experience periods of illiquidity which could cause
the Portfolio to hold a security it might otherwise sell or could force the
sale of a security at inopportune times or for prices that do not reflect
current market value. A risk of using derivatives is that the Adviser or
Sub-Adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security,
the hedge might not correlate to the market's movements and may have unexpected
or undesired results such as a loss or a reduction in gains.

FOREIGN SECURITIES. There are certain risks in owning foreign securities
including those resulting from: fluctuations in currency exchange rates;
devaluation of currencies; political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions; reduced availability of public information concerning issuers;
accounting, auditing and financial reporting standard or other regulatory
practices and requirements that are not uniform when compared to those
applicable to domestic companies; settlement and clearance procedures in some
countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices are more volatile that
those of domestic companies. With certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of portfolios or other assets of the
Portfolio including the withholding of dividends.

The Portfolio may enter into foreign currency transactions either on a spot or
cash basis at prevailing rates or through forward foreign currency exchange
contracts in order to have the necessary currencies to settle transactions, to
help protect Portfolio assets against adverse changes in foreign currency
exchange rates, or to provide exposure to a foreign currency commensurate with
the exposure to securities from that country. Such efforts could limit
potential gains that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Portfolio.

INABILITY TO SELL SECURITIES. Certain securities generally trade in lower
volume and may be less liquid than securities of large established companies.
These less liquid securities could include securities of small and mid-size
U.S. companies, high-yield securities, convertible securities, unrated debt and
convertible securities, securities that originate from small offerings and
foreign securities, particularly those from companies in countries with an
emerging securities market. The Portfolio could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Portfolio.

INDEX STRATEGY. The Portfolio may use an indexing strategy that does not
attempt to manage market volatility, use defensive strategies or reduce the
effects of any long-term periods of poor stock performance. The correlation
between the performance of the Portfolio and the performance of the indices may
be affected by the Portfolio's expenses, and the timing of purchases and
redemptions of the Portfolio's shares.

INVESTMENT BY FUNDS-OF-FUNDS. The Portfolio's shares may be purchased by other
investment companies, including through fund-of-funds arrangements within the
ING Funds family. In some cases, the Portfolio may serve as a primary or
significant investment vehicle for a fund-of-funds. From time to time, the
Portfolio may experience large inflows or redemptions due to allocations or
rebalancings by these funds-of funds. While it is impossible to predict the
overall impact of these transactions over time, there could be adverse effects
on portfolio management. For example, the Portfolio may be required to sell
securities or invest cash at times when it would not otherwise do so. These

10    More Information About Risks




                            MORE INFORMATION ABOUT RISKS
- --------------------------------------------------------------------
transactions could also increase transaction costs or portfolio turnover. The
Adviser or portfolio manager will monitor transactions by the funds-of funds
and will attempt to minimize any adverse effects on the Portfolio and
funds-of-funds as a result of these transactions. So long as the Portfolio
accepts investments by other investment companies, it will not purchase
securities of other investment companies, except to the extent permitted by the
1940 Act or under the terms of an exemptive order granted by the SEC.

LENDING PORTFOLIO SECURITIES. In order to generate additional income, the
Portfolio may lend portfolio securities in an amount up to 33  1/3% of total
Portfolio assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. When the Portfolio lends its securities,
it is responsible for investing the cash collateral it receives from the
borrower of the securities, and the Portfolio could incur losses in connection
with the investment of such cash collateral. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower default or fail financially.

MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization and may
be prepaid prior to maturity. Like other fixed-income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other
fixed-income securities. The rate of prepayments on underlying mortgages will
affect the price and volatility of a mortgage-related security, and may have
the effect of shortening or extending the effective maturity of the security
beyond what was anticipated at the time of the purchase. Unanticipated rates of
prepayment on underlying mortgages can be expected to increase the volatility
of such securities. In addition, the value of these securities may fluctuate in
response to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by the Portfolio. Additionally, although
mortgages and mortgage-related securities are generally supported by some form
of government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations, and
thus, are subject to risk of default.

OTHER INVESTMENT COMPANIES. The Portfolio may invest in other investment
companies to the extent permitted by the 1940 Act and the rules and regulations
thereunder. These may include exchange-traded funds ("ETFs") and Holding
Company Depositary Receipts ("HOLDRs"), among others. ETFs are exchange traded
investment companies that are designed to provide investment results
corresponding to an equity index and include, among others, Standard & Poor's
Depositary Receipts ("SPDRs"), PowerShares QQQTM ("QQQQ"), Dow Jones Industrial
Average Trading Stocks ("Diamonds") and iShares exchange-traded funds
("iShares"). The main risk of investing in other investment companies
(including ETFs) is that the value of the underlying securities held by the
investment company might decrease. The value of the underlying securities can
fluctuate in response to activities of individual companies or in response to
general market and/or economic conditions. Because the Portfolio may invest in
other investment companies, you will pay a proportionate share of the expenses
of that other investment company (including management fees, administration
fees and custodial fees). Additional risks of investments in ETFs include: (i)
an active trading market for an ETF's shares may not develop or be maintained
or (ii) trading may be halted if the listing exchanges' officials deem such
action appropriate, the shares are delisted from the exchange, or the
activation of market-wide "circuit breakers" (which are tied to large decreases
in stock prices) halts trading generally. Because HOLDRs concentrate in the
stocks of a particular industry, trends in that industry may have a dramatic
impact on their value.

To seek to achieve a return on uninvested cash or for other reasons,the
Portfolio may invest its assets in ING Institutional Prime Money Market Fund
and/or one or more other money market funds advised by ING affiliates ("ING
Money Market Funds"). The Portfolio's purchase of shares of an ING Money Market
Fund will result in the Portfolio paying a proportionate share of the expenses
of the ING Money Market Fund. The Portfolio's Adviser will waive its fee in an
amount equal to the advisory fee received by the adviser of the ING Money
Market Fund in which the Portfolio invests resulting from the Portfolio's
investment into the ING Money Market Fund.

U.S. GOVERNMENT SECURITIES AND OBLIGATIONS. Obligations issued by some U.S.
government agencies, authorities, instrumentalities or sponsored enterprises,
such as the Government National Mortgage Association, are backed by the full
faith and credit of the U.S. Treasury while obligations issued by others, such
as the Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation and Federal Home Loan Banks, are backed solely by the entity's own
resources or by the ability of the entity to borrow from the U.S. Treasury. No
assurance can be given that the U.S. government will provide financial support
to U.S. government agencies, authorities, instrumentalities or sponsored
enterprises if it is not obliged to do so by law.

PERCENTAGE AND RATING LIMITATIONS. Unless otherwise stated, the percentage and
rating limitations in this Prospectus apply at the time of investment.

PORTFOLIO TURNOVER. The Portfolio is generally expected to engage in frequent
and active trading of portfolio securities to achieve its investment objective.
A high portfolio turnover rate involves greater expenses to the Portfolio,
including brokerage commissions and other transaction costs, which may have an
adverse effect on the performance of the Portfolio.

[GRAPHIC APPEARS HERE]


                          If you have any questions, please call 1-800-992-0180.

                                              More Information About Risks    11




DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Portfolio declares and pays dividends and capital gains distributions, if
any, on an annual basis usually in June. To comply with federal tax
regulations, the Portfolio, may also pay an additional capital gains
distribution, usually in June.
TAX MATTERS

Holders of Variable Contracts should refer to the prospectus for their
contracts for information regarding the tax consequences of owning such
contracts and should consult their tax advisers before investing.

The Portfolio intends to qualify as a regulated investment company ("RIC") for
federal income tax purposes by satisfying the requirements under Subchapter M
of the Code, including requirements with respect to diversification of assets,
distribution of income and sources of income. As a RIC, the Portfolio generally
will not be subject to tax on its net investment company taxable income and net
realized capital gains. The Portfolio also intends to comply with the
diversification requirements of Section 817(h) of the Code and the underlying
regulations for Variable Contracts so that owners of these contracts should not
be subject to federal tax on distributions of dividends and income from the
Portfolio to the insurance company's separate accounts.

Since the sole shareholders of the Portfolio will be separate accounts or other
permitted investors, no discussion is included herein as to the federal income
tax consequences at the shareholder level. For information concerning the
federal income tax consequences to purchasers of the policies, see the attached
prospectus for the policy.

See the SAI for further information about tax matters.

THE TAX STATUS OF YOUR INVESTMENT IN THE PORTFOLIO DEPENDS UPON THE FEATURES OF
YOUR VARIABLE CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE PROSPECTUS
FOR THE VARIABLE CONTACT.

12    Dividends, Distributions and Taxes




                                                     PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

                           PERFORMANCE OF THE INDICES

ALTHOUGH THE PORTFOLIO'S INVESTMENT OBJECTIVE SEEKS TO MAXIMIZE TOTAL RETURN
OVER THE LONG TERM BY ALLOCATING ITS ASSETS AMONG STOCKS, BONDS, SHORT-TERM
INSTRUMENTS AND OTHER INVESTMENTS, THE PERFORMANCE INFORMATION THAT FOLLOWS FOR
THE RUSSELL GLOBAL LARGE CAP(Reg. TM) INDEX, THE LEHMAN BROTHERS U.S. AGGREGATE
BOND INDEX(Reg. TM), AND THE COMPOSITE INDEX CONSISTING OF 85% RUSSELL GLOBAL
LARGE CAP(Reg. TM) INDEX AND 15% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX(Reg.
TM) (COLLECTIVELY, THE "INDICES"), IS NOT THE PAST PERFORMANCE OF THE PORTFOLIO
OR ANY OTHER INVESTMENT.

The Indices' performance does not include any fees and expenses associated with
investing, including management fees and brokerage costs, and would be lower if
it did. The Indices' performance also does not reflect the deduction of any
insurance fees or charges that are imposed by the insurance company in
connection with its sale of variable contracts. You should refer to the
separate account prospectuses, prospectus summary or disclosure statement
describing variable contracts for information pertaining to these insurance
fees or charges. If the insurance fees or charges were included, the
performance would be lower. Past performance of the Indices is no guarantee of
future results, either for the Indices or for any mutual fund. You cannot
invest directly in an index.

           PERFORMANCE OF THE RUSSELL GLOBAL LARGE CAP(REG. TM) INDEX
The bar chart below shows the changes in the Russell Global Large Cap(Reg. TM)
Index performance from year to year and the table shows the average annual
total returns for the Russell Global Large Cap(Reg. TM) Index over the periods
indicated as of December 31, 2007. These returns reflect reinvestment of
dividends and other earnings.

Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit. It should
be noted that the long-term performance of the Russell Global Large Cap(Reg.
TM) Index coincides with a long bull stock market.

                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)
                               [INSERT BAR CHART]

                          AVERAGE ANNUAL TOTAL RETURNS

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007

                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                                            1 YEAR    3 YEARS    5 YEARS    10 YEARS
 RUSSELL GLOBAL LARGE CAP(Reg. TM) INDEX

As stated above, Russell Global Large Cap(Reg. TM) Index returns do not
represent actual Portfolio performance. Russell Global Large Cap(Reg. TM) Index
performance returns do not reflect management fees, transaction costs or
expenses.
ING RussellTM Global large Cap Index 85% Portfolio is not promoted, sponsored
or endorsed by, nor in any way affiliated with Russell Investment Group
("Russell"). Russell is not responsible for and has not reviewed the Portfolio
nor any associated literature or publications and Russell makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.
Russell reserves the right, at any time and without notice, to alter, amend,
terminate, or in any way change the Russell Indices. Russell has no obligation
to take the needs of any particular fund or its participants or any other
product or person into consideration in determining, composing, or calculating
any of the Russell Indices.

[GRAPHIC APPEARS HERE]


                          If you have any questions, please call 1-800-992-0180.

                                                  Performance of the Indices  13




PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

PERFORMANCE OF THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX(REG. TM)
("LBAB INDEX")

The bar chart below shows the changes in the LBAB Index' performance from year
to year and the table shows the average annual total returns for the LBAB Index
over the periods indicated as of December 31, 2007. These returns reflect
reinvestment of dividends and other earnings.
Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit.
                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)

                               [INSERT BAR CHART]

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007
                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

               1 YEAR    3 YEARS    5 YEARS    10 YEARS
 LBAB INDEX

Prior performance is net of taxes and includes reinvested dividends and
interest. As stated above, LBAB Index returns do not represent actual Portfolio
performance. LBAB Index' performance returns do not reflect management fees,
transaction costs or expenses.
The Portfolio is not sponsored or sold by Lehman Brothers or its affiliates.
Lehman Brothers makes no representations or warranty, express or implied, to
the shareholders of the Portfolio or any member of the public regarding the
advisability of investing in securities generally or in the Portfolio
particularly, or the ability of the LBAB Index to track general bond market
performance. The LBAB Index is determined, composed and calculated by Lehman
Brothers without regard to ING Investments, LLC, its affiliates or the
Portfolio. Lehman Brothers has no obligation to take the needs of ING
Investments, LLC, its affiliates or the shareholders of the Portfolio into
consideration in determining, composing, or calculating the LBAB Index. Lehman
Brothers is not responsible for and has not participated in the determination
of the timing or, prices at, or quantities of the purchase and sales of
investments in the Portfolio. Lehman Brothers has no obligation or liability in
connection with the administration or, marketing or, or trading in or of the
Portfolio. Lehman Brothers and the LBAB Index are trademarks of Lehman
Brothers, Inc.

14  Performance of the Indices




                                                     PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

PERFORMANCE OF THE 85% RUSSELL GLOBAL LARGE CAP INDEX AND 15% LBAB
INDEX COMPOSITE

The bar chart below shows the changes in the Composite Index' performance from
year to year and the table shows the average annual total returns for the
Composite Index over the periods indicated as of December 31, 2007. These
returns reflect reinvestment of dividends and other earnings.
Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit.

                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)

                               [INSERT BAR CHART]

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                    1 YEAR    3 YEARS    5 YEARS    10 YEARS
 COMPOSITE INDEX

Prior performance is net of taxes and includes reinvested dividends and
interest. As stated above, Composite Index returns do not represent actual
Portfolio performance. Composite Index' performance returns do not reflect
management fees, transaction costs or expenses.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                  Performance of the Indices  15




FINANCIAL
 HIGHLIGHTS
- --------------------------------------------------------------------
Because the Portfolio did not commence operations as of the fiscal year ended
December 31, 2007, financial highlights are not available.

16  Financial Highlights




TO OBTAIN MORE INFORMATION
YOU'LL FIND MORE INFORMATION ABOUT THE FUND IN OUR:

ANNUAL/SEMI-ANNUAL SHAREHOLDER REPORTS
In the Portfolio's annual/semi-annual shareholder reports, when available, you
will find a discussion of the recent market conditions and principal investment
strategies that significantly affected the Portfolio's performance during its
last fiscal year, the financial statements and the independent registered
public accounting firm's reports (in the annual shareholder report only).

STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI contains more detailed information about the Fund. The SAI is legally
part of this Prospectus (it is incorporated by reference). A copy has been
filed with the SEC.

Please write, call or visit our website for a free copy of the current annual/
semi-annual shareholder reports, the SAI or other information.

To make shareholder inquiries contact:

THE ING FUNDS
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258-2034

1-800-992-0180

Or visit our website at WWW.INGFUNDS.COM

This information may also be reviewed or obtained from the SEC. In order to
review the information in person, you will need to visit the SEC's Public
Reference Room in Washington, D.C. or call 202-551-8090 for information on the
operation of the Public Reference Room. Otherwise, you may obtain the
information for a fee by contacting the SEC at:

U.S. SECURITIES AND EXCHANGE COMMISSION
Public Reference Section
100 F Street, N.E.
Washington, D.C. 20549

or at the e-mail address: PUBLICINFO@SEC.GOV

Or obtain the information at no cost by visiting the SEC's Internet website at
WWW.SEC.GOV.

When contacting the SEC, you will want to refer to the Portfolio's SEC file
numbers. The file numbers are as follows:

ING Variable Portfolios, Inc.                         811-7651
  ING RussellTM Global Large Cap Index 85% Portfolio

PRPRO-RGLCI85I                                                   (0808-082008)
[GRAPHIC APPEARS HERE]

- --------------------------------------------------------------------------------




[GRAPHIC APPEARS HERE]

PROSPECTUS

Prospectus

AUGUST 20, 2008

Class I

ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO

This Prospectus contains important information about investing in Class I shares
of ING RussellTM Global Large Cap Index 85% Portfolio. You should read it
carefully before you invest and keep it for future reference. Please note that
your investment: is not a bank deposit, is not insured or guaranteed by the
Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve

[GRAPHIC APPEARS HERE]

Board or any other government agency, and is affected by market fluctuations.
There is no guarantee that the Fund will achieve its investment objective. As
with all mutual funds, the U.S. Securities and Exchange Commission ("SEC") has
not approved or disapproved these securities nor has the SEC judged whether the
information in this Prospectus is accurate or adequate. Any representation to
the contrary is a criminal offense.

- -------------------------------------------------------------------------------




                                                                  WHAT'S INSIDE
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
       INVESTMENT
       OBJECTIVE
[GRAPHIC APPEARS HERE]
       PRINCIPAL
       INVESTMENT
       STRATEGIES
[GRAPHIC APPEARS HERE]
       RISKS

Risk is the potential that your
investment will lose money or
not earn as much as you hope.
All mutual funds have varying
degrees of risk, depending on
the securities in which they
invest. Please read this
Prospectus carefully to be sure
you understand the principal
investment strategies and risks
associated with the Portfolio.
You should consult the
Statement of Additional
Information ("SAI") for a
complete list of the investment
strategies and risks.
[GRAPHIC APPEARS HERE]

       WHAT YOU
       PAY TO
       INVEST

The Portfolio is intended to be the funding vehicle for variable annuity
contracts and variable life insurance policies ("Variable Contracts") to be
offered by the separate accounts of certain life insurance companies
("Participating Insurance Companies") and qualified pension or retirement plans
("Qualified Plans").

Individual Variable Contract holders are not "shareholders" of the Portfolio.
The Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Variable Contract holders. Shares of the Portfolio are not
offered directly to the general public.
[GRAPHIC APPEARS HERE]

If you have any questions about the Fund, please call your investment
professional or us at 1-800-992-0180.

These pages contain a description of the Fund included in this Prospectus,
including the Portfolio's investment objective, principal investment strategies
and risks.

You'll also find:

WHAT YOU PAY TO INVEST. A list of the fees and expenses you pay - both directly
and indirectly - when you invest in the Fund.

INTRODUCTION TO THE PORTFOLIO                       1
ING RussellTM Global Large Cap Index 85% Portfolio  2

WHAT YOU PAY TO INVEST                              4
INFORMATION FOR INVESTORS                           6
MANAGEMENT OF THE PORTFOLIO                         9
MORE INFORMATION ABOUT RISKS                       10
DIVIDENDS, DISTRIBUTIONS AND TAXES                 12
PERFORMANCE OF THE INDICES                         13
FINANCIAL HIGHLIGHTS                               16
TO OBTAIN MORE INFORMATION                 Back Cover




INTRODUCTION TO THE PORTFOLIO
- --------------------------------------------------------------------------------

Risk is the potential that your investment will lose money or not earn as much
as you hope. All mutual funds have varying degrees of risk, depending on the
securities in which they invest. Please read this Prospectus carefully to be
sure you understand the principal investment strategies and risks associated
with the Portfolio. You should consult the Statement of Additional Information
("SAI") for a complete list of the investment strategies and risks.
[GRAPHIC APPEARS HERE]


If you have any questions about the Fund, please call your investment
professional or us at 1-800-992-0180.

This Prospectus is designed to help you make informed decisions about your
investments.

GLOBAL EQUITY INDEX PORTFOLIO

 The Portfolio seeks to maximize total return over the long term by allocating
 its assets among stocks, bonds, short-term instruments, and other investments.
     It may be a suitable investment if you:

      o are investing for the long-term - at least several years;
      o are looking for exposure to international markets; and
      o are willing to accept higher risk in exchange for the potential for
        long-term growth.

1   Introduction to the Portfolio




                                                                         ADVISER
                                                            ING Investments, LLC
                                                                     SUB-ADVISER
                                                   ING Investment Management Co.
ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

INVESTMENT OBJECTIVE

The Portfolio seeks to maximize total return over the long term by allocating
its assets among stock, bonds, short-term instruments and other investments.
The Portfolio's investment objective is not fundamental and may be changed
without a shareholder vote.

[GRAPHIC APPEARS HERE]

PRINCIPAL  INVESTMENT STRATEGIES
The Portfolio normally invests 85% of its net assets (plus borrowings for
investment purposes) in equity securities of companies included in the Russell
Global Large Cap(Reg. TM) Index and 15% of its net assets (plus borrowings for
investment purposes) in fixed-income securities included in the Lehman Brothers
U.S. Aggregate Bond Index(Reg. TM), exchange-traded funds ("ETFs"), or other
investment companies that seek investment results that correspond to the price
and yield performance of the Lehman Brothers U.S. Aggregate Bond Index(Reg.
TM). The securities in the Russell Global Large Cap(Reg. TM) Index and the
Lehman Brothers U.S. Aggregate Bond Index(Reg. TM) in which the Portfolio
invests, may include convertible securities that are convertible into stock
included in the indices, ETFs, and other derivatives whose economic returns
are, by design, closely equivalent to the returns of the indices, or its
components. The Portfolio will provide shareholders with at least 60 days'
prior notice of any change in this investment policy.

The Portfolio employs a "passive management" approach designed to track the
performance of the Russell Global Large Cap(Reg. TM) Index and Lehman Brothers
U.S. Aggregate Bond Index(Reg. TM) ("Indices"). The Russell Global Large
Cap(Reg. TM) Index is an unmanaged index that measures the performance of the
largest companies in the Russell Global Index. As of December 31, 2007, the
smallest company in the Russell Global Large Cap(Reg. TM) Index had a market
capitalization of $___ billion and the largest company had a market
capitalization of $___ billion. The Lehman Brothers U.S. Aggregate Bond
Index(Reg. TM) is an unmanaged index that measures the performance of the U.S
investment grade bond market, which includes investment grade U.S. Treasury
bonds, government-related bonds, investment grade corporate bonds, mortgage
pass-through securities, commercial mortgage-backed securities and asset-backed
securities that are publicly offered for sale in the United States. The
securities in the Lehman Brothers U.S. Aggregate Bond Index(Reg. TM) have $250
million or more of outstanding face value and have at least one year remaining
to maturity. In addition, the securities must be denominated in U.S. dollars
and must be fixed-rate and non-convertible.

The Portfolio may not always hold all of the same securities as the Indices.
The Portfolio may also invest in stock index futures and other derivatives as a
substitute for the sale or purchase of securities in the Indices and to provide
equity exposure to the Portfolio's cash position. Although the Portfolio
attempts to track, as closely as possible, the performance of the Indices, the
Portfolio does not always perform exactly like the Indices. Unlike the Indices,
the Portfolio has operating expenses and transaction costs and therefore, has a
performance disadvantage versus the Indices.

The Portfolio may lend portfolio securities on a short-term or longterm basis,
up to 33 1/3% of its total assets.

The Portfolio may invest in other investment companies to the extent permitted
under the Investment Company Act of 1940, as amended, and the rules,
regulations, and exemptions thereunder.

The Portfolio may engage in frequent and active trading of portfolio securities
to achieve its investment objective.

- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:

CONVERTIBLE SECURITIES - the value of convertible securities may fall when
interest rates rise. Convertible securities with longer maturities tend to be
more sensitive to changes in interest rates, usually making them more volatile
than convertible securities with shorter maturities. The Portfolio could lose
money if the issuer of a convertible security is unable to meet its financial
obligations or goes bankrupt.

DERIVATIVES - derivatives are subject to the risk of changes in the market
price of the underlying securities, credit risk with respect to the
counterparty to the derivative instruments and the risk of loss due to changes
in interest rates. The use of certain derivatives may also have a leveraging
effect which may increase the volatility of the Portfolio and may reduce its
returns.

FOREIGN INVESTING - Foreign investments may be riskier than U.S. investments
for many reasons, including: changes in currency exchange rates; unstable
political and economic conditions; a lack of adequate company information;
differences in the way securities markets operate; less secure foreign banks or
securities depositories than those in the United States; less standardization
of accounting standards and market regulations in certain foreign countries and
varying foreign controls on investments. Foreign investments may also be
affected by administrative difficulties, such as delays in clearing and
settling transactions. Additionally, securities of foreign companies may be
denominated in foreign currencies. Exchange rate fluctuations may reduce or
eliminate gains or create losses. Hedging strategies intended to reduce this
risk may not perform as expected. These factors may make foreign investments
more volatile and potentially less liquid than U.S. investments. To the extent
the Portfolio invests in countries with emerging securities markets, the risks
of foreign investing may be greater, as these countries may be less politically
and economically stable than other countries. It may also be more difficult to
buy and sell securities in countries with emerging securities markets.

INDEX STRATEGY - the Portfolio uses an indexing strategy that does not attempt
to manage market volatility, use defensive strategies, or reduce the effects of
any long-term periods of poor market performance. The correlation between the
Portfolio and index performance may be affected by the Portfolio's expenses and
the timing of purchases and redemptions of the Portfolio's shares.

INTEREST RATE - fixed-income securities are subject to the risk that interest
rates will rise, which generally causes bond prices to fall. Economic and
market conditions may cause issuers to default or go bankrupt. High-yield
instruments are even more sensitive to economic and market conditions than
other fixed-income instruments.

MORTGAGE-RELATED SECURITIES - the prices of mortgage-related securities are
sensitive to changes in interest rates and changes in the prepayment patterns
on the underlying instruments. If the principal on the underlying mortgage
notes is repaid faster than anticipated, the price of the mortgage-related
security may fall.

OTHER INVESTMENT COMPANIES - the main risk of investing in other investment
companies, including ETFs, is the risk that the value of the underlying
securities might decrease. Because the Portfolio invests in other investment
companies, you will pay a proportionate share of the expenses of that other
investment company (including management fees, administration fees, and
custodial fees) in addition to the expenses of the Portfolio.

PREPAYMENT RISK - the Portfolio may invest in mortgage-related securities which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Portfolio will be forced to reinvest this money at lower yields.

PRICE VOLATILITY - the value of the Portfolio changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may fluctuate, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While
equities may offer the potential for greater long-term growth than most debt
securities, they generally have higher volatility.

The Portfolio invests primarily in securities of larger companies, which
sometimes have more stable prices than smaller companies.

U.S. GOVERNMENT SECURITIES AND OBLIGATIONS - some U.S. government securities
are backed by the full faith and credit of the U.S. government and are
guaranteed as to both principal and interest by the U.S. Treasury. These
include direct obligations such as U.S. Treasury notes, bills and bonds, as
well as indirect obligations such as the Government National Mortgage
Association ("GNMA"). Other U.S. government securities are not direct
obligations of the U.S. Treasury, but rather are backed by the ability to
borrow directly from the U.S. Treasury. Still others are supported solely by
the credit of the agency or instrumentality itself and are neither guaranteed
nor insured by the U.S. government. No assurance can be given that the U.S.
government would provide financial support to such agencies if needed. U.S.
government securities may be subject to varying degrees of credit risk and all
U.S. government securities may be subject to price declines due to changing
interest rates. Securities directly supported by the full faith and credit of
the U.S. government have less credit risk.

INABILITY TO SELL SECURITIES - convertible securities may be less liquid than
other investments. The Portfolio could lose money if it cannot sell a security
at the time and price that would be most beneficial to the Portfolio.

SECURITIES LENDING - there is the risk that when lending portfolio securities,
the securities may not be available to the Portfolio on a timely basis and it
may lose the opportunity to sell the securities at a desirable price. Engaging
in securities lending could have a leveraging effect which may intensify the
market risk, credit risk and other risks associated with investments in the
Portfolio.

PORTFOLIO TURNOVER - a high portfolio turnover rate involves greater expenses
to the Portfolio including brokerage commissions and other transaction costs,
which may have an adverse impact on performance.

2        ING RussellTM Global Large Cap Index 85% Portfolio




                             ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

HOW THE PORTFOLIO
HAS PERFORMED

                Since the Portfolio had not commenced operations as of December
                31, 2007, there is no performance information included in this
                Prospectus. However, performance of the Russell Global Large
                Cap(Reg. TM) Index, the Lehman Brothers U.S. Aggregate Bond
                Index, and a composite index consisting of 85% Russell Global
                Large Cap(Reg. TM) Index and 15% Lehman Brothers U.S. Aggregate
                Bond Index are included in this Prospectus in the section
                entitled "Performance of the Indices."

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                           ING RussellTM Global Large Cap Index 85% Portfolio  3




WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

      The table that follows shows the estimated fees and operating expenses
      paid each year by the Portfolio. Actual expenses paid by the Portfolio
      may vary from year to year.

      Your Variable Contract or Qualified Plan is a contract between you and
      the issuing life insurance company or plan provider. The Portfolio is not
      a party to your Variable Contract or Qualified Plan but is merely an
      investment option made available to you by your insurance company or plan
      provider under your Variable Contract or Qualified Plan. The table does
      not reflect expenses and charges that are, or may be, imposed under your
      Variable Contract or Qualified Plan. For information on these charges or
      expenses, please refer to the applicable Variable Contract prospectus,
      prospectus summary, or disclosure statement. If you hold shares of the
      Portfolio that were purchased through an investment in a Qualified Plan,
      you should consult your administrator for more information regarding
      additional expenses that may be assessed in connection with your plan.
      The fees and expenses of the Portfolio are not fixed or specified under
      the terms of your Variable Contract or Qualified Plan.

SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT).
Not applicable.

OPERATING EXPENSES PAID EACH YEAR BY THE PORTFOLIO(1)
(as a % of average net assets)

                                                               DISTRIBUTION
                                                  MANAGEMENT      (12B-1)        OTHER
PORTFOLIO                                            FEES          FEES       EXPENSES(2)
- -------------------------------------------      ------------ -------------- -------------
 ING RussellTM Global Large Cap Index 85%    %                      N/A             0.25

                                                 ACQUIRED        TOTAL                            NET
                                                   FUND        PORTFOLIO      WAIVERS AND      PORTFOLIO
                                                   FEES        OPERATING     REIMBURSEMENTS    OPERATING
PORTFOLIO                                    AND EXPENSES(3)    EXPENSES   AND RECOUPMENT(4)   EXPENSES
- ------------------------------------------- ----------------- ----------- ------------------- ----------
 ING RussellTM Global Large Cap Index 85%

- --------------------------------------------------------------------------------
(1)      This table shows the estimated operating expenses for Class I shares
         of the Portfolio as a ratio of expenses to average daily net assets.
         The Portfolio had not commenced operations as of December 31, 2007,
         therefore, Other Expenses are estimated for the current fiscal year.

(2)      ING Funds Services, LLC receives an annual administrative fee equal to
         _____% of the Portfolio's average daily net assets which is reflected
         in Other Expenses. Russell Investment Group also receives an annual
         licensing fee of _____% for the Russell Global Large Cap(Reg. TM)
         Index. Also includes an estimated ___% non-recurring offering expenses
         and excluding this amount, Total Portfolio Operating Expenses would
         have been _____%.

(3)      The Acquired Fund Fees and Expenses are not fees and expenses incurred
         by the Portfolio directly. These fees and expenses include the
         Portfolio's pro rata share of the cumulative expenses charged by the
         Acquired Funds in which the Portfolio invests. The fees and expenses
         will vary based on the Portfolio's allocation of assets to, and the
         annualized net expenses of, the particular Acquired Funds. The impact
         of these fees and expenses is shown in Net Portfolio Operating
         Expenses.

(4)      ING Investments, LLC has entered into a written expense limitation
         agreement with the Portfolio under which it will limit expenses of the
         Portfolio excluding interest, taxes, brokerage and extraordinary
         expenses, and Acquired Fund Fees and Expenses, subject to possible
         recoupment by ING Investments within three years. The amount of the
         Portfolio's expenses to be waived during the current fiscal year by
         ING Investments, LLC, is shown under the heading Waivers and
         Reimbursements. The expense limit will continue through at least May
         1, 2009. The expense limitation agreement is contractual and shall
         renew automatically for one-year terms unless ING Investments, LLC
         provides written notice of the termination of the expense limitation
         agreement within 90 days of the end of the then-current term or upon
         termination of the investment management agreement. For more
         information on the expense limitation agreement, please see the SAI.

4  What You Pay to Invest




                                                         WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]

      EXAMPLE

      The Example is intended to help you compare the cost of investing in the
      Portfolio with the cost of investing in other mutual funds. The Example
      assumes that you invest $10,000 in the Portfolio for the time periods
      indicated and then redeem all of your shares at the end of those periods.
      The Example also assumes that your investment has a 5% return each year,
      that all dividends and distributions are reinvested, and that the the
      Portfolio's net operating expenses remain the same. The Example does not
      reflect expenses which are, or may be, imposed by a Variable Contract or
      Qualified Plan that may use the Portfolio as its underlying investment
      option. If such expenses were reflected, the expenses indicated would be
      higher. Although your actual cost may be higher or lower, the Example
      shows what your costs would be based on these assumptions. Keep in mind
      that this is an estimate. Actual expenses and performance may vary.

CLASS I

PORTFOLIO                                                1 YEAR    3 YEARS
- ---------------------------------------------           --------  --------
 ING RussellTM Global Large Cap Index 85%(1)    $

- --------------------------------------------------------------------------------

(1)   The Example reflects the expense limitation agreement/waivers for the
      one-year period and the first year of the three-year period.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                       What You Pay to Invest  5




INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------

ABOUT YOUR INVESTMENT
Shares of the Portfolio are offered for purchase by separate accounts to serve
as an investment option under Variable Contacts, to Qualified Plans, to certain
other investment companies, and to other investors as permitted to satisfy the
diversification and other requirements under Section 817(h) of the Internal
Revenue Code of 1986, as amended, ("Code") and under federal tax regulations,
revenue rulings or private letter rulings issued by the Internal Revenue
Service.

You do not buy, sell, or exchange shares of the Portfolio. You choose it as an
investment option through your Variable Contract or Qualified Plan.

The insurance company that issued your Variable Contract is responsible for
investing in the Portfolio according to the investment options you've chosen.
You should consult your Variable Contract prospectus, prospectus summary or
disclosure statement for additional information about how this works. The
Portfolio assumes no responsibility for such prospectus, prospectus summary or
disclosure statement.

ING Funds Distributor, LLC, ("Distributor") the distributor for the Portfolio
also offers directly to the public, other ING Funds that have similar names,
investment objectives, and strategies as those of the Portfolio offered by this
Prospectus. You should be aware that the Portfolio is likely to differ from
these other ING Funds in size and cash flow pattern. Accordingly, the
performance of the Portfolio can be expected to vary from those of the other
funds.

The Portfolio currently does not foresee any disadvantages to investors if the
Portfolio serves as an investment option for Variable Contracts, offers its
shares directly to Qualified Plans or offers its shares to other permitted
investors. However, it is possible that the interests of owners of Variable
Contracts and and Qualified Plans for which the Portfolio serves as an
investment option and other permitted investors might, at some time, be in
conflict because of differences in tax treatment or other considerations. The
Portfolio's Board of Directors ("Board") directed ING Investments, LLC to
monitor events to identify any material conflicts between Variable Contract
owners, Qualified Plans, and other permitted investors and would have to
determine what actions, if any, should be taken in the event of such a
conflict. If such a conflict occurred, an insurance company participating in
the Portfolio might be required to redeem the investment of one or more of its
separate accounts from the Portfolio, a pension plan, investment company or
other permitted investor which might force the Portfolio to sell securities at
disadvantageous prices.

The Portfolio may discontinue offering shares at any time. If the Portfolio is
discontinued, any allocation to the Portfolio will be allocated to another
portfolio that the Board believes is suitable as long as any required
regulatory standards are met (which may include SEC approval).

FREQUENT TRADING - MARKET TIMING

The Portfolio is intended for long-term investment and not as a short-term
trading vehicle. Accordingly, organizations or individuals that use market
timing investment strategies should not purchase shares of the Portfolio.
Shares of the Portfolio are primarily sold through omnibus account arrangements
with financial intermediaries as an investment option for Variable Contracts
issued by insurances companies and as an investment option for Qualified Plans.
Omnibus accounts generally do not identify customers' trading activity on an
individual basis. The Portfolio's administrator has agreements which require
such intermediaries to provide detailed account information, including trading
history, upon request of the Portfolio.

The Portfolio relies on the financial intermediaries to monitor frequent,
short-term trading within the Portfolio by their customers. You should review
the materials provided to you by your financial intermediary including, in the
case of a Variable Contract, the prospectus that describes the contract or, in
the case of a Qualified Plan, the plan documentation for its policies regarding
frequent, short-term trading. Such policies may be more or less restrictive
than the Portfolio's policy. With trading information received as a result of
these agreements, the Portfolio may make a determination that certain trading
activity is harmful to the Portfolio and its shareholders even if such activity
is not strictly prohibited by the intermediaries' excessive trading policy. As
a result, a shareholder investing directly or indirectly in the Portfolio may
have their trading privileges suspended without violating the stated excessive
trading policy of the intermediary. The Portfolio reserves the right, in its
sole discretion and without prior notice, to reject, restrict or refuse
purchase orders whether directly or by exchange including purchase orders that
have been accepted by a financial intermediary, if the Portfolio determines
that such purchase order is not to be in the best interest of the Portfolio.
The Portfolio seeks assurances from the financial intermediaries that they have
procedures adequate to monitor and address frequent, short-term trading. There
is, however, no guarantee that the procedures of the financial intermediaries
will be able to curtail frequent, short-term trading activity.

The Portfolio believes that market timing or frequent, short-term trading in
any account, including a Variable Contract or Qualified Plan account, is not in
the best interest of the Portfolio or its shareholders. Due to the disruptive
nature of this activity, it can adversely impact the ability of the Adviser or
the Sub-Adviser to invest assets in an orderly, long-term manner. Frequent
trading can disrupt the management of the Portfolio and raise its expenses
through: increased trading and transaction costs; forced and unplanned
portfolio turnover; lost opportunity costs; and large asset swings that
decrease the Portfolio's ability to provide maximum investment return to all
shareholders. This in turn can have an adverse effect on the Portfolio's
performance.

Because the Portfolio invests in foreign securities, it may present greater
opportunities for market timers and thus be at a greater risk for excessive
trading. If an event occurring after the close of a

6    Information for Investors




                                         INFORMATION FOR INVESTORS
- --------------------------------------------------------------------
foreign market, but before the time the Portfolio computes its current net
asset value ("NAV"), causes a change in the price of the foreign security and
such price is not reflected in the Portfolio's current NAV, investors may
attempt to take advantage of anticipated price movements in securities held by
the Portfolio based on such pricing discrepancies. This is often referred to as
"price arbitrage." Such price arbitrage opportunities may also occur in
portfolios which do not invest in foreign securities. For example, if trading
in a security held by the Portfolio is halted and does not resume prior to the
time the Portfolio calculates its NAV, such "stale pricing" presents an
opportunity for investors to take advantage of the pricing discrepancy.
Similarily, a portfolio that holds thinly-traded securities, such as certain
small-capitalization securities, may be exposed to varying levels of pricing
arbitrage. The Portfolio has adopted fair valuation policies and procedures
intended to reduce the Portfolio's exposure to price arbitrage, stale pricing,
and other potential pricing discrepancies. However, to the extent that the
Portfolio's NAV does not immediately reflect these changes in market
conditions, short-term trading may dilute the value of Portfolio shares, which
negatively affects long-term shareholders.

Although the policies and procedures known to the Portfolio that are followed
by the financial intermediaries that use the Portfolio and the monitoring by
the the Portfolio are designed to discourage frequent, short-term trading, none
of these measures can eliminate the possibility that frequent, short-term
trading activity in the Portfolio will occur. Moreover, decisions about
allowing trades in the Portfolio may be required. These decisions are
inherently subjective, and will be made in a manner that is in the best
interest of the Portfolio's shareholders.

CLASSES OF SHARES

The Porfolio also offers Adviser Class and Service Class shares. Adviser Class
and Service Class shares are not offered in this Prospectus.

HOW ING COMPENSATES ENTITIES OFFERING ITS PORTFOLIO AS AN INVESTMENT OPTION IN
ITS INSURANCE PRODUCTS

ING mutual funds may be offered as investment options in Variable Contracts by
affiliated and non-affiliated insurance companies. The Portfolio's Adviser or
Distributor (collectively "ING"), out of its own resources and without
additional cost to the Portfolio or its shareholders, may pay additional
compensation to these insurance companies. The amount of the payment is based
upon an annual percentage of the average net assets held in the Portfolio by
those companies. The Portfolio's Adviser and Distributor may make these
payments for administrative, record keeping, or other services that insurance
companies provide to the Portfolio. These payments may also provide incentive
for insurance companies to make the Portfolio available through the Variable
Contracts issued by the insurance company, and thus they may promote the
distribution of the shares of the Portfolio.

The distributing broker-dealer for the Portfolio is ING Funds Distributor. ING
Funds Distributor has entered into such agreements with non-affiliated
insurance companies. Fees payable under these arrangements are at annual rates
that range from 0.15% to 0.25%. This is computed as a percentage of the average
aggregate amount invested in the Portfolio by contract holders through the
relevant insurance company's Variable Contracts. As of the date of this
Prospectus, the Adviser has entered in such arrangements with the following
insurance companies: Z\)rich Kemper Life Insurance Company; Symetra Life
Insurance Company; and First Fortis Life Insurance Company.

The Adviser also has entered into similar agreements with affiliated insurers
including, but not limited to:

ING Life Insurance and Annuity Company; ReliaStar Life Insurance Company;
ReliaStar Life of New York; Security Life of Denver; and ING USA Annuity and
Life Insurance Co. ING uses a variety of financial and accounting techniques to
allocate resources and profits across the organization. These methods may take
the form of cash payments to affiliates. These methods do not impact the costs
incurred when investing in the Portfolio. Additionally, if the Portfolio is not
sub-advised or is sub-advised by an ING Entity, ING may retain more revenue
than on those portfolios it must pay to have sub-advised by non-affiliated
entities. Management personnel of ING may receive additional compensation if
the overall amount of investments in the Portfolio advised by ING meets certain
target levels or increases over time.

The insurance companies through which investors hold shares of the Portfolio
may also pay fees to third parties in connection with distribution of Variable
Contracts and for services provided to contract owners. The Portfolio, the
Adviser, and the Distributor are not a party to these arrangements. Investors
should consult the prospectus and statement of additional information for their
Variable Contracts for a discussion of these payments.

Ultimately, the agent or broker selling the Variable Contract to you could have
a financial interest in selling you a particular product to increase the
compensation they receive. Please make sure you read fully each prospectus and
discuss any questions you have with your agent or broker.

NET ASSET VALUE

The NAV per share of the Portfolio is determined each business day as of the
close of regular trading ("Market Close") on the New York Stock Exchange
("NYSE") (normally 4:00 p.m. Eastern time unless otherwise designated by the
NYSE). The Portfolio is open for business every day the NYSE is open. The NYSE
is closed on all weekends and on all national holidays and Good Friday.
Portfolio shares will not be priced on those days. The NAV per share of each
class of the Portfolio is calculated by taking the value of the Portfolio's
assets attributable to that class, subtracting the Portfolio's liabilities
attributable to that class, and dividing by the number of shares of that class
that are outstanding.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                  Information for Investors    7




INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------

In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations
and short-term debt securities, and for situations where market quotations are
deemed unreliable. Investments in securities maturing in 60 days or less are
valued at amortized cost, which, when combined with accrued interest,
approximates market value. Securities prices may be obtained from automated
pricing services. Shares of investment companies held by the Portfolio will
generally be valued at the latest NAV reported by those investment companies.
The prospectuses for those investment companies explain the circumstances under
which they will use fair value pricing and the effects of using fair value
pricing.

Trading of foreign securities may not take place every day the NYSE is open.
Also, trading in some foreign markets and on some electronic trading networks
may occur on weekends or holidays when the Portfolio's NAV is not calculated.
As a result, the NAV of the Portfolio may change on days when shareholders will
not be able to purchase or redeem the Portfolio's shares.

When market quotations are not available or are deemed unreliable, the
Portfolio will use a fair value for the security that is determined in
accordance with procedures adopted by the Board. The types of securities for
which such fair value pricing might be required include, but are not limited
to:

o  Foreign securities, where a foreign security whose value at the close of the
   foreign market on which it principally trades likely would have changed by
   the time of the close of the NYSE, or the closing value is otherwise deemed
   unreliable;

o  Securities of an issuer that has entered into a restructuring;

o  Securities whose trading has been halted or suspended;

o  Fixed-income securities that have gone into default and for which there are
   no current market value quotations; and

o  Securities that are restricted as to transfer or resale.

The the Adviser or Sub-Adviser may rely on the recommendations of a fair value
pricing service approved the Portfolio's Board in valuing foreign securities.
Valuing securities at fair value involves greater reliance on judgment than
valuing securities that have readily available market quotations. The Adviser
or Sub-Adviser makes such determinations in good faith in accordance with
procedures adopted by the Portfolio's Board. Fair value determinations can also
involve reliance on quantitative models employed by a fair value pricing
service. There can be no assurance that the Portfolio could obtain the fair
value assigned to a security if it were to sell the security at approximately
the time at which the Portfolio determines its NAV per share.

When an insurance company's Variable or Qualified Plan is buying shares of the
Portfolio, it will pay the NAV that is next calculated after the order from the
insurance company's Variable Contract holder or Qualified Plan participant is
received in proper form. When an insurance company's Variable Contract or
Qualified Plan is selling shares, it will normally receive the NAV that is next
calculated after the order from the insurance company's Variable Contract
holder or Qualified Plan participant is received in proper form.

PORTFOLIO HOLDINGS DISCLOSURE POLICY

A description of the policies and procedures with respect to the disclosure of
the Portfolio's portfolio securities is available in the SAI. The Portfolio
posts its portfolio holdings schedule on its website on a calendar-quarter
basis and makes it available on the first day of the second month in the next
quarter. The portfolio holdings schedule is as of the last day of the month
preceding the quarter-end (e.g., the Portfolio will post the quarter ending
June 30 holdings on August 1). The Portfolio's portfolio holdings schedule
will, at a minimum, remain available on the Portfolio's website until the
Portfolio files a Form N-CSR or Form N-Q with the SEC for the period that
includes the date as of which the website information is current. The
Portfolio's website is located at www.ingfunds.com.

8    Information for Investors




ADVISER AND SUB-ADVISER             MANAGEMENT OF THE PORTFOLIO
- --------------------------------------------------------------------
ADVISER
ING INVESTMENTS, LLC ("ING INVESTMENTS" OR "ADVISER"), an Arizona limited
liability company, serves as the investment adviser to the Portfolio. ING
Investments has overall responsibility for the management of the Fund. ING
Investments oversees all investment advisory and portfolio management services
for the Fund.

ING Investments is registered with the SEC as an investment adviser. ING
Investments is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING
Groep") (NYSE: ING). ING Groep is a global financial institution of Dutch
origin offering banking, investments, life insurance, and institutional clients
in more than 50 countries. With a diverse work force of about 125,000 people,
ING Groep comprises a broad spectrum of pominent companies that increasingly
serve their clients under the ING brand. ING Investments became an investment
management firm in April, 1995.

As of June 30, 2008, ING Investments managed approximately $__ billion in
assets.

The principal address of ING Investments is 7337 East Doubletree Ranch Road,
Scottsdale, Arizona 85258.

ING Investments receives a monthly fee for its services based on the average
daily net assets of the Portfolio.

The following table shows the aggregate annual management fees to be apid by
the Portfolio as a percentage of the Portfolio's average daily net assets:

                                             MANAGEMENT
PORTFOLIO                                        FEE
 ING Russell Global Large Cap Index 85%             0.46%

For information regarding the basis for the Board's approval of the investment
advisory and investment sub-advisory relationships, please refer to the
Portfolio's annual shareholder report to be dated December 31, 2008.
SUB-ADVISER

ING Investments has engaged a sub-adviser to provide the day-to-day management
of the Portfolio's portfolio. The sub-adviser is an affiliate of ING
Investments.

ING Investments acts as a "manager-of-managers" for the Portfolio. ING
Investments delegates to the sub-adviser of the Portfolio the responsibility
for investment management, subject to ING Investments' oversight. ING
Investments is responsible for monitoring the investment program and
performance of the sub-adviser of the Portfolio.

From time to time, ING Investments may also recommend the appointment of
additional sub-advisers or replacement of sub-advisers to the Portfolio's
Board. It is not expected that ING Investments would normally recommend
replacement of affiliated sub-advisers as part of its oversight
responsibilities. The Portfolio and ING Investments have received exemptive
relief from the SEC to permit ING Investments, with the approval of the
Portfolio's Board, to appoint additional non-affiliated sub-advisers or to
replace an existing sub-adviser with a non-affiliated sub-adviser as well as
change the terms of a contract with a non-affiliated sub-adviser, without
submitting the contract to a vote of the Portfolio's shareholders. The
Portfolio will notify shareholders of any change in the identity of the
sub-adviser of the Portfolio. In this event, the name of the Portfolio and its
principal investment strategies may also change.

Under the terms of the sub-advisory agreement, the agreement can be terminated
by either ING Investments or the Portfolio's Board. In the event the
sub-advisory agreement is terminated, the sub-adviser may be replaced subject
to any regulatory requirements or ING Investments may assume day-to-day
investment management of the Fund.

ING INVESTMENT MANAGEMENT CO.

ING Investment Management Co. ("ING IM" or "Sub-Adviser"), a Connecticut
corporation, serves as the Sub-Adviser to the Portfolio. ING IM is responsible
for managing the assets of the Portfolio in accordance with the Portfolio's
investment objective and policies, subject to oversight by ING Investments and
the Portfolio's Board.

Founded in 1972, ING IM is registered with the SEC as an investment adviser.
ING IM has acted as adviser or sub-adviser to mutual funds since 1994 and has
managed institutional accounts since 1972. ING IM is an indirect, wholly-owned
subsidiary of ING Groep and is an affiliate of ING Investments. As of June 30,
2008, ING IM managed approximately $____ billion in assets. The principal
office of ING IM is 230 Park Avenue, New York, NY 10169.

The following individuals are jointly responsible for the day-today management
of the Portfolio:

Omar Aguilar, Ph.D. has co-managed the Portfolio since inception. He has been
with ING IM since July 2004 and is Head of Quantitative Equity Research. Dr.
Aguilar previously served as head of Lehman Brothers' quantitative research for
its alternative investment management business since 2002. Prior to that, Dr.
Aguilar was director of quantitative research and a portfolio manager with
Merrill Lynch Investment Management since 1999.

Vincent Costa, has co-managed the Portfolio since its inception. He joined ING
IM in April 2006 as Senior Quantitative Portfolio Manager from Merrill Lynch
Investment Managers where he had been employed since 1999, most recently as
Managing Director and Chief Investment Officer for that firm's Quantitative
Investment strategies.
ADDITIONAL INFORMATION REGARDING PORTFOLIO MANAGERS

The SAI provides additional information about each portfolio manager's
compensation, other accounts managed by each portfolio manager and each
portfolio manager's ownership of securities in the Fund.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                Management of the Portfolio    9




MORE INFORMATION ABOUT RISKS
- --------------------------------------------------------------------------------

All mutual funds involve risk - some more than others - and there is always the
chance that you could lose money or not earn as much as you hope. The
Portfolio's risk profile is largely a factor of the principal securities in
which it invests and investment techniques that it uses. The following pages
discuss the risks associated with certain of the types of securities in which
the Portfolio may invest and certain of the investment practices that the
Portfolio may use. For more information about these and other types of
securities and investment techniques that may be used by the Portfolio, see the
SAI.

Many of the investment techniques and strategies discussed in this Prospectus
and in the SAI are discretionary, which means that the Adviser or Sub-Adviser
can decide whether to use them or not. The Portfolio may invest in these
securities or use these techniques as par of the Portfolio's principal
investment strategy.
PRINCIPAL RISKS

The principal risks of the Portfolio are highlighted below. Please see the SAI
for a further discussion of the principal and other investment strategies
employed by the Portfolio.

CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security and as such, is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. The Portfolio may be required to redeem or convert a
convertible security before the holder would otherwise choose.

DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the
performance of an underlying asset or assets. Some derivatives are
sophisticated instruments that typically involve a small investment of cash
relative to the magnitude of risks assumed. These may include swap agreements,
options, forwards, and futures. Derivative securities are subject to market
risk which could be significant for those that have a leveraging effect.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. In addition, derivatives and their
underlying securities may experience periods of illiquidity which could cause
the Portfolio to hold a security it might otherwise sell or could force the
sale of a security at inopportune times or for prices that do not reflect
current market value. A risk of using derivatives is that the Adviser or
Sub-Adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security,
the hedge might not correlate to the market's movements and may have unexpected
or undesired results such as a loss or a reduction in gains.

FOREIGN SECURITIES. There are certain risks in owning foreign securities
including those resulting from: fluctuations in currency exchange rates;
devaluation of currencies; political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions; reduced availability of public information concerning issuers;
accounting, auditing and financial reporting standard or other regulatory
practices and requirements that are not uniform when compared to those
applicable to domestic companies; settlement and clearance procedures in some
countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices are more volatile that
those of domestic companies. With certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of portfolios or other assets of the
Portfolio including the withholding of dividends.

The Portfolio may enter into foreign currency transactions either on a spot or
cash basis at prevailing rates or through forward foreign currency exchange
contracts in order to have the necessary currencies to settle transactions, to
help protect Portfolio assets against adverse changes in foreign currency
exchange rates, or to provide exposure to a foreign currency commensurate with
the exposure to securities from that country. Such efforts could limit
potential gains that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Portfolio.

INABILITY TO SELL SECURITIES. Certain securities generally trade in lower
volume and may be less liquid than securities of large established companies.
These less liquid securities could include securities of small and mid-size
U.S. companies, high-yield securities, convertible securities, unrated debt and
convertible securities, securities that originate from small offerings and
foreign securities, particularly those from companies in countries with an
emerging securities market. The Portfolio could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Portfolio.

INDEX STRATEGY. The Portfolio may use an indexing strategy that does not
attempt to manage market volatility, use defensive strategies or reduce the
effects of any long-term periods of poor stock performance. The correlation
between the performance of the Portfolio and the performance of the indices may
be affected by the Portfolio's expenses, and the timing of purchases and
redemptions of the Portfolio's shares.

INVESTMENT BY FUNDS-OF-FUNDS. The Portfolio's shares may be purchased by other
investment companies, including through fund-of-funds arrangements within the
ING Funds family. In some cases, the Portfolio may serve as a primary or
significant investment vehicle for a fund-of-funds. From time to time, the
Portfolio may experience large inflows or redemptions due to allocations or
rebalancings by these funds-of funds. While it is impossible to predict the
overall impact of these transactions over time, there could be adverse effects
on portfolio management. For example, the Portfolio may be required to sell
securities or invest cash at times when it would not otherwise do so. These

10    More Information About Risks




                            MORE INFORMATION ABOUT RISKS
- --------------------------------------------------------------------
transactions could also increase transaction costs or portfolio turnover. The
Adviser or portfolio manager will monitor transactions by the funds-of funds
and will attempt to minimize any adverse effects on the Portfolio and
funds-of-funds as a result of these transactions. So long as the Portfolio
accepts investments by other investment companies, it will not purchase
securities of other investment companies, except to the extent permitted by the
1940 Act or under the terms of an exemptive order granted by the SEC.

LENDING PORTFOLIO SECURITIES. In order to generate additional income, the
Portfolio may lend portfolio securities in an amount up to 33  1/3% of total
Portfolio assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. When the Portfolio lends its securities,
it is responsible for investing the cash collateral it receives from the
borrower of the securities, and the Portfolio could incur losses in connection
with the investment of such cash collateral. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower default or fail financially.

MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization and may
be prepaid prior to maturity. Like other fixed-income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other
fixed-income securities. The rate of prepayments on underlying mortgages will
affect the price and volatility of a mortgage-related security, and may have
the effect of shortening or extending the effective maturity of the security
beyond what was anticipated at the time of the purchase. Unanticipated rates of
prepayment on underlying mortgages can be expected to increase the volatility
of such securities. In addition, the value of these securities may fluctuate in
response to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by the Portfolio. Additionally, although
mortgages and mortgage-related securities are generally supported by some form
of government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations, and
thus, are subject to risk of default.

OTHER INVESTMENT COMPANIES. The Portfolio may invest in other investment
companies to the extent permitted by the 1940 Act and the rules and regulations
thereunder. These may include exchange-traded funds ("ETFs") and Holding
Company Depositary Receipts ("HOLDRs"), among others. ETFs are exchange traded
investment companies that are designed to provide investment results
corresponding to an equity index and include, among others, Standard & Poor's
Depositary Receipts ("SPDRs"), PowerShares QQQTM ("QQQQ"), Dow Jones Industrial
Average Trading Stocks ("Diamonds") and iShares exchange-traded funds
("iShares"). The main risk of investing in other investment companies
(including ETFs) is that the value of the underlying securities held by the
investment company might decrease. The value of the underlying securities can
fluctuate in response to activities of individual companies or in response to
general market and/or economic conditions. Because the Portfolio may invest in
other investment companies, you will pay a proportionate share of the expenses
of that other investment company (including management fees, administration
fees and custodial fees). Additional risks of investments in ETFs include: (i)
an active trading market for an ETF's shares may not develop or be maintained
or (ii) trading may be halted if the listing exchanges' officials deem such
action appropriate, the shares are delisted from the exchange, or the
activation of market-wide "circuit breakers" (which are tied to large decreases
in stock prices) halts trading generally. Because HOLDRs concentrate in the
stocks of a particular industry, trends in that industry may have a dramatic
impact on their value.

To seek to achieve a return on uninvested cash or for other reasons,the
Portfolio may invest its assets in ING Institutional Prime Money Market Fund
and/or one or more other money market funds advised by ING affiliates ("ING
Money Market Funds"). The Portfolio's purchase of shares of an ING Money Market
Fund will result in the Portfolio paying a proportionate share of the expenses
of the ING Money Market Fund. The Portfolio's Adviser will waive its fee in an
amount equal to the advisory fee received by the adviser of the ING Money
Market Fund in which the Portfolio invests resulting from the Portfolio's
investment into the ING Money Market Fund.

U.S. GOVERNMENT SECURITIES AND OBLIGATIONS. Obligations issued by some U.S.
government agencies, authorities, instrumentalities or sponsored enterprises,
such as the Government National Mortgage Association, are backed by the full
faith and credit of the U.S. Treasury while obligations issued by others, such
as the Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation and Federal Home Loan Banks, are backed solely by the entity's own
resources or by the ability of the entity to borrow from the U.S. Treasury. No
assurance can be given that the U.S. government will provide financial support
to U.S. government agencies, authorities, instrumentalities or sponsored
enterprises if it is not obliged to do so by law.

PERCENTAGE AND RATING LIMITATIONS. Unless otherwise stated, the percentage and
rating limitations in this Prospectus apply at the time of investment.

PORTFOLIO TURNOVER. The Portfolio is generally expected to engage in frequent
and active trading of portfolio securities to achieve its investment objective.
A high portfolio turnover rate involves greater expenses to the Portfolio,
including brokerage commissions and other transaction costs, which may have an
adverse effect on the performance of the Portfolio.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                              More Information About Risks    11




DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Portfolio declares and pays dividends and capital gains distributions, if
any, on an annual basis usually in June. To comply with federal tax
regulations, the Portfolio, may also pay an additional capital gains
distribution, usually in June.
TAX MATTERS

Holders of Variable Contracts should refer to the prospectus for their
contracts for information regarding the tax consequences of owning such
contracts and should consult their tax advisers before investing.

The Portfolio intends to qualify as a regulated investment company ("RIC") for
federal income tax purposes by satisfying the requirements under Subchapter M
of the Code, including requirements with respect to diversification of assets,
distribution of income and sources of income. As a RIC, the Portfolio generally
will not be subject to tax on its net investment company taxable income and net
realized capital gains. The Portfolio also intends to comply with the
diversification requirements of Section 817(h) of the Code and the underlying
regulations for Variable Contracts so that owners of these contracts should not
be subject to federal tax on distributions of dividends and income from the
Portfolio to the insurance company's separate accounts.

Since the sole shareholders of the Portfolio will be separate accounts or other
permitted investors, no discussion is included herein as to the federal income
tax consequences at the shareholder level. For information concerning the
federal income tax consequences to purchasers of the policies, see the attached
prospectus for the policy.

See the SAI for further information about tax matters.

THE TAX STATUS OF YOUR INVESTMENT IN THE PORTFOLIO DEPENDS UPON THE FEATURES OF
YOUR VARIABLE CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE PROSPECTUS
FOR THE VARIABLE CONTACT.

12    Dividends, Distributions and Taxes




                                                     PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

                           PERFORMANCE OF THE INDICES

ALTHOUGH THE PORTFOLIO'S INVESTMENT OBJECTIVE SEEKS TO MAXIMIZE TOTAL RETURN
OVER THE LONG TERM BY ALLOCATING ITS ASSETS AMONG STOCKS, BONDS, SHORT-TERM
INSTRUMENTS AND OTHER INVESTMENTS, THE PERFORMANCE INFORMATION THAT FOLLOWS FOR
THE RUSSELL GLOBAL LARGE CAP(Reg. TM) INDEX, THE LEHMAN BROTHERS U.S. AGGREGATE
BOND INDEX(Reg. TM), AND THE COMPOSITE INDEX CONSISTING OF 85% RUSSELL GLOBAL
LARGE CAP(Reg. TM) INDEX AND 15% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX(Reg.
TM) (COLLECTIVELY, THE "INDICES"), IS NOT THE PAST PERFORMANCE OF THE PORTFOLIO
OR ANY OTHER INVESTMENT.

The Indices' performance does not include any fees and expenses associated with
investing, including management fees and brokerage costs, and would be lower if
it did. The Indices' performance also does not reflect the deduction of any
insurance fees or charges that are imposed by the insurance company in
connection with its sale of variable contracts. You should refer to the
separate account prospectuses, prospectus summary or disclosure statement
describing variable contracts for information pertaining to these insurance
fees or charges. If the insurance fees or charges were included, the
performance would be lower. Past performance of the Indices is no guarantee of
future results, either for the Indices or for any mutual fund. You cannot
invest directly in an index.

           PERFORMANCE OF THE RUSSELL GLOBAL LARGE CAP(REG. TM) INDEX
The bar chart below shows the changes in the Russell Global Large Cap(Reg. TM)
Index performance from year to year and the table shows the average annual
total returns for the Russell Global Large Cap(Reg. TM) Index over the periods
indicated as of December 31, 2007. These returns reflect reinvestment of
dividends and other earnings.

Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit. It should
be noted that the long-term performance of the Russell Global Large Cap(Reg.
TM) Index coincides with a long bull stock market.

                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)
                               [INSERT BAR CHART]

                          AVERAGE ANNUAL TOTAL RETURNS

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007

                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                                            1 YEAR    3 YEARS    5 YEARS    10 YEARS
 RUSSELL GLOBAL LARGE CAP(Reg. TM) INDEX

As stated above, Russell Global Large Cap(Reg. TM) Index returns do not
represent actual Portfolio performance. Russell Global Large Cap(Reg. TM) Index
performance returns do not reflect management fees, transaction costs or
expenses.

ING RussellTM Global large Cap Index 85% Portfolio is not promoted, sponsored
or endorsed by, nor in any way affiliated with Russell Investment Group
("Russell"). Russell is not responsible for and has not reviewed the Portfolio
nor any associated literature or publications and Russell makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.

Russell reserves the right, at any time and without notice, to alter, amend,
terminate, or in any way change the Russell Indices. Russell has no obligation
to take the needs of any particular fund or its participants or any other
product or person into consideration in determining, composing, or calculating
any of the Russell Indices.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                  Performance of the Indices  13




PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

PERFORMANCE OF THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX(REG. TM) ("LBAB
                                    INDEX")

The bar chart below shows the changes in the LBAB Index' performance from year
to year and the table shows the average annual total returns for the LBAB Index
over the periods indicated as of December 31, 2007. These returns reflect
reinvestment of dividends and other earnings.

Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit.

                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)

                               [INSERT BAR CHART]

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

               1 YEAR    3 YEARS    5 YEARS    10 YEARS
 LBAB INDEX

Prior performance is net of taxes and includes reinvested dividends and
interest. As stated above, LBAB Index returns do not represent actual Portfolio
performance. LBAB Index' performance returns do not reflect management fees,
transaction costs or expenses.

The Portfolio is not sponsored or sold by Lehman Brothers or its affiliates.
Lehman Brothers makes no representations or warranty, express or implied, to
the shareholders of the Portfolio or any member of the public regarding the
advisability of investing in securities generally or in the Portfolio
particularly, or the ability of the LBAB Index to track general bond market
performance. The LBAB Index is determined, composed and calculated by Lehman
Brothers without regard to ING Investments, LLC, its affiliates or the
Portfolio. Lehman Brothers has no obligation to take the needs of ING
Investments, LLC, its affiliates or the shareholders of the Portfolio into
consideration in determining, composing, or calculating the LBAB Index. Lehman
Brothers is not responsible for and has not participated in the determination
of the timing or, prices at, or quantities of the purchase and sales of
investments in the Portfolio. Lehman Brothers has no obligation or liability in
connection with the administration or, marketing or, or trading in or of the
Portfolio. Lehman Brothers and the LBAB Index are trademarks of Lehman
Brothers, Inc.

14  Performance of the Indices




                                                     PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

PERFORMANCE OF THE 85% RUSSELL GLOBAL LARGE CAP INDEX AND 15% LBAB INDEX
                                   COMPOSITE
The bar chart below shows the changes in the Composite Index' performance from
year to year and the table shows the average annual total returns for the
Composite Index over the periods indicated as of December 31, 2007. These
returns reflect reinvestment of dividends and other earnings.
Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit.

                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)

                               [INSERT BAR CHART]

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                    1 YEAR    3 YEARS    5 YEARS    10 YEARS
 COMPOSITE INDEX

Prior performance is net of taxes and includes reinvested dividends and
interest. As stated above, Composite Index returns do not represent actual
Portfolio performance. Composite Index' performance returns do not reflect
management fees, transaction costs or expenses.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                  Performance of the Indices  15




FINANCIAL
 HIGHLIGHTS
- --------------------------------------------------------------------
Because the Portfolio did not commence operations as of the fiscal year ended
December 31, 2007, financial highlights are not available.

16  Financial Highlights




TO OBTAIN MORE INFORMATION
YOU'LL FIND MORE INFORMATION ABOUT THE FUND IN OUR:

ANNUAL/SEMI-ANNUAL SHAREHOLDER REPORTS
In the Portfolio's annual/semi-annual shareholder reports, when available, you
will find a discussion of the recent market conditions and principal investment
strategies that significantly affected the Portfolio's performance during its
last fiscal year, the financial statements and the independent registered
public accounting firm's reports (in the annual shareholder report only).

STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI contains more detailed information about the Fund. The SAI is legally
part of this Prospectus (it is incorporated by reference). A copy has been
filed with the SEC.

Please write, call or visit our website for a free copy of the current annual/
semi-annual shareholder reports, the SAI or other information.

To make shareholder inquiries contact:

THE ING FUNDS
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258-2034

1-800-992-0180

Or visit our website at WWW.INGFUNDS.COM

This information may also be reviewed or obtained from the SEC. In order to
review the information in person, you will need to visit the SEC's Public
Reference Room in Washington, D.C. or call 202-551-8090 for information on the
operation of the Public Reference Room. Otherwise, you may obtain the
information for a fee by contacting the SEC at:

U.S. SECURITIES AND EXCHANGE COMMISSION
Public Reference Section
100 F Street, N.E.
Washington, D.C. 20549

or at the e-mail address: PUBLICINFO@SEC.GOV

Or obtain the information at no cost by visiting the SEC's Internet website at
WWW.SEC.GOV.

When contacting the SEC, you will want to refer to the Portfolio's SEC file
numbers. The file numbers are as follows:

ING Variable Portfolios, Inc.                         811-7651
  ING RussellTM Global Large Cap Index 85% Portfolio

PRPRO-RGLCI85I                                                   (0808-082008)
[GRAPHIC APPEARS HERE]

- --------------------------------------------------------------------------------




[GRAPHIC APPEARS HERE]

PROSPECTUS

Prospectus

AUGUST 20, 2008

Service Class

ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO

This Prospectus contains important information about investing in Service Class
shares of ING RussellTM Global Large Cap Index 85% Portfolio. You should read it
carefully before you invest and keep it for future reference. Please note that
your investment: is not a bank deposit, is not insured or guaranteed by the
Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve Board or any
other government agency, and is affected

[GRAPHIC APPEARS HERE]

by market fluctuations. There is no guarantee that the Fund will achieve its
investment objective. As with all mutual funds, the U.S. Securities and Exchange
Commission ("SEC") has not approved or disapproved these securities nor has the
SEC judged whether the information in this Prospectus is accurate or adequate.
Any representation to the contrary is a criminal offense.
- -------------------------------------------------------------------------------




                                                                  WHAT'S INSIDE
- --------------------------------------------------------------------------------

[GRAPHIC APPEARS HERE]

       INVESTMENT
       OBJECTIVE
[GRAPHIC APPEARS HERE]

       PRINCIPAL
       INVESTMENT
       STRATEGIES
[GRAPHIC APPEARS HERE]

       RISKS

Risk is the potential that your
investment will lose money or
not earn as much as you hope.
All mutual funds have varying
degrees of risk, depending on
the securities in which they
invest. Please read this
Prospectus carefully to be sure
you understand the principal
investment strategies and risks
associated with the Portfolio.
You should consult the
Statement of Additional
Information ("SAI") for a
complete list of the investment
strategies and risks.
[GRAPHIC APPEARS HERE]

       WHAT YOU
       PAY TO
       INVEST

The Portfolio is intended to be the funding vehicle for variable annuity
contracts and variable life insurance policies ("Variable Contracts") to be
offered by the separate accounts of certain life insurance companies
("Participating Insurance Companies") and qualified pension or retirement plans
("Qualified Plans").

Individual Variable Contract holders are not "shareholders" of the Portfolio.
The Participating Insurance Companies and their separate accounts are the
shareholders or investors, although such companies may pass through voting
rights to their Variable Contract holders. Shares of the Portfolio are not
offered directly to the general public.
[GRAPHIC APPEARS HERE]

If you have any questions about the Fund, please call your investment
professional or us at 1-800-992-0180.

These pages contain a description of the Fund included in this Prospectus,
including the Portfolio's investment objective, principal investment strategies
and risks.

You'll also find:

WHAT YOU PAY TO INVEST. A list of the fees and expenses you pay - both directly
and indirectly - when you invest in the Fund.

INTRODUCTION TO THE PORTFOLIO                       1
ING RussellTM Global Large Cap Index 85% Portfolio  2

WHAT YOU PAY TO INVEST                        4
INFORMATION FOR INVESTORS                     6
MANAGEMENT OF THE PORTFOLIO                   9
MORE INFORMATION ABOUT RISKS                 10
DIVIDENDS, DISTRIBUTIONS AND TAXES           12
PERFORMANCE OF THE INDICES                   13
FINANCIAL HIGHLIGHTS                         16
TO OBTAIN MORE INFORMATION           Back Cover




INTRODUCTION TO THE PORTFOLIO
- --------------------------------------------------------------------------------

Risk is the potential that your investment will lose money or not earn as much
as you hope. All mutual funds have varying degrees of risk, depending on the
securities in which they invest. Please read this Prospectus carefully to be
sure you understand the principal investment strategies and risks associated
with the Portfolio. You should consult the Statement of Additional Information
("SAI") for a complete list of the investment strategies and risks.

[GRAPHIC APPEARS HERE]

If you have any questions about the Fund, please call your investment
professional or us at 1-800-992-0180.

This Prospectus is designed to help you make informed decisions about your
investments.

GLOBAL EQUITY INDEX PORTFOLIO

The Portfolio seeks to maximize total return over the long term by allocating
its assets among stocks, bonds, short-term instruments, and other investments.

     It may be a suitable investment if you:

      o are investing for the long-term - at least several years;
      o are looking for exposure to international markets; and
      o are willing to accept higher risk in exchange for the potential for
        long-term growth.

1   Introduction to the Portfolio




                                                                        ADVISER
                                                            ING Investments, LLC

                                                                     SUB-ADVISER
                                                   ING Investment Management Co.
ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO
- --------------------------------------------------------------------------------

[GRAPHIC APPEARS HERE]

INVESTMENT OBJECTIVE

The Portfolio seeks to maximize total return over the long term by allocating
its assets among stock, bonds, short-term instruments and other investments.
The Portfolio's investment objective is not fundamental and may be changed
without a shareholder vote.

[GRAPHIC APPEARS HERE]

PRINCIPAL  INVESTMENT STRATEGIES
The Portfolio normally invests 85% of its net assets (plus borrowings for
investment purposes) in equity securities of companies included in the Russell
Global Large Cap(Reg. TM) Index and 15% of its net assets (plus borrowings for
investment purposes) in fixed-income securities included in the Lehman Brothers
U.S. Aggregate Bond Index(Reg. TM), exchange-traded funds ("ETFs"), or other
investment companies that seek investment results that correspond to the price
and yield performance of the Lehman Brothers U.S. Aggregate Bond Index(Reg.
TM). The securities in the Russell Global Large Cap(Reg. TM) Index and the
Lehman Brothers U.S. Aggregate Bond Index(Reg. TM) in which the Portfolio
invests, may include convertible securities that are convertible into stock
included in the indices, ETFs, and other derivatives whose economic returns
are, by design, closely equivalent to the returns of the indices, or its
components. The Portfolio will provide shareholders with at least 60 days'
prior notice of any change in this investment policy.

The Portfolio employs a "passive management" approach designed to track the
performance of the Russell Global Large Cap(Reg. TM) Index and Lehman Brothers
U.S. Aggregate Bond Index(Reg. TM) ("Indices"). The Russell Global Large
Cap(Reg. TM) Index is an unmanaged index that measures the performance of the
largest companies in the Russell Global Index. As of December 31, 2007, the
smallest company in the Russell Global Large Cap(Reg. TM) Index had a market
capitalization of $___ billion and the largest company had a market
capitalization of $___ billion. The Lehman Brothers U.S. Aggregate Bond
Index(Reg. TM) is an unmanaged index that measures the performance of the U.S
investment grade bond market, which includes investment grade U.S. Treasury
bonds, government-related bonds, investment grade corporate bonds, mortgage
pass-through securities, commercial mortgage-backed securities and asset-backed
securities that are publicly offered for sale in the United States. The
securities in the Lehman Brothers U.S. Aggregate Bond Index(Reg. TM) have $250
million or more of outstanding face value and have at least one year remaining
to maturity. In addition, the securities must be denominated in U.S. dollars
and must be fixed-rate and non-convertible.

The Portfolio may not always hold all of the same securities as the Indices.
The Portfolio may also invest in stock index futures and other derivatives as a
substitute for the sale or purchase of securities in the Indices and to provide
equity exposure to the Portfolio's cash position. Although the Portfolio
attempts to track, as closely as possible, the performance of the Indices, the
Portfolio does not always perform exactly like the Indices. Unlike the Indices,
the Portfolio has operating expenses and transaction costs and therefore, has a
performance disadvantage versus the Indices.

The Portfolio may lend portfolio securities on a short-term or longterm basis,
up to 33 1/3% of its total assets.

The Portfolio may invest in other investment companies to the extent permitted
under the Investment Company Act of 1940, as amended, and the rules,
regulations, and exemptions thereunder.

The Portfolio may engage in frequent and active trading of portfolio securities
to achieve its investment objective.

- --------------------------------------------------------------------------------

[GRAPHIC APPEARS HERE]

RISKS
You could lose money on an investment in the Fund. The Fund may be affected by
the following risks, among others:

CONVERTIBLE SECURITIES - the value of convertible securities may fall when
interest rates rise. Convertible securities with longer maturities tend to be
more sensitive to changes in interest rates, usually making them more volatile
than convertible securities with shorter maturities. The Portfolio could lose
money if the issuer of a convertible security is unable to meet its financial
obligations or goes bankrupt.

DERIVATIVES - derivatives are subject to the risk of changes in the market
price of the underlying securities, credit risk with respect to the
counterparty to the derivative instruments and the risk of loss due to changes
in interest rates. The use of certain derivatives may also have a leveraging
effect which may increase the volatility of the Portfolio and may reduce its
returns.

FOREIGN INVESTING - Foreign investments may be riskier than U.S. investments
for many reasons, including: changes in currency exchange rates; unstable
political and economic conditions; a lack of adequate company information;
differences in the way securities markets operate; less secure foreign banks or
securities depositories than those in the United States; less standardization
of accounting standards and market regulations in certain foreign countries and
varying foreign controls on investments. Foreign investments may also be
affected by administrative difficulties, such as delays in clearing and
settling transactions. Additionally, securities of foreign companies may be
denominated in foreign currencies. Exchange rate fluctuations may reduce or
eliminate gains or create losses. Hedging strategies intended to reduce this
risk may not perform as expected. These factors may make foreign investments
more volatile and potentially less liquid than U.S. investments. To the extent
the Portfolio invests in countries with emerging securities markets, the risks
of foreign investing may be greater, as these countries may be less politically
and economically stable than other countries. It may also be more difficult to
buy and sell securities in countries with emerging securities markets.

INDEX STRATEGY - the Portfolio uses an indexing strategy that does not attempt
to manage market volatility, use defensive strategies, or reduce the effects of
any long-term periods of poor market performance. The correlation between the
Portfolio and index performance may be affected by the Portfolio's expenses and
the timing of purchases and redemptions of the Portfolio's shares.

INTEREST RATE - fixed-income securities are subject to the risk that interest
rates will rise, which generally causes bond prices to fall. Economic and
market conditions may cause issuers to default or go bankrupt. High-yield
instruments are even more sensitive to economic and market conditions than
other fixed-income instruments.

MORTGAGE-RELATED SECURITIES - the prices of mortgage-related securities are
sensitive to changes in interest rates and changes in the prepayment patterns
on the underlying instruments. If the principal on the underlying mortgage
notes is repaid faster than anticipated, the price of the mortgage-related
security may fall.

OTHER INVESTMENT COMPANIES - the main risk of investing in other investment
companies, including ETFs, is the risk that the value of the underlying
securities might decrease. Because the Portfolio invests in other investment
companies, you will pay a proportionate share of the expenses of that other
investment company (including management fees, administration fees, and
custodial fees) in addition to the expenses of the Portfolio.

PREPAYMENT RISK - the Portfolio may invest in mortgage-related securities which
can be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling, the
Portfolio will be forced to reinvest this money at lower yields.

PRICE VOLATILITY - the value of the Portfolio changes as the prices of its
investments go up or down. Equity securities face market, issuer and other
risks, and their values may fluctuate, sometimes rapidly and unpredictably.
Market risk is the risk that securities may decline in value due to factors
affecting securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating to the
issuer, such as changes in the financial condition of the issuer. While
equities may offer the potential for greater long-term growth than most debt
securities, they generally have higher volatility.

The Portfolio invests primarily in securities of larger companies, which
sometimes have more stable prices than smaller companies.

U.S. GOVERNMENT SECURITIES AND OBLIGATIONS - some U.S. government securities
are backed by the full faith and credit of the U.S. government and are
guaranteed as to both principal and interest by the U.S. Treasury. These
include direct obligations such as U.S. Treasury notes, bills and bonds, as
well as indirect obligations such as the Government National Mortgage
Association ("GNMA"). Other U.S. government securities are not direct
obligations of the U.S. Treasury, but rather are backed by the ability to
borrow directly from the U.S. Treasury. Still others are supported solely by
the credit of the agency or instrumentality itself and are neither guaranteed
nor insured by the U.S. government. No assurance can be given that the U.S.
government would provide financial support to such agencies if needed. U.S.
government securities may be subject to varying degrees of credit risk and all
U.S. government securities may be subject to price declines due to changing
interest rates. Securities directly supported by the full faith and credit of
the U.S. government have less credit risk.

INABILITY TO SELL SECURITIES - convertible securities may be less liquid than
other investments. The Portfolio could lose money if it cannot sell a security
at the time and price that would be most beneficial to the Portfolio.

SECURITIES LENDING - there is the risk that when lending portfolio securities,
the securities may not be available to the Portfolio on a timely basis and it
may lose the opportunity to sell the securities at a desirable price. Engaging
in securities lending could have a leveraging effect which may intensify the
market risk, credit risk and other risks associated with investments in the
Portfolio.

PORTFOLIO TURNOVER - a high portfolio turnover rate involves greater expenses
to the Portfolio including brokerage commissions and other transaction costs,
which may have an adverse impact on performance.

2        ING RussellTM Global Large Cap Index 85% Portfolio




                             ING RUSSELLTM GLOBAL LARGE CAP INDEX 85% PORTFOLIO
- --------------------------------------------------------------------------------

[GRAPHIC APPEARS HERE]

HOW THE PORTFOLIO
HAS PERFORMED

                Since the Portfolio had not commenced operations as of December
                31, 2007, there is no performance information included in this
                Prospectus. However, performance of the Russell Global Large
                Cap(Reg. TM) Index, the Lehman Brothers U.S. Aggregate Bond
                Index, and a composite index consisting of 85% Russell Global
                Large Cap(Reg. TM) Index and 15% Lehman Brothers U.S. Aggregate
                Bond Index are included in this Prospectus in the section
                entitled "Performance of the Indices."

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                          If you have any questions, please call 1-800-992-0180.

                           ING RussellTM Global Large Cap Index 85% Portfolio  3




WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------

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      The table that follows shows the estimated fees and operating expenses
      paid each year by the Portfolio. Actual expenses paid by the Portfolio
      may vary from year to year.

      Your Variable Contract or Qualified Plan is a contract between you and
      the issuing life insurance company or plan provider. The Portfolio is not
      a party to your Variable Contract or Qualified Plan but is merely an
      investment option made available to you by your insurance company or plan
      provider under your Variable Contract or Qualified Plan. The table does
      not reflect expenses and charges that are, or may be, imposed under your
      Variable Contract or Qualified Plan. For information on these charges or
      expenses, please refer to the applicable Variable Contract prospectus,
      prospectus summary, or disclosure statement. If you hold shares of the
      Portfolio that were purchased through an investment in a Qualified Plan,
      you should consult your administrator for more information regarding
      additional expenses that may be assessed in connection with your plan.
      The fees and expenses of the Portfolio are not fixed or specified under
      the terms of your Variable Contract or Qualified Plan.

SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT).
Not applicable.

OPERATING EXPENSES PAID EACH YEAR BY THE PORTFOLIO(1)
(as a % of average net assets)

                                                               DISTRIBUTION AND/OR
                                                                   SHAREHOLDER
                                                                     SERVICE
                                                  MANAGEMENT         (12B-1)           OTHER
PORTFOLIO                                            FEES             FEES          EXPENSES(2)
- -------------------------------------------      ------------ -------------------- -------------
 ING RussellTM Global Large Cap Index 85%    %                  0.25                 0.25

                                                 ACQUIRED        TOTAL                            NET
                                                   FUND        PORTFOLIO      WAIVERS AND      PORTFOLIO
                                                   FEES        OPERATING     REIMBURSEMENTS    OPERATING
PORTFOLIO                                    AND EXPENSES(3)    EXPENSES   AND RECOUPMENT(4)   EXPENSES
- ------------------------------------------- ----------------- ----------- ------------------- ----------
 ING RussellTM Global Large Cap Index 85%

- --------------------------------------------------------------------------------

(1)      This table shows the estimated operating expenses for Adviser Class
         shares of the Portfolio as a ratio of expenses to average daily net
         assets. The Portfolio had not commenced operations as of December 31,
         2007, therefore, Other Expenses are estimated for the current fiscal
         year.

(2)      ING Funds Services, LLC receives an annual administrative fee equal to
         _____% of the Portfolio's average daily net assets which is reflected
         in Other Expenses. Russell Investment Group also receives an annual
         licensing fee of _____% for the Russell Global Large Cap(Reg. TM)
         Index. Also includes an estimated ___% non-recurring offering expenses
         and excluding this amount, Total Portfolio Operating Expenses would
         have been _____%.

(3)      The Acquired Fund Fees and Expenses are not fees and expenses incurred
         by the Portfolio directly. These fees and expenses include the
         Portfolio's pro rata share of the cumulative expenses charged by the
         Acquired Funds in which the Portfolio invests. The fees and expenses
         will vary based on the Portfolio's allocation of assets to, and the
         annualized net expenses of, the particular Acquired Funds. The impact
         of these fees and expenses is shown in Net Portfolio Operating
         Expenses.

(4)      ING Investments, LLC has entered into a written expense limitation
         agreement with the Portfolio under which it will limit expenses of the
         Portfolio excluding interest, taxes, brokerage and extraordinary
         expenses, and Acquired Fund Fees and Expenses, subject to possible
         recoupment by ING Investments within three years. The amount of the
         Portfolio's expenses to be waived during the current fiscal year by
         ING Investments, LLC, is shown under the heading Waivers and
         Reimbursements. The expense limit will continue through at least May
         1, 2009. The expense limitation agreement is contractual and shall
         renew automatically for one-year terms unless ING Investments, LLC
         provides written notice of the termination of the expense limitation
         agreement within 90 days of the end of the then-current term or upon
         termination of the investment management agreement. For more
         information on the expense limitation agreement, please see the SAI.

4  What You Pay to Invest




                                                         WHAT YOU PAY TO INVEST
- --------------------------------------------------------------------------------

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      EXAMPLE

      The Example is intended to help you compare the cost of investing in the
      Portfolio with the cost of investing in other mutual funds. The Example
      assumes that you invest $10,000 in the Portfolio for the time periods
      indicated and then redeem all of your shares at the end of those periods.
      The Example also assumes that your investment has a 5% return each year,
      that all dividends and distributions are reinvested, and that the the
      Portfolio's net operating expenses remain the same. The Example does not
      reflect expenses which are, or may be, imposed by a Variable Contract or
      Qualified Plan that may use the Portfolio as its underlying investment
      option. If such expenses were reflected, the expenses indicated would be
      higher. Although your actual cost may be higher or lower, the Example
      shows what your costs would be based on these assumptions. Keep in mind
      that this is an estimate. Actual expenses and performance may vary.

CLASS S

PORTFOLIO                                                1 YEAR    3 YEARS
- ---------------------------------------------           --------  --------
 ING RussellTM Global Large Cap Index 85%(1)    $

- --------------------------------------------------------------------------------

(1)   The Example reflects the expense limitation agreement/waivers for the
      one-year period and the first year of the three-year period.

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                          If you have any questions, please call 1-800-992-0180.

                                                       What You Pay to Invest  5




INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------

ABOUT YOUR INVESTMENT


Shares of the Portfolio are offered for purchase by separate accounts to serve
as an investment option under Variable Contacts, to Qualified Plans, to certain
other investment companies, and to other investors as permitted to satisfy the
diversification and other requirements under Section 817(h) of the Internal
Revenue Code of 1986, as amended, ("Code") and under federal tax regulations,
revenue rulings or private letter rulings issued by the Internal Revenue
Service.

You do not buy, sell, or exchange shares of the Portfolio. You choose it as an
investment option through your Variable Contract or Qualified Plan.

The insurance company that issued your Variable Contract is responsible for
investing in the Portfolio according to the investment options you've chosen.
You should consult your Variable Contract prospectus, prospectus summary or
disclosure statement for additional information about how this works. The
Portfolio assumes no responsibility for such prospectus, prospectus summary or
disclosure statement.

ING Funds Distributor, LLC, ("Distributor") the distributor for the Portfolio
also offers directly to the public, other ING Funds that have similar names,
investment objectives, and strategies as those of the Portfolio offered by this
Prospectus. You should be aware that the Portfolio is likely to differ from
these other ING Funds in size and cash flow pattern. Accordingly, the
performance of the Portfolio can be expected to vary from those of the other
funds.

The Portfolio currently does not foresee any disadvantages to investors if the
Portfolio serves as an investment option for Variable Contracts, offers its
shares directly to Qualified Plans or offers its shares to other permitted
investors. However, it is possible that the interests of owners of Variable
Contracts and and Qualified Plans for which the Portfolio serves as an
investment option and other permitted investors might, at some time, be in
conflict because of differences in tax treatment or other considerations. The
Portfolio's Board of Directors ("Board") directed ING Investments, LLC to
monitor events to identify any material conflicts between Variable Contract
owners, Qualified Plans, and other permitted investors and would have to
determine what actions, if any, should be taken in the event of such a
conflict. If such a conflict occurred, an insurance company participating in
the Portfolio might be required to redeem the investment of one or more of its
separate accounts from the Portfolio, a pension plan, investment company or
other permitted investor which might force the Portfolio to sell securities at
disadvantageous prices.

The Portfolio may discontinue offering shares at any time. If the Portfolio is
discontinued, any allocation to the Portfolio will be allocated to another
portfolio that the Board believes is suitable as long as any required
regulatory standards are met (which may include SEC approval).

FREQUENT TRADING - MARKET TIMING

The Portfolio is intended for long-term investment and not as a short-term
trading vehicle. Accordingly, organizations or individuals that use market
timing investment strategies should not purchase shares of the Portfolio.
Shares of the Portfolio are primarily sold through omnibus account arrangements
with financial intermediaries as an investment option for Variable Contracts
issued by insurances companies and as an investment option for Qualified Plans.
Omnibus accounts generally do not identify customers' trading activity on an
individual basis. The Portfolio's administrator has agreements which require
such intermediaries to provide detailed account information, including trading
history, upon request of the Portfolio.

The Portfolio relies on the financial intermediaries to monitor frequent,
short-term trading within the Portfolio by their customers. You should review
the materials provided to you by your financial intermediary including, in the
case of a Variable Contract, the prospectus that describes the contract or, in
the case of a Qualified Plan, the plan documentation for its policies regarding
frequent, short-term trading. Such policies may be more or less restrictive
than the Portfolio's policy. With trading information received as a result of
these agreements, the Portfolio may make a determination that certain trading
activity is harmful to the Portfolio and its shareholders even if such activity
is not strictly prohibited by the intermediaries' excessive trading policy. As
a result, a shareholder investing directly or indirectly in the Portfolio may
have their trading privileges suspended without violating the stated excessive
trading policy of the intermediary. The Portfolio reserves the right, in its
sole discretion and without prior notice, to reject, restrict or refuse
purchase orders whether directly or by exchange including purchase orders that
have been accepted by a financial intermediary, if the Portfolio determines
that such purchase order is not to be in the best interest of the Portfolio.
The Portfolio seeks assurances from the financial intermediaries that they have
procedures adequate to monitor and address frequent, short-term trading. There
is, however, no guarantee that the procedures of the financial intermediaries
will be able to curtail frequent, short-term trading activity.

The Portfolio believes that market timing or frequent, short-term trading in
any account, including a Variable Contract or Qualified Plan account, is not in
the best interest of the Portfolio or its shareholders. Due to the disruptive
nature of this activity, it can adversely impact the ability of the Adviser or
the Sub-Adviser to invest assets in an orderly, long-term manner. Frequent
trading can disrupt the management of the Portfolio and raise its expenses
through: increased trading and transaction costs; forced and unplanned
portfolio turnover; lost opportunity costs; and large asset swings that
decrease the Portfolio's ability to provide maximum investment return to all
shareholders. This in turn can have an adverse effect on the Portfolio's
performance.

Because the Portfolio invests in foreign securities, it may present greater
opportunities for market timers and thus be at a greater risk for excessive
trading. If an event occurring after the close of a

6    Information for Investors




                                         INFORMATION FOR INVESTORS
- --------------------------------------------------------------------

foreign market, but before the time the Portfolio computes its current net
asset value ("NAV"), causes a change in the price of the foreign security and
such price is not reflected in the Portfolio's current NAV, investors may
attempt to take advantage of anticipated price movements in securities held by
the Portfolio based on such pricing discrepancies. This is often referred to as
"price arbitrage." Such price arbitrage opportunities may also occur in
portfolios which do not invest in foreign securities. For example, if trading
in a security held by the Portfolio is halted and does not resume prior to the
time the Portfolio calculates its NAV, such "stale pricing" presents an
opportunity for investors to take advantage of the pricing discrepancy.
Similarily, a portfolio that holds thinly-traded securities, such as certain
small-capitalization securities, may be exposed to varying levels of pricing
arbitrage. The Portfolio has adopted fair valuation policies and procedures
intended to reduce the Portfolio's exposure to price arbitrage, stale pricing,
and other potential pricing discrepancies. However, to the extent that the
Portfolio's NAV does not immediately reflect these changes in market
conditions, short-term trading may dilute the value of Portfolio shares, which
negatively affects long-term shareholders.

Although the policies and procedures known to the Portfolio that are followed
by the financial intermediaries that use the Portfolio and the monitoring by
the the Portfolio are designed to discourage frequent, short-term trading, none
of these measures can eliminate the possibility that frequent, short-term
trading activity in the Portfolio will occur. Moreover, decisions about
allowing trades in the Portfolio may be required. These decisions are
inherently subjective, and will be made in a manner that is in the best
interest of the Portfolio's shareholders.

CLASSES OF SHARES

The Porfolio also offers Adviser Class and Class I shares. Adviser Class and
Class I shares are not offered in this Prospectus.

DISTRIBUTION AND SHAREHOLDER SERVICE FEES

The Company has adopted a distribution and shareholder service fee plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended
("1940 Act")("Distribution Plan") for the Class S shares of the Portfolio.
Under the Distribution Plan, the Distributor, the Portfolio's principal
underwriter, is paid an annual distribution fee at the rate of 0.25% as a
percentage of average daily net assets of the Class S shares of the Portfolio.
The distribution and shareholder service fee may be used to cover expenses
incurred in promoting the sale of Class S shares and for providing shareholder
services and/or account maintenance services to shareholders. The Distributor
may reallow all or a portion of these fees to broker-dealers entering into
selling agreements with it, including affiliates. Because these fees are paid
out on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.

HOW ING COMPENSATES ENTITIES OFFERING ITS PORTFOLIO AS AN INVESTMENT OPTION IN
ITS INSURANCE PRODUCTS

ING mutual funds may be offered as investment options in Variable Contracts by
affiliated and non-affiliated insurance companies. In addition to paying fees
under the Portfolio's Distribution Plan, the Portfolio's Adviser or Distributor
(collectively "ING"), out of its own resources and without additional cost to
the Portfolio or its shareholders, may pay additional compensation to these
insurance companies. The amount of the payment is based upon an annual
percentage of the average net assets held in the Portfolio by those companies.
The Portfolio's Adviser and Distributor may make these payments for
administrative, record keeping, or other services that insurance companies
provide to the Portfolio. These payments may also provide incentive for
insurance companies to make the Portfolio available through the Variable
Contracts issued by the insurance company, and thus they may promote the
distribution of the shares of the Portfolio.

The distributing broker-dealer for the Portfolio is ING Funds Distributor. ING
Funds Distributor has entered into such agreements with non-affiliated
insurance companies. Fees payable under these arrangements are at annual rates
that range from 0.15% to 0.25%. This is computed as a percentage of the average
aggregate amount invested in the Portfolio by contract holders through the
relevant insurance company's Variable Contracts. As of the date of this
Prospectus, the Adviser has entered in such arrangements with the following
insurance companies: Z\)rich Kemper Life Insurance Company; Symetra Life
Insurance Company; and First Fortis Life Insurance Company.

The Adviser also has entered into similar agreements with affiliated insurers
including, but not limited to:

ING Life Insurance and Annuity Company; ReliaStar Life Insurance Company;
ReliaStar Life of New York; Security Life of Denver; and ING USA Annuity and
Life Insurance Co. ING uses a variety of financial and accounting techniques to
allocate resources and profits across the organization. These methods may take
the form of cash payments to affiliates. These methods do not impact the costs
incurred when investing in the Portfolio. Additionally, if the Portfolio is not
sub-advised or is sub-advised by an ING Entity, ING may retain more revenue
than on those portfolios it must pay to have sub-advised by non-affiliated
entities. Management personnel of ING may receive additional compensation if
the overall amount of investments in the Portfolio advised by ING meets certain
target levels or increases over time.

The insurance companies through which investors hold shares of the Portfolio
may also pay fees to third parties in connection with distribution of Variable
Contracts and for services provided to contract owners. The Portfolio, the
Adviser, and the Distributor are not a party to these arrangements. Investors
should consult the prospectus and statement of additional information for their
Variable Contracts for a discussion of these payments.

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                          If you have any questions, please call 1-800-992-0180.

                                                  Information for Investors    7




INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------

Ultimately, the agent or broker selling the Variable Contract to you could have
a financial interest in selling you a particular product to increase the
compensation they receive. Please make sure you read fully each prospectus and
discuss any questions you have with your agent or broker.

NET ASSET VALUE

The NAV per share of the Portfolio is determined each business day as of the
close of regular trading ("Market Close") on the New York Stock Exchange
("NYSE") (normally 4:00 p.m. Eastern time unless otherwise designated by the
NYSE). The Portfolio is open for business every day the NYSE is open. The NYSE
is closed on all weekends and on all national holidays and Good Friday.
Portfolio shares will not be priced on those days. The NAV per share of each
class of the Portfolio is calculated by taking the value of the Portfolio's
assets attributable to that class, subtracting the Portfolio's liabilities
attributable to that class, and dividing by the number of shares of that class
that are outstanding.

In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations
and short-term debt securities, and for situations where market quotations are
deemed unreliable. Investments in securities maturing in 60 days or less are
valued at amortized cost, which, when combined with accrued interest,
approximates market value. Securities prices may be obtained from automated
pricing services. Shares of investment companies held by the Portfolio will
generally be valued at the latest NAV reported by those investment companies.
The prospectuses for those investment companies explain the circumstances under
which they will use fair value pricing and the effects of using fair value
pricing.

Trading of foreign securities may not take place every day the NYSE is open.
Also, trading in some foreign markets and on some electronic trading networks
may occur on weekends or holidays when the Portfolio's NAV is not calculated.
As a result, the NAV of the Portfolio may change on days when shareholders will
not be able to purchase or redeem the Portfolio's shares.

When market quotations are not available or are deemed unreliable, the
Portfolio will use a fair value for the security that is determined in
accordance with procedures adopted by the Board. The types of securities for
which such fair value pricing might be required include, but are not limited
to:

o  Foreign securities, where a foreign security whose value at the close of the
   foreign market on which it principally trades likely would have changed by
   the time of the close of the NYSE, or the closing value is otherwise deemed
   unreliable;

o  Securities of an issuer that has entered into a restructuring;

o  Securities whose trading has been halted or suspended;

o  Fixed-income securities that have gone into default and for which there are
   no current market value quotations; and

o  Securities that are restricted as to transfer or resale.

The the Adviser or Sub-Adviser may rely on the recommendations of a fair value
pricing service approved the Portfolio's Board in valuing foreign securities.
Valuing securities at fair value involves greater reliance on judgment than
valuing securities that have readily available market quotations. The Adviser
or Sub-Adviser makes such determinations in good faith in accordance with
procedures adopted by the Portfolio's Board. Fair value determinations can also
involve reliance on quantitative models employed by a fair value pricing
service. There can be no assurance that the Portfolio could obtain the fair
value assigned to a security if it were to sell the security at approximately
the time at which the Portfolio determines its NAV per share.

When an insurance company's Variable or Qualified Plan is buying shares of the
Portfolio, it will pay the NAV that is next calculated after the order from the
insurance company's Variable Contract holder or Qualified Plan participant is
received in proper form. When an insurance company's Variable Contract or
Qualified Plan is selling shares, it will normally receive the NAV that is next
calculated after the order from the insurance company's Variable Contract
holder or Qualified Plan participant is received in proper form.

PORTFOLIO HOLDINGS DISCLOSURE POLICY

A description of the policies and procedures with respect to the disclosure of
the Portfolio's portfolio securities is available in the SAI. The Portfolio
posts its portfolio holdings schedule on its website on a calendar-quarter
basis and makes it available on the first day of the second month in the next
quarter. The portfolio holdings schedule is as of the last day of the month
preceding the quarter-end (e.g., the Portfolio will post the quarter ending
June 30 holdings on August 1). The Portfolio's portfolio holdings schedule
will, at a minimum, remain available on the Portfolio's website until the
Portfolio files a Form N-CSR or Form N-Q with the SEC for the period that
includes the date as of which the website information is current. The
Portfolio's website is located at www.ingfunds.com.

8    Information for Investors




ADVISER AND SUB-ADVISER             MANAGEMENT OF THE PORTFOLIO
- --------------------------------------------------------------------

ADVISER

ING INVESTMENTS, LLC ("ING INVESTMENTS" OR "ADVISER"), an Arizona limited
liability company, serves as the investment adviser to the Portfolio. ING
Investments has overall responsibility for the management of the Fund. ING
Investments oversees all investment advisory and portfolio management services
for the Fund.

ING Investments is registered with the SEC as an investment adviser. ING
Investments is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING
Groep") (NYSE: ING). ING Groep is a global financial institution of Dutch
origin offering banking, investments, life insurance, and institutional clients
in more than 50 countries. With a diverse work force of about 125,000 people,
ING Groep comprises a broad spectrum of pominent companies that increasingly
serve their clients under the ING brand. ING Investments became an investment
management firm in April, 1995.

As of June 30, 2008, ING Investments managed approximately $__ billion in
assets.

The principal address of ING Investments is 7337 East Doubletree Ranch Road,
Scottsdale, Arizona 85258.

ING Investments receives a monthly fee for its services based on the average
daily net assets of the Portfolio.

The following table shows the aggregate annual management fees to be apid by
the Portfolio as a percentage of the Portfolio's average daily net assets:

                                             MANAGEMENT
PORTFOLIO                                        FEE
 ING Russell Global Large Cap Index 85%             0.46%

For information regarding the basis for the Board's approval of the investment
advisory and investment sub-advisory relationships, please refer to the
Portfolio's annual shareholder report to be dated December 31, 2008.

SUB-ADVISER

ING Investments has engaged a sub-adviser to provide the day-to-day management
of the Portfolio's portfolio. The sub-adviser is an affiliate of ING
Investments.

ING Investments acts as a "manager-of-managers" for the Portfolio. ING
Investments delegates to the sub-adviser of the Portfolio the responsibility
for investment management, subject to ING Investments' oversight. ING
Investments is responsible for monitoring the investment program and
performance of the sub-adviser of the Portfolio.

From time to time, ING Investments may also recommend the appointment of
additional sub-advisers or replacement of sub-advisers to the Portfolio's
Board. It is not expected that ING Investments would normally recommend
replacement of affiliated sub-advisers as part of its oversight
responsibilities. The Portfolio and ING Investments have received exemptive
relief from the SEC to permit ING Investments, with the approval of the
Portfolio's Board, to appoint additional non-affiliated sub-advisers or to
replace an existing sub-adviser with a non-affiliated sub-adviser as well as
change the terms of a contract with a non-affiliated sub-adviser, without
submitting the contract to a vote of the Portfolio's shareholders. The
Portfolio will notify shareholders of any change in the identity of the
sub-adviser of the Portfolio. In this event, the name of the Portfolio and its
principal investment strategies may also change.

Under the terms of the sub-advisory agreement, the agreement can be terminated
by either ING Investments or the Portfolio's Board. In the event the
sub-advisory agreement is terminated, the sub-adviser may be replaced subject
to any regulatory requirements or ING Investments may assume day-to-day
investment management of the Fund.

ING INVESTMENT MANAGEMENT CO.

ING Investment Management Co. ("ING IM" or "Sub-Adviser"), a Connecticut
corporation, serves as the Sub-Adviser to the Portfolio. ING IM is responsible
for managing the assets of the Portfolio in accordance with the Portfolio's
investment objective and policies, subject to oversight by ING Investments and
the Portfolio's Board.

Founded in 1972, ING IM is registered with the SEC as an investment adviser.
ING IM has acted as adviser or sub-adviser to mutual funds since 1994 and has
managed institutional accounts since 1972. ING IM is an indirect, wholly-owned
subsidiary of ING Groep and is an affiliate of ING Investments. As of June 30,
2008, ING IM managed approximately $____ billion in assets. The principal
office of ING IM is 230 Park Avenue, New York, NY 10169.

The following individuals are jointly responsible for the day-today management
of the Portfolio:

Omar Aguilar, Ph.D. has co-managed the Portfolio since inception. He has been
with ING IM since July 2004 and is Head of Quantitative Equity Research. Dr.
Aguilar previously served as head of Lehman Brothers' quantitative research for
its alternative investment management business since 2002. Prior to that, Dr.
Aguilar was director of quantitative research and a portfolio manager with
Merrill Lynch Investment Management since 1999.

Vincent Costa, has co-managed the Portfolio since its inception. He joined ING
IM in April 2006 as Senior Quantitative Portfolio Manager from Merrill Lynch
Investment Managers where he had been employed since 1999, most recently as
Managing Director and Chief Investment Officer for that firm's Quantitative
Investment strategies.

ADDITIONAL INFORMATION REGARDING PORTFOLIO MANAGERS

The SAI provides additional information about each portfolio manager's
compensation, other accounts managed by each portfolio manager and each
portfolio manager's ownership of securities in the Fund.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                Management of the Portfolio    9




MORE INFORMATION ABOUT RISKS
- --------------------------------------------------------------------------------

All mutual funds involve risk - some more than others - and there is always the
chance that you could lose money or not earn as much as you hope. The
Portfolio's risk profile is largely a factor of the principal securities in
which it invests and investment techniques that it uses. The following pages
discuss the risks associated with certain of the types of securities in which
the Portfolio may invest and certain of the investment practices that the
Portfolio may use. For more information about these and other types of
securities and investment techniques that may be used by the Portfolio, see the
SAI.

Many of the investment techniques and strategies discussed in this Prospectus
and in the SAI are discretionary, which means that the Adviser or Sub-Adviser
can decide whether to use them or not. The Portfolio may invest in these
securities or use these techniques as par of the Portfolio's principal
investment strategy.

PRINCIPAL RISKS

The principal risks of the Portfolio are highlighted below. Please see the SAI
for a further discussion of the principal and other investment strategies
employed by the Portfolio.

CONVERTIBLE SECURITIES. The price of a convertible security will normally
fluctuate in some proportion to changes in the price of the underlying equity
security and as such, is subject to risks relating to the activities of the
issuer and general market and economic conditions. The income component of
convertible securities causes fluctuations based upon changes in interest rates
and the credit quality of the issuer. Convertible securities are often lower
rated securities. The Portfolio may be required to redeem or convert a
convertible security before the holder would otherwise choose.

DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the
performance of an underlying asset or assets. Some derivatives are
sophisticated instruments that typically involve a small investment of cash
relative to the magnitude of risks assumed. These may include swap agreements,
options, forwards, and futures. Derivative securities are subject to market
risk which could be significant for those that have a leveraging effect.
Derivatives are also subject to credit risks related to the counterparty's
ability to perform and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. In addition, derivatives and their
underlying securities may experience periods of illiquidity which could cause
the Portfolio to hold a security it might otherwise sell or could force the
sale of a security at inopportune times or for prices that do not reflect
current market value. A risk of using derivatives is that the Adviser or
Sub-Adviser might imperfectly judge the market's direction. For instance, if a
derivative is used as a hedge to offset investment risk in another security,
the hedge might not correlate to the market's movements and may have unexpected
or undesired results such as a loss or a reduction in gains.

FOREIGN SECURITIES. There are certain risks in owning foreign securities
including those resulting from: fluctuations in currency exchange rates;
devaluation of currencies; political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions; reduced availability of public information concerning issuers;
accounting, auditing and financial reporting standard or other regulatory
practices and requirements that are not uniform when compared to those
applicable to domestic companies; settlement and clearance procedures in some
countries that may not be reliable and can result in delays in settlement;
higher transaction and custody expenses than for domestic securities; and
limitations on foreign ownership of equity securities. Also, securities of many
foreign companies may be less liquid and the prices are more volatile that
those of domestic companies. With certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of portfolios or other assets of the
Portfolio including the withholding of dividends.

The Portfolio may enter into foreign currency transactions either on a spot or
cash basis at prevailing rates or through forward foreign currency exchange
contracts in order to have the necessary currencies to settle transactions, to
help protect Portfolio assets against adverse changes in foreign currency
exchange rates, or to provide exposure to a foreign currency commensurate with
the exposure to securities from that country. Such efforts could limit
potential gains that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Portfolio.

INABILITY TO SELL SECURITIES. Certain securities generally trade in lower
volume and may be less liquid than securities of large established companies.
These less liquid securities could include securities of small and mid-size
U.S. companies, high-yield securities, convertible securities, unrated debt and
convertible securities, securities that originate from small offerings and
foreign securities, particularly those from companies in countries with an
emerging securities market. The Portfolio could lose money if it cannot sell a
security at the time and price that would be most beneficial to the Portfolio.

INDEX STRATEGY. The Portfolio may use an indexing strategy that does not
attempt to manage market volatility, use defensive strategies or reduce the
effects of any long-term periods of poor stock performance. The correlation
between the performance of the Portfolio and the performance of the indices may
be affected by the Portfolio's expenses, and the timing of purchases and
redemptions of the Portfolio's shares.

INVESTMENT BY FUNDS-OF-FUNDS. The Portfolio's shares may be purchased by other
investment companies, including through fund-of-funds arrangements within the
ING Funds family. In some cases, the Portfolio may serve as a primary or
significant investment vehicle for a fund-of-funds. From time to time, the
Portfolio may experience large inflows or redemptions due to allocations or
rebalancings by these funds-of funds. While it is impossible to predict the
overall impact of these transactions over time, there could be adverse effects
on portfolio management. For example, the Portfolio may be required to sell
securities or invest cash at times when it would not otherwise do so. These

10    More Information About Risks




                            MORE INFORMATION ABOUT RISKS
- --------------------------------------------------------------------

transactions could also increase transaction costs or portfolio turnover. The
Adviser or portfolio manager will monitor transactions by the funds-of funds
and will attempt to minimize any adverse effects on the Portfolio and
funds-of-funds as a result of these transactions. So long as the Portfolio
accepts investments by other investment companies, it will not purchase
securities of other investment companies, except to the extent permitted by the
1940 Act or under the terms of an exemptive order granted by the SEC.

LENDING PORTFOLIO SECURITIES. In order to generate additional income, the
Portfolio may lend portfolio securities in an amount up to 33  1/3% of total
Portfolio assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. When the Portfolio lends its securities,
it is responsible for investing the cash collateral it receives from the
borrower of the securities, and the Portfolio could incur losses in connection
with the investment of such cash collateral. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower default or fail financially.

MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-backed security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization and may
be prepaid prior to maturity. Like other fixed-income securities, when interest
rates rise, the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as much as other
fixed-income securities. The rate of prepayments on underlying mortgages will
affect the price and volatility of a mortgage-related security, and may have
the effect of shortening or extending the effective maturity of the security
beyond what was anticipated at the time of the purchase. Unanticipated rates of
prepayment on underlying mortgages can be expected to increase the volatility
of such securities. In addition, the value of these securities may fluctuate in
response to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by the Portfolio. Additionally, although
mortgages and mortgage-related securities are generally supported by some form
of government or private guarantee and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations, and
thus, are subject to risk of default.

OTHER INVESTMENT COMPANIES. The Portfolio may invest in other investment
companies to the extent permitted by the 1940 Act and the rules and regulations
thereunder. These may include exchange-traded funds ("ETFs") and Holding
Company Depositary Receipts ("HOLDRs"), among others. ETFs are exchange traded
investment companies that are designed to provide investment results
corresponding to an equity index and include, among others, Standard & Poor's
Depositary Receipts ("SPDRs"), PowerShares QQQTM ("QQQQ"), Dow Jones Industrial
Average Trading Stocks ("Diamonds") and iShares exchange-traded funds
("iShares"). The main risk of investing in other investment companies
(including ETFs) is that the value of the underlying securities held by the
investment company might decrease. The value of the underlying securities can
fluctuate in response to activities of individual companies or in response to
general market and/or economic conditions. Because the Portfolio may invest in
other investment companies, you will pay a proportionate share of the expenses
of that other investment company (including management fees, administration
fees and custodial fees). Additional risks of investments in ETFs include: (i)
an active trading market for an ETF's shares may not develop or be maintained
or (ii) trading may be halted if the listing exchanges' officials deem such
action appropriate, the shares are delisted from the exchange, or the
activation of market-wide "circuit breakers" (which are tied to large decreases
in stock prices) halts trading generally. Because HOLDRs concentrate in the
stocks of a particular industry, trends in that industry may have a dramatic
impact on their value.

To seek to achieve a return on uninvested cash or for other reasons,the
Portfolio may invest its assets in ING Institutional Prime Money Market Fund
and/or one or more other money market funds advised by ING affiliates ("ING
Money Market Funds"). The Portfolio's purchase of shares of an ING Money Market
Fund will result in the Portfolio paying a proportionate share of the expenses
of the ING Money Market Fund. The Portfolio's Adviser will waive its fee in an
amount equal to the advisory fee received by the adviser of the ING Money
Market Fund in which the Portfolio invests resulting from the Portfolio's
investment into the ING Money Market Fund.

U.S. GOVERNMENT SECURITIES AND OBLIGATIONS. Obligations issued by some U.S.
government agencies, authorities, instrumentalities or sponsored enterprises,
such as the Government National Mortgage Association, are backed by the full
faith and credit of the U.S. Treasury while obligations issued by others, such
as the Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation and Federal Home Loan Banks, are backed solely by the entity's own
resources or by the ability of the entity to borrow from the U.S. Treasury. No
assurance can be given that the U.S. government will provide financial support
to U.S. government agencies, authorities, instrumentalities or sponsored
enterprises if it is not obliged to do so by law.

PERCENTAGE AND RATING LIMITATIONS. Unless otherwise stated, the percentage and
rating limitations in this Prospectus apply at the time of investment.

PORTFOLIO TURNOVER. The Portfolio is generally expected to engage in frequent
and active trading of portfolio securities to achieve its investment objective.
A high portfolio turnover rate involves greater expenses to the Portfolio,
including brokerage commissions and other transaction costs, which may have an
adverse effect on the performance of the Portfolio.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                              More Information About Risks    11




DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

The Portfolio declares and pays dividends and capital gains distributions, if
any, on an annual basis usually in June. To comply with federal tax
regulations, the Portfolio, may also pay an additional capital gains
distribution, usually in June.

TAX MATTERS

Holders of Variable Contracts should refer to the prospectus for their
contracts for information regarding the tax consequences of owning such
contracts and should consult their tax advisers before investing.

The Portfolio intends to qualify as a regulated investment company ("RIC") for
federal income tax purposes by satisfying the requirements under Subchapter M
of the Code, including requirements with respect to diversification of assets,
distribution of income and sources of income. As a RIC, the Portfolio generally
will not be subject to tax on its net investment company taxable income and net
realized capital gains. The Portfolio also intends to comply with the
diversification requirements of Section 817(h) of the Code and the underlying
regulations for Variable Contracts so that owners of these contracts should not
be subject to federal tax on distributions of dividends and income from the
Portfolio to the insurance company's separate accounts.

Since the sole shareholders of the Portfolio will be separate accounts or other
permitted investors, no discussion is included herein as to the federal income
tax consequences at the shareholder level. For information concerning the
federal income tax consequences to purchasers of the policies, see the attached
prospectus for the policy.

See the SAI for further information about tax matters.

THE TAX STATUS OF YOUR INVESTMENT IN THE PORTFOLIO DEPENDS UPON THE FEATURES OF
YOUR VARIABLE CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE PROSPECTUS
FOR THE VARIABLE CONTACT.

12    Dividends, Distributions and Taxes




                                                     PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

                           PERFORMANCE OF THE INDICES
ALTHOUGH THE PORTFOLIO'S INVESTMENT OBJECTIVE SEEKS TO MAXIMIZE TOTAL RETURN
OVER THE LONG TERM BY ALLOCATING ITS ASSETS AMONG STOCKS, BONDS, SHORT-TERM
INSTRUMENTS AND OTHER INVESTMENTS, THE PERFORMANCE INFORMATION THAT FOLLOWS FOR
THE RUSSELL GLOBAL LARGE CAP(Reg. TM) INDEX, THE LEHMAN BROTHERS U.S. AGGREGATE
BOND INDEX(Reg. TM), AND THE COMPOSITE INDEX CONSISTING OF 85% RUSSELL GLOBAL
LARGE CAP(Reg. TM) INDEX AND 15% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX(Reg.
TM) (COLLECTIVELY, THE "INDICES"), IS NOT THE PAST PERFORMANCE OF THE PORTFOLIO
OR ANY OTHER INVESTMENT.


The Indices' performance does not include any fees and expenses associated with
investing, including management fees and brokerage costs, and would be lower if
it did. The Indices' performance also does not reflect the deduction of any
insurance fees or charges that are imposed by the insurance company in
connection with its sale of variable contracts. You should refer to the
separate account prospectuses, prospectus summary or disclosure statement
describing variable contracts for information pertaining to these insurance
fees or charges. If the insurance fees or charges were included, the
performance would be lower. Past performance of the Indices is no guarantee of
future results, either for the Indices or for any mutual fund. You cannot
invest directly in an index.

           PERFORMANCE OF THE RUSSELL GLOBAL LARGE CAP(REG. TM) INDEX
The bar chart below shows the changes in the Russell Global Large Cap(Reg. TM)
Index performance from year to year and the table shows the average annual
total returns for the Russell Global Large Cap(Reg. TM) Index over the periods
indicated as of December 31, 2007. These returns reflect reinvestment of
dividends and other earnings.

Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit. It should
be noted that the long-term performance of the Russell Global Large Cap(Reg.
TM) Index coincides with a long bull stock market.

                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)

                               [INSERT BAR CHART]

                          AVERAGE ANNUAL TOTAL RETURNS

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007

                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                                            1 YEAR    3 YEARS    5 YEARS    10 YEARS
 RUSSELL GLOBAL LARGE CAP(Reg. TM) INDEX

As stated above, Russell Global Large Cap(Reg. TM) Index returns do not
represent actual Portfolio performance. Russell Global Large Cap(Reg. TM) Index
performance returns do not reflect management fees, transaction costs or
expenses.

ING RussellTM Global large Cap Index 85% Portfolio is not promoted, sponsored
or endorsed by, nor in any way affiliated with Russell Investment Group
("Russell"). Russell is not responsible for and has not reviewed the Portfolio
nor any associated literature or publications and Russell makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.

Russell reserves the right, at any time and without notice, to alter, amend,
terminate, or in any way change the Russell Indices. Russell has no obligation
to take the needs of any particular fund or its participants or any other
product or person into consideration in determining, composing, or calculating
any of the Russell Indices.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                  Performance of the Indices  13




PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

PERFORMANCE OF THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX(REG. TM) ("LBAB
                                    INDEX")
The bar chart below shows the changes in the LBAB Index' performance from year
to year and the table shows the average annual total returns for the LBAB Index
over the periods indicated as of December 31, 2007. These returns reflect
reinvestment of dividends and other earnings.

Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit.

                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)

                               [INSERT BAR CHART]

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

               1 YEAR    3 YEARS    5 YEARS    10 YEARS
 LBAB INDEX

Prior performance is net of taxes and includes reinvested dividends and
interest. As stated above, LBAB Index returns do not represent actual Portfolio
performance. LBAB Index' performance returns do not reflect management fees,
transaction costs or expenses.

The Portfolio is not sponsored or sold by Lehman Brothers or its affiliates.
Lehman Brothers makes no representations or warranty, express or implied, to
the shareholders of the Portfolio or any member of the public regarding the
advisability of investing in securities generally or in the Portfolio
particularly, or the ability of the LBAB Index to track general bond market
performance. The LBAB Index is determined, composed and calculated by Lehman
Brothers without regard to ING Investments, LLC, its affiliates or the
Portfolio. Lehman Brothers has no obligation to take the needs of ING
Investments, LLC, its affiliates or the shareholders of the Portfolio into
consideration in determining, composing, or calculating the LBAB Index. Lehman
Brothers is not responsible for and has not participated in the determination
of the timing or, prices at, or quantities of the purchase and sales of
investments in the Portfolio. Lehman Brothers has no obligation or liability in
connection with the administration or, marketing or, or trading in or of the
Portfolio. Lehman Brothers and the LBAB Index are trademarks of Lehman
Brothers, Inc.

14  Performance of the Indices




                                                     PERFORMANCE OF THE INDICES
- --------------------------------------------------------------------------------

PERFORMANCE OF THE 85% RUSSELL GLOBAL LARGE CAP INDEX AND 15% LBAB INDEX
                                   COMPOSITE
The bar chart below shows the changes in the Composite Index' performance from
year to year and the table shows the average annual total returns for the
Composite Index over the periods indicated as of December 31, 2007. These
returns reflect reinvestment of dividends and other earnings.

Past performance is not indicative of future results and, as with any
investment, there is always a potential for loss as well as profit.

                         YEAR-BY-YEAR TOTAL RETURNS(1)
                (FOR THE PERIODS ENDED DECEMBER 31 OF EACH YEAR)

                               [INSERT BAR CHART]

1998    1999    2000    2001    2002    2003    2004    2005    2006    2007

                          AVERAGE ANNUAL TOTAL RETURNS
                   (FOR THE PERIODS ENDED DECEMBER 31, 2007)

                    1 YEAR    3 YEARS    5 YEARS    10 YEARS
 COMPOSITE INDEX

Prior performance is net of taxes and includes reinvested dividends and
interest. As stated above, Composite Index returns do not represent actual
Portfolio performance. Composite Index' performance returns do not reflect
management fees, transaction costs or expenses.

[GRAPHIC APPEARS HERE]

                          If you have any questions, please call 1-800-992-0180.

                                                  Performance of the Indices  15




FINANCIAL
 HIGHLIGHTS
- --------------------------------------------------------------------

Because the Portfolio did not commence operations as of the fiscal year ended
December 31, 2007, financial highlights are not available.

16  Financial Highlights




TO OBTAIN MORE INFORMATION
YOU'LL FIND MORE INFORMATION ABOUT THE FUND IN OUR:

ANNUAL/SEMI-ANNUAL SHAREHOLDER REPORTS
In the Portfolio's annual/semi-annual shareholder reports, when available, you
will find a discussion of the recent market conditions and principal investment
strategies that significantly affected the Portfolio's performance during its
last fiscal year, the financial statements and the independent registered
public accounting firm's reports (in the annual shareholder report only).

STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI contains more detailed information about the Fund. The SAI is legally
part of this Prospectus (it is incorporated by reference). A copy has been
filed with the SEC.

Please write, call or visit our website for a free copy of the current annual/
semi-annual shareholder reports, the SAI or other information.

To make shareholder inquiries contact:

THE ING FUNDS
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258-2034

1-800-992-0180

Or visit our website at WWW.INGFUNDS.COM

This information may also be reviewed or obtained from the SEC. In order to
review the information in person, you will need to visit the SEC's Public
Reference Room in Washington, D.C. or call 202-551-8090 for information on the
operation of the Public Reference Room. Otherwise, you may obtain the
information for a fee by contacting the SEC at:

U.S. SECURITIES AND EXCHANGE COMMISSION
Public Reference Section
100 F Street, N.E.
Washington, D.C. 20549

or at the e-mail address: PUBLICINFO@SEC.GOV

Or obtain the information at no cost by visiting the SEC's Internet website at
WWW.SEC.GOV.

When contacting the SEC, you will want to refer to the Portfolio's SEC file
numbers. The file numbers are as follows:

ING Variable Portfolios, Inc.                         811-7651
  ING RussellTM Global Large Cap Index 85% Portfolio

PRPRO-RGLCI85I                                                   (0808-082008)
[GRAPHIC APPEARS HERE]

- --------------------------------------------------------------------------------


STATEMENT OF ADDITIONAL INFORMATION

August 20, 2008

ING VARIABLE PORTFOLIOS, INC.

7337 East Doubletree Ranch Road

Scottsdale, AZ 85258-2034

(800) 992-0180

ING Global Equity Option Portfolio

Service Class Shares

This Statement of Additional Information (“SAI”) relates to ING Global Equity Option Portfolio (“Portfolio”), a series of ING Variable Portfolios, Inc. (“Company”). A prospectus or prospectuses (each a “Prospectus” and collectively, the “Prospectuses”) for the Portfolio dated August 20, 2008, which provide the basic information you should know before investing in the Portfolio, may be obtained without charge from the Portfolio or the Portfolio’s principal underwriter, ING Funds Distributor, LLC (“Distributor”), at the address listed above. This SAI is not a Prospectus, but is incorporated therein by reference, and should be read in conjunction with the Prospectuses, each dated August 20, 2008, which have been filed with the U.S. Securities and Exchange Commission (“SEC”). Capitalized terms not defined in this SAI are used as defined in the Prospectuses.

The information in this SAI expands on the information contained in the Prospectuses and any supplements thereto. Copies of the Prospectuses and annual or semi-annual shareholder reports, when available, may be obtained upon request and without charge by contacting the Portfolio at the address and phone number written above.

Shares of the Portfolio are sold to insurance company separate accounts, so that the Portfolio may serve as an investment option under variable life insurance policies and variable annuity contracts issued by insurance companies (“Variable Contracts”). The Portfolio also may sell its shares to certain other investors, such as qualified pension and retirement plans, insurance companies and any adviser to the Portfolio as well as to the general accounts of any insurance company whose separate account holds shares of the Portfolio. Shares of the Portfolio are currently offered to separate accounts (“Variable Accounts”) of insurance companies that are subsidiaries of ING Groep N.V. (“ING Groep”) as well as non-affiliated insurance companies. Shares of the Portfolio also may be made available to affiliated investment companies under fund-of-funds arrangements, consistent with Section 12(d)(1)(G) of the Investment Company Act of 1940, as amended (“1940 Act”). For information on allocating premiums and cash values under the terms of the Variable Contracts, see the prospectus for your Variable Contract.

ING Variable Portfolios, Inc. is authorized to issue multiple series of shares, representing a diversified portfolio of investments with different investment objectives, policies and restrictions.

 

1


TABLE OF CONTENTS

 

GENERAL INFORMATION

   3

FUNDAMENTAL AND NON-FUNDAMENTAL INVESTMENT RESTRICTIONS

   3

DIRECTORS AND OFFICERS

   47

BOARD

   51

DIRECTOR OWNERSHIP OF SECURITIES

   52

INDEPENDENT DIRECTOR OWNERSHIP OF SECURITIES

   52

CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS

   53

ADVISER

   54

SUB-ADVISER

   55

ADMINISTRATOR

   58

CUSTODIAN

   59

TRANSFER AGENT

   59

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   59

LEGAL COUNSEL

   59

PRINCIPAL UNDERWRITER

   60

DISTRIBUTION SERVICING ARRANGEMENTS

   60

SHAREHOLDER SERVICE AND DISTRIBUTION ARRANGEMENTS

   60

DISTRIBUTION AND/OR SHAREHOLDER SERVICE (12B-1) FEES PAID

   61

DISCLOSURE OF THE PORTFOLIO’S PORTFOLIO SECURITIES

   61

PURCHASE AND REDEMPTION OF SHARES

   63

PORTFOLIO TRANSACTIONS

   64

CODE OF ETHICS

   67

PROXY VOTING PROCEDURES

   67

NET ASSET VALUE

   68

TAX CONSIDERATIONS

   69

PERFORMANCE INFORMATION

   71

FINANCIAL STATEMENTS

   73

APPENDIX A

   A-1

 

2


GENERAL INFORMATION

Effective May 1, 2002, the name of ING Variable Portfolios, Inc. was changed as follows:

 

Old Name

  

New Name

Aetna Variable Portfolios, Inc.

   ING Variable Portfolios, Inc.

Organization. ING Variable Portfolios, Inc. was incorporated in Maryland in 1996 and is registered as a diversified open-end management investment company consisting of separately managed series.

This SAI pertains only to ING Global Equity Option Portfolio.

Classes. The Board of Directors of the Portfolio (the “Board”) has the authority to subdivide the Portfolio into classes of shares having different attributes, so long as each share of each class represents a proportionate interest in the Portfolio equal to each other share in the Portfolio. Shares of the Portfolio currently are classified into three classes. ADV Class, Class I and Class S shares are offered through this SAI and the corresponding Prospectuses. Each class of shares has the same rights, privileges and preferences, except with respect to: (a) the distribution fees borne by ADV Class and Class S; (b) the expenses allocable exclusively to each class; and (c) the voting rights on matters exclusively affecting a single class.

Capital Stock. Shares of the Portfolio have no preemptive or conversion rights. Each share of the Portfolio has the same rights to share in dividends declared by that Portfolio. Upon liquidation of the Portfolio, shareholders in the Portfolio are entitled to share pro rata in the net assets of the Portfolio available for distribution to shareholders. Shares of the Portfolio are fully paid and non-assessable.

Shareholder Liability. The Board intends to conduct the operations of the Portfolio, with the advice of counsel, in such a way as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Portfolio.

Voting Rights. Shareholders of the Portfolio are entitled to one vote for each full share held (and fractional votes for fractional shares held) and will vote in the election of Directors (hereafter, “Directors”) (to the extent hereinafter provided), and on other matters submitted to the vote of shareholders. Participants who select the Portfolio for investment through their variable annuity contract (“VA Contract”) or variable life insurance policy (“VLI Policy”) are not the shareholders of the Portfolio. The insurance companies that issue the separate accounts are the true shareholders, but generally pass through voting to Participants as described in the prospectus for the applicable VA Contract or VLI Policy. Once the initial Board is elected, no meetings of the shareholders for the purpose of electing Directors will be held unless and until such time as less than a majority of the Directors holding office have been elected by the shareholders, or shareholders holding 10% or more of the outstanding shares request such a vote. The Directors then in office will call a shareholder meeting for election of Directors. Vacancies occurring between any such meetings shall be filled as allowed by law, provided that immediately after filling any such vacancy, at least two-thirds of the Directors holding office have been elected by the shareholders. Except as set forth above, the Directors shall continue to hold office and may appoint successor Directors. Directors may be removed at any meeting of shareholders by the vote of a majority of all shares entitled to vote. Any Director may also voluntarily resign from office. Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of Directors can, if they choose to do so, elect all the Directors of the Portfolio, in which event the holders of the remaining shares will be unable to elect any person as a Director.

1940 Act Classification. The Portfolio is an open-end management investment company, as that term is defined under the 1940 Act. The Portfolio is a diversified company, as that term is defined under the 1940 Act. The 1940 Act generally requires that with respect to 75% of its total assets, a diversified company may not invest more than 5% of its total assets in the securities of any one issuer.

FUNDAMENTAL and NON-FUNDAMENTAL INVESTMENT RESTRICTIONS

The following investment restrictions are fundamental which means they may be changed only with the approval of the holders of a majority of the Portfolio’s outstanding voting securities, defined in the 1940 Act as

 

3


the lesser of: (1) 67% or more of the Portfolio’s shares present at a shareholders’ meeting at which the holders of more than 50% of the Portfolio’s outstanding shares of that Portfolio are present in person or by proxy; or (2) more than 50% of the Portfolio’s outstanding voting securities, present in person or by proxy. All other investment policies or practices are considered by the Portfolios to be non-fundamental and accordingly may be changed without shareholder approval. The Portfolio’s investment objective is non-fundamental and may be changed without a shareholder vote. Shareholders will be provided at least 60 days’ prior written notice of any change to the Portfolio’s non-fundamental investment objective. All percentage limitations set forth below apply immediately after a purchase or initial investment. There will be no violation of any investment policy or restriction if that restriction is complied with at the time the relevant action is taken, notwithstanding a later change in the market value of an investment, in net or total assets, in the securities rating of the investment or any other change.

As a matter of fundamental policy, the Portfolio may not:

 

1. purchase securities of any issuer if, as a result, with respect to 75% of the Portfolio’s total assets, more than 5% of the value of its total assets would be invested in the securities of any one issuer or the Portfolio’s ownership would be more than 10% of the outstanding voting securities of any issuer, provided that this restriction does not limit the Portfolio’s investments in securities issued or guaranteed by the U.S. government, its agencies and instrumentalities, or investments in securities of other registered management investment companies;

 

2. purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. government, any state or territory of the United States, or any of their agencies, instrumentalities or political subdivisions; and (b) notwithstanding this limitation or any other fundamental investment limitation, assets may be invested in the securities of one or more registered management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Portfolio;

 

3. make loans, except to the extent permitted under the 1940 Act, including the rules, regulations, interpretations and any exemptive relief obtained by the Portfolio;

 

4. issue senior securities except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Portfolio;

 

5. purchase or sell real estate, except that the Portfolio may (i) acquire or lease office space for its own use, (ii) invest in securities of issuers that invest in real estate or interests therein, (iii) invest in mortgage-related securities and other securities that are secured by real estate or interests therein, or (iv) hold and sell real estate acquired by the Portfolio as a result of the ownership of securities;

 

6. purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Portfolio from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical commodities). This limitation does not apply to foreign currency transactions, including, without limitation, forward currency contracts;

 

7. borrow money, except to the extent permitted under the 1940 Act, including the rules, regulations, interpretations thereunder and any exemptive relief obtained by the Portfolio; and

 

8. underwrite any issue of securities within the meaning of the Securities Act of 1933 (“1933 Act”) except when it might technically be deemed to be an underwriter either: (a) in connection with the disposition of the Portfolio security; or (b) in connection with the purchase of securities directly from the issuer thereof in accordance with its investment objective. This restriction shall not limit the Portfolio’s ability to invest in securities issued by other registered management investment companies.

 

4


With respect to fundamental policy number (2), industry classifications are in accordance with Global Industrial Classification (“GIC”) Standards and Standard Industrial Classification (“SIC”) Codes. Industry classifications may be changed at any time to reflect changes in the market place.

The Board has adopted the following non-fundamental investment restrictions, which may be changed by the Board and without shareholder vote. The Portfolio will not:

 

1. make short sales of securities, other than short sales “against the box,” or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that this restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs if the Portfolio as described in the SAI and in the Prospectuses;

 

2. invest in companies for the purpose of exercising control or management; and

 

3. purchase interests in oil, gas or other mineral exploration programs; however, this limitation will not prohibit the acquisition of securities of companies engaged in the production or transmission of oil, gas, or other materials.

SUPPLEMENTAL DESCRIPTION OF PORTFOLIO INVESTMENTS AND RISKS

Investments, Investment Strategies and Risks

The table below identifies various securities and investment techniques used by ING Investments, LLC (“Adviser” or “ING Investments”) and the sub-adviser in managing the Portfolio. The table has been marked to indicate those securities and investment techniques that ING Investments and the sub-advisers may use to manage the Portfolio. The Portfolio may use any or all of these techniques at any one time, and the fact that the Portfolio may use a technique does not mean that the technique will be used. The securities and investment techniques are subject to the limitations explained elsewhere in this SAI or the accompanying Prospectus. The Portfolio’s transactions in a particular type of security or use of a particular technique is subject to limitations imposed by the Portfolio’s investment objective, policies and restrictions described in that Portfolio’s Prospectus and/or this SAI, as well as federal securities laws. There can be no assurance that any of the Portfolios will achieve their investment objectives. The Portfolio’s policies, strategies and practices are non-fundamental unless otherwise indicated. A more detailed description of the securities and investment techniques, as well as the risks associated with those securities and investment techniques that the Portfolios utilize, follows the table. The descriptions of the securities and investment techniques in this section supplement the discussion of principal investment strategies contained in the Portfolio’s Prospectus. Where a particular type of security or investment technique is not discussed in the Portfolio’s Prospectus, that security or investment technique is not a principal investment strategy.

 

Asset Classes/ Investment Techniques

   Global Equity Option

Equities

  

Common Stock

   X

Convertible Securities

   X

IPOs

   X

Preferred Stock

   X

Synthetic Convertible Securities

   X

Unseasoned Companies

   X

Foreign and Emerging Market Investments

  

ADRs/EDRs/GDRs

   X

Eurodollar Convertible Securities

   X

Eurodollar/ Yankee Dollar Instruments

   X

Foreign and Emerging Market Securities

   X

Foreign Bank Obligations

   X

Foreign Currency Exchange Transactions

   X

Foreign Mortgage-Related Securities3

   X

International Debt Securities

   X

 

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Asset Classes/ Investment Techniques

   Global Equity Option

Sovereign Debt Securities

   X

Supranational Agencies

   X

Fixed-Income

  

ARMS

   X

Asset-Backed Securities (non-mortgage)

   X

Banking Industry Obligations/Short-Term Investments

   X

Corporate Debt Securities

   X

Credit-Linked Notes

   X

Floating or Variable Rate Instruments

   X

GICs

   X

GNMA Certificates

   X

Government Trust Certificates

   X

High-Yield Securities

   X

Mortgage-Related Securities

   X

Municipal Securities

   X

Municipal Lease Obligations

   X

Repurchase Agreements

   X

Savings Association Obligations

   X

Subordinated Mortgage Securities

   X

Interest-only/ Principal-only Stripped Mortgage-Backed Securities

   X

Tax Exempt Ind. Dev. Bonds & Pollution Control Bonds

   X

United States Government Securities

   X

Zero-Coupon and Pay-In-Kind

   X

Other Investments

  

Derivatives

   X

Financial Futures Contracts and Related Options

   X

Forward Foreign Currency Contracts

   X

Foreign Currency Options

   X

Foreign Futures Contracts and Foreign Option

   X

Index-, Currency-, and Equity-Linked Securities

   X

Options on Futures

   X

Over-the-Counter Options

   X

Put and Call Options

   X

Stock Index Options

   X

Straddles

   X

Warrants

   X

Other Investment Companies

   X

Private Funds

   X

Real Estate Securities

   X

Restricted and Illiquid Securities

   X

TBA Sale Commitments

   X

Trust-Preferred Securities

   X

Investment Techniques

  

Borrowing

   X

Lending of Portfolio Securities

   X

Reverse Repurchase Agreements and Dollar Rolls

   X

Securities, Interest Rate and Currency Swaps

   X

Temporary Defensive Positions

   X

Short Sales

   X

When-Issued Securities and Delayed-Delivery Transactions

   X

EQUITY INVESTMENTS

Common stock

Common stock represents an equity (ownership) interest in a company. This ownership interest generally gives an Underlying Fund the right to vote on issues affecting the company’s organization and operations and such investments may be diversified over a cross-section of industries and individual companies. Some of these companies will be organizations with market capitalizations of $500 million or less or companies that have limited product lines, markets and financial resources and are dependent upon a limited management

 

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group. Examples of possible investments include emerging growth companies employing new technology, cyclical companies, initial public offerings of companies offering high growth potential, or other corporations offering good potential for high growth in market value. The securities of such companies may be subject to more abrupt or erratic market movements than larger, more established companies both because the securities typically are traded in lower volume and because the issuers typically are subject to a greater degree to changes in earnings and prospects.

Other types of equity securities may also be purchased, such as preferred stock, convertible securities, or other securities that are exchangeable for shares of common stock.

Convertible Securities

A convertible security is a security that may be converted either at a stated price or rate within a specified period of time into a specified number of shares of common stock. By investing in convertible securities, an Underlying Fund seeks the opportunity, through the conversion feature, to participate in the capital appreciation of the common stock into which the securities are convertible, while investing at a better price than may be available on the common stock or obtaining a higher fixed-rate of return than is available on common stock. The value of a convertible security is a function of its “investment value” (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its “conversion value” (the security’s worth, at market value, if converted into the underlying common stock). The credit standing of the issuer and other factors may also affect the investment value of a convertible security. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value.

The market value of convertible debt securities tends to vary inversely with the level of interest rates. The value of the security declines as interest rates increase and the value increases as interest rates decline. Although under normal market conditions longer term debt securities have greater yields than do shorter-term debt securities of similar quality, they are subject to greater price fluctuations. A convertible security may be subject to redemption at the option of the issuer at a price established in the instrument governing the convertible security. If a convertible security held by an Underlying Fund is called for redemption, an Underlying Fund must permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Rating requirements do not apply to convertible debt securities purchased by an Underlying Fund because the Underlying Funds purchase such securities for their equity characteristics.

Initial Public Offerings

Initial Public Offerings (“IPOs”) occur when a company first offers its securities to the public. Although companies can be any age or size at the time of their IPO, they are often smaller and have a limited operating history, which involves a greater potential for the value of their securities to be impaired following the IPO. Investors in IPOs can be adversely affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders. In addition, all of the factors that affect stock market performance may have a greater impact on the shares of IPO companies.

The price of a company’s securities may be highly unstable at the time of its IPO and for a period thereafter due to market psychology prevailing at the time of the IPO, the absence of a prior public market, the small number of shares available and limited availability of investor information. As a result of this or other factors, adviser or the Underlying Fund’s sub-adviser might decide to sell an IPO security more quickly than it would otherwise, which may result in a significant gain or loss and greater transaction costs to the Underlying Funds. Any gains from shares held for 12 months or less will be treated as short-term gains, taxable as ordinary income to an Underlying Fund’s shareholders. In addition, IPO securities may be subject to varying patterns of trading volume and may, at times, be difficult to sell without an unfavorable impact on prevailing prices.

 

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The effect of an IPO investment can have a magnified impact on an Underlying Fund’s performance when the Underlying Fund’s asset base is small. Consequently, IPOs may constitute a significant portion of the Underlying Funds’ returns particularly when the fund is small. Since the number of securities issued in an IPO is limited, it is likely that IPO securities will represent a smaller component of an Underlying Fund’s assets as it increases in size and, therefore, have a more limited effect on the Underlying Fund’s performance.

There can be no assurance that IPOs will continue to be available for the Underlying Funds to purchase. The number or quality of IPOs available for purchase by the Underlying Funds may vary, decrease or entirely disappear. In some cases, the Underlying Funds may not be able to purchase IPOs at the offering price, but may have to purchase the shares in the aftermarket at a price greatly exceeding the offering price, making it more difficult for the Underlying Funds to realize a profit.

Preferred stock

Unlike common stock, preferred stock offers a stated dividend rate payable from a corporation’s earnings. Such preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. If interest rates rise, the fixed dividend on preferred stock may be less attractive, causing the price of preferred stock to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to maturity, a negative feature when interest rates decline. Dividends on some preferred stock may be “cumulative,” requiring all or a portion of prior unpaid dividends to be paid before dividends are paid on the issuer’s common stock. Preferred stock also generally has a preference over common stock on the distribution of a corporation’s assets in the event of liquidation of the corporation, and may be “participating,” which means that it may be entitled to a dividend exceeding the stated dividend in certain cases. The rights of preferred stock on the distribution of a corporation’s assets in the event of liquidation are generally subordinate to the rights associated with a corporation’s debt securities.

“Synthetic” Convertible Securities

Synthetic convertible securities are derivative positions composed of two or more different securities whose investment characteristics, taken together, resemble those of convertible securities. For example, an Underlying Fund may purchase a non-convertible debt security and a warrant or option, which enables the Underlying Fund to have a convertible-like position with respect to a company, group of companies or stock index. Synthetic convertible securities are typically offered by financial institutions and investment banks in private placement transactions. Upon conversion, an Underlying Fund generally receives an amount in cash equal to the difference between the conversion price and the then current value of the underlying security. Unlike a true convertible security, a synthetic convertible comprises two or more separate securities each with its own market value. Therefore, the market value of a synthetic convertible is the sum of the values of its fixed-income component and its convertible component. For this reason, the values of a synthetic convertible and a true convertible security may respond differently to market fluctuations.

Unseasoned Companies

The Underlying Funds consider securities of companies with limited operating histories to be securities of companies with a record of less than three years’ continuous operation, even including the operations of any predecessors and parents. (These are sometimes referred to as “unseasoned issuers.”) These companies by their nature have only a limited operating history that can be used for evaluating the company’s growth prospects. As a result, investment decisions for these securities may place a greater emphasis on current or planned product lines and the reputation and experience of the company’s management and less emphasis on fundamental valuation factors than would be the case for more mature companies.

FOREIGN AND EMERGING MARKET INVESTMENTS

American Depositary Receipts, European Depositary Receipts and Global Depositary Receipts

American Depositary Receipts (“ADRs”), Global Depositary (“GDRs”) and European Depositary Receipts (“EDRs”) or other similar securities represent securities of foreign issuers. These securities are typically dollar

 

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denominated, although their market price is subject to fluctuations of the foreign currency in which the underlying securities are denominated. Depositary receipts include: ADRs, EDRs and GDRs. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying foreign securities, ADRs are typically designed for U.S. investors and held either in physical form or in book entry form. EDRs are similar to ADRs but may be listed and traded on a European exchange as well as in the United States (typically, these securities are traded on the Luxembourg exchange in Europe). Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in the European securities markets. GDRs are similar to EDRs although they may be held through foreign clearing agents such as Euroclear and other foreign depositories. Depositary receipts denominated in U.S. dollars will not be considered foreign securities for purposes of the investment limitation concerning investment in foreign securities.

Eurodollar Convertible Securities

Eurodollar convertible securities are fixed-income securities of a U.S. issuer or a foreign issuer that are issued outside the United States and are convertible into equity securities of the same or a different issuer. Interest and dividends on Eurodollar securities are payable in U.S. dollars outside of the United States. The Underlying Funds may invest without limitation in Eurodollar convertible securities. The Eurodollar convertible securities are convertible into foreign equity securities listed, or represented by ADRs listed, on the New York Stock Exchange or the American Stock Exchange or convertible into publicly traded common stock of U.S. companies. Each Underlying Fund may also invest up to 15% of its total assets invested in convertible securities, taken at market value, in Eurodollar convertible securities that are convertible into foreign equity securities, which are not listed, or represented by ADRs listed, on such exchanges.

Eurodollar and Yankee Dollar Instruments

Eurodollar instruments are bonds that pay interest and principal in U.S. dollars held in banks outside the United States, primarily in Europe. Eurodollar instruments are usually issued on behalf of multinational companies and foreign governments by large underwriting groups composed of banks and issuing houses from many countries. Yankee Dollar instruments are U.S. dollar denominated bonds issued in the United States by foreign banks and corporations. These investments involve risks that are different from investments in securities issued by U.S. issuers.

Foreign and Emerging Market Securities

Foreign financial markets, while growing in volume, have, for the most part, substantially less volume than U.S. markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable domestic companies. The foreign markets also have different clearance and settlement procedures, and in certain markets there have been many times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delivery of securities may not occur at the same time as payment in some foreign markets. Delays in settlement could result in temporary periods when a portion of the assets of an Underlying Fund is uninvested and no return is earned thereon. The inability of the Underlying Fund to make intended security purchases due to settlement problems could cause the an Underlying Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the portfolios due to subsequent declines in value of the portfolio security or, if the Underlying Funds have entered into a contract to sell the security, could result in possible liability to the purchaser.

As foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards and practices comparable to those applicable to domestic companies, there may be less publicly available information about certain foreign companies than about domestic companies. There is generally less government supervision and regulation of exchanges, financial institutions and issuers in foreign countries than there is in the United States. A foreign government may impose exchange control regulations that may have an impact on currency exchange rates, and there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could affect U.S. investments in those countries.

 

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Changes in foreign currency exchange rates will affect the value of securities denominated or quoted in currencies other than the U.S. dollar and the unrealized appreciation or depreciation of investments so far as U.S. investors are concerned. Transactional costs in non-U.S. securities may involve greater time from the trade date until settlement than domestic securities transactions and involve the risk of possible losses through the holding of securities by custodians and securities depositories in foreign countries.

Although the Underlying Funds will use reasonable efforts to obtain the best available price and the most favorable execution with respect to all transactions and the adviser or sub-adviser to the Underlying Funds will consider the full range and quality of services offered by the executing broker or dealer when making these determinations, fixed commissions on many foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Certain foreign governments levy withholding taxes against dividend and interest income, or may impose other taxes. Although in some countries a portion of these taxes are recoverable, the non-recovered portion of foreign withholding taxes will reduce the income received by the Underlying Funds on these investments. The risks of investing in foreign securities may be intensified for investments in issuers domiciled or doing substantial business in emerging markets or countries with limited or developing capital markets. Security prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less-established markets and economies. In particular, countries with emerging markets may have relatively unstable governments, present the risk of sudden adverse government action and even nationalization of businesses, restrictions on foreign ownership, or prohibitions of repatriation of assets, and may have less protection of property rights than more developed countries. The economies of countries with emerging markets may be predominantly based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of substantial holdings difficult or impossible at times. Transaction settlement and dividend collection procedures may be less reliable in emerging markets than in developed markets. Securities of issuers located in other countries with emerging markets may have limited marketability and may be subject to more abrupt or erratic price movements.

Foreign Bank Obligations

Obligations of foreign banks and foreign branches of U.S. banks involve somewhat different investment risks from those affecting obligations of U.S. banks, including the possibilities that liquidity could be impaired because of future political and economic developments; the obligations may be less marketable than comparable obligations of U.S. banks; a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations; foreign deposits may be seized or nationalized; foreign governmental restrictions (such as foreign exchange controls) may be adopted which might adversely affect the payment of principal and interest on those obligations; and the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks. In addition, the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to U.S. banks. In that connection, foreign banks are not subject to examination by any U.S. government agency or instrumentality.

Foreign Currency Exchange Transactions

The Underlying Funds may buy and sell securities denominated in currencies other than the U.S. dollar, and receive interest, dividends and sale proceeds in currencies other than the U.S. dollar, and therefore may enter into foreign currency exchange transactions to convert to and from different foreign currencies and to convert foreign currencies to and from the U.S. dollar. The Underlying Funds may either enter into these transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or use forward foreign currency contracts to purchase or sell foreign currencies. A forward foreign currency exchange contract is an agreement to exchange one currency for another — for example, to exchange a certain amount of U.S. dollars for a certain amount of Korean Won — at a future date. Forward foreign currency contracts are included in the group of instruments that can be characterized as derivatives. Neither spot transactions nor forward foreign currency exchange contracts eliminate fluctuations in the prices of an Underlying Fund’s portfolio securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline.

 

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Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time, they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of these securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain. Use of currency hedging techniques may also be limited by management’s need to protect the status of an Underlying Fund as a regulated investment company under the Internal Revenue Code of 1986, as amended (“Code”).

Foreign Mortgage-Related Securities

Foreign mortgage-related securities are interests in pools of mortgage loans made to residential homebuyers domiciled in a foreign country. These include mortgage loans made by trust and mortgage loan companies, credit unions, chartered banks, and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations (e.g. Canada Mortgage and Housing Corporation and First Australian National Mortgage Acceptance Corporation Limited). The mechanics of these mortgage-related securities are generally the same as those issued in the United States. However, foreign mortgage markets may differ materially from the U.S. mortgage market with respect to matters such as size of loan pools, pre-payment experience, and maturities of loans.

International Debt Securities

The Underlying Funds may invest in International debt securities (which may be denominated in U.S. dollar or in non-U.S. currencies) of any rating issued or guaranteed by foreign corporations, certain supranational entities (such as the World Bank) and foreign governments (including political subdivisions having tax authority) or their agencies or instrumentalities, including ADRs. These debt obligations may be bonds (including sinking fund and callable bonds), debentures and notes, together with preferred stock, pay-in-kind securities of zero-coupon securities.

In determining whether to invest in debt obligations of foreign issuers, an Underlying Fund will consider the relative yields of foreign and domestic high-yield securities, the economies of foreign countries, the condition of such countries’ financial markets, the interest rate climate of such countries and the relationship of such countries’ currency to the U.S. dollar. These factors are judged on the basis of fundamental economic criteria (e.g. relative inflation levels and trends, growth rate forecasts, balance of payments status and economic policies) as well as technical and political data. Subsequent foreign currency losses may result in the Underlying Funds having previously distributed more income in a particular period than was available from investment income, which could result in a return of capital to shareholders. The Underlying Fund’s portfolio of foreign securities may include those of a number of foreign countries, or, depending upon market conditions, those of a single country.

Investments in securities of issuers in non-industrialized countries generally involve more risk and may be considered highly speculative. Although a portion of the Underlying Fund’s investment income may be received or realized in foreign currencies, the Underlying Fund will be required to compute and distribute its income in U.S. dollar and absorb the cost of current fluctuations and the cost of currency conversions. Investment in foreign securities involves considerations and risks not associated with investment in securities of U.S. issuers. For example, foreign issuers may not be required to use generally accepted accounting principles. If foreign securities are not registered under the 1933 Act, as amended, the issuer may not have to comply with the disclosure requirements of the Securities Exchange Act of 1934, as amended (“1934 Act”). The values of foreign securities investments will be affected by incomplete or inaccurate information available to the adviser or sub-adviser as to foreign issuers, changes in currency rates, exchange control regulations or currency blockage, expropriation or nationalization of assets, application of foreign tax laws (including withholding taxes), changes in governmental administration or economic or monetary policy. In addition, it is generally more difficult to obtain court judgments outside the United States.

 

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Restrictions on Foreign Investments

Some developing countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities, such as an Underlying Fund. As illustrations, certain countries may require governmental approval prior to investment by foreign persons, limit the amount of investment by foreign persons in a particular company or limit the investment by foreign persons to only a specific class of securities of a company that may have less advantageous terms (including price) than securities of the company available for purchase by nationals. Certain countries may restrict investment opportunities in issuers or industries deemed important to national interests.

The manner in which foreign investors may invest in companies in certain developing countries, as well as limitations on such investments, also may have an adverse impact on the operations of an Underlying Fund that invests in such countries. For example, an Underlying Fund may be required in certain of such countries to invest initially through a local broker or other entity and then have the shares purchased re-registered in the name of an Underlying Fund. Re-registration, in some instances, may not occur on a timely basis, resulting in a delay during which an Underlying Fund may be denied certain of its rights as an investor, including rights as to dividends or to be made aware of certain corporate actions. There also may be instances when an Underlying Fund places a purchase order but is subsequently informed, at the time of re-registration, that the permissible allocation of the investment to foreign investors has been filled, depriving an Underlying Fund of the ability to make its desired investment at that time.

Substantial limitations may exist in certain countries with respect to an Underlying Fund’s ability to repatriate investment income, capital or the proceeds of sales of securities by foreign investors. An Underlying Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of capital, as well as by the application to an Underlying Fund of any restrictions on investments. Even when there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the operations of an Underlying Fund. For example, funds may be withdrawn from the People’s Republic of China only in U.S. or Hong Kong dollars and only at an exchange rate established by the government once each week.

In certain countries, banks or other financial institutions may be among the leading companies or have actively traded securities. The 1940 Act restricts an Underlying Fund’s investments in any equity securities of an issuer that, in its most recent fiscal year, derived more than 15% of its revenues from “securities related activities,” as defined by the rules thereunder. The provisions may restrict an Underlying Fund’s investments in certain foreign banks and other financial institutions.

Risks of Investing in Foreign Securities

Investments in foreign securities involve certain inherent risks, including the following:

Market Characteristics. Settlement practices for transactions in foreign markets may differ from those in U. S. markets, and may include delays beyond periods customary in the United States. Foreign security trading practices, including those involving securities settlement where an Underlying Fund’s assets may be released prior to receipt of payment or securities, may expose the Underlying Fund to increased risk in the event of a failed trade or the insolvency of a foreign broker-dealer. Transactions in options on securities, future contracts, futures options and currency contracts may not be regulated as effectively on foreign exchanges as similar transactions in the United States, and may not involve clearing mechanisms and related guarantees. The value of such positions also could be adversely affected by the imposition of different exercise terms and procedures and margin requirements than in the United States. The value of an Underlying Fund’s position may also be adversely impacted by delays in its abilities to act upon economic events occurring in foreign markets during non-business hours in the United States.

Legal and Regulatory Matters. In addition to nationalization, foreign governments may take other actions that could have a significant effect on market prices of securities and payment of interest, including restrictions on foreign investment, expropriation of goods and imposition of taxes, currency restrictions and exchange control regulations.

 

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Taxes. The interest payable on certain of the Underlying Funds’ foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Portfolio’s shareholders. A shareholder otherwise subject to U.S. federal income taxes may, subject to certain limitations, be entitled to claim a credit or deduction of U.S. federal income tax purposes for his/her proportionate share of such foreign taxes paid by an Underlying Fund.

Costs. The expense ratio of an Underlying Fund that invests in foreign securities is likely to be higher than those of investment companies investing in domestic securities, since the cost of maintaining the custody of foreign securities is higher. In considering whether to invest in the securities of a foreign company, the adviser or sub-adviser considers such factors as the characteristics of the particular company, differences between economic trends and the performance of securities markets within the United States and those within other countries, and also factors relating to the general economic, governmental and social conditions of the country or countries where the company is located. The extent to which and Underlying Fund will be invested in foreign companies and countries and depositary receipts will fluctuate from time to time with the limitations described in the Prospectus, depending on the adviser’s or sub-adviser’s assessment of prevailing market, economic and other conditions.

Sovereign Debt Securities

Sovereign debt securities are issued by governments of foreign countries. The sovereign debt in which the Underlying Funds may invest may be rated below investment grade. These securities usually offer higher yields than higher-rated securities but are also subject to greater risk than higher-rated securities.

Supranational Agencies

Securities of supranational agencies are not considered government securities and are not supported directly or indirectly by the U.S. government. Examples of supranational agencies include, but are not limited to, the International Bank for Reconstruction and Development (commonly referred to as the World Bank), which was chartered to finance development projects in developing member countries; the European Union, which is a 27-nation organization engaged in cooperative economic activities; and the Asian Development Bank, which is an international development bank established to lend funds, promote investment and provide technical assistance to member nations in the Asian and Pacific regions.

FIXED-INCOME SECURITIES

Adjustable Rate Mortgage Securities

Adjustable rate mortgage securities (“ARMS”) are pass-through mortgage securities collateralized by mortgages with adjustable rather than fixed rates. Generally, ARMS have a specified maturity date and amortize principal over their life. In periods of declining interest rates, there is a reasonable likelihood that ARMS will experience increased rates of prepayment of principal. However, the major difference between ARMS and fixed-rate mortgage securities is that the interest rate and the rate of amortization of principal of ARMS can and do change in accordance with movements in particular, pre-specified, published interest rate index. The amount of interest on ARMS is calculated by adding a specified amount, the “margin,” to the index, subject to limitations on the maximum and minimum interest that can be charged to the mortgagor during the life of the mortgage or to maximum and minimum changes to that interest rate during a given period. Because the interest rates on ARMS generally move in the same direction as market interest rates, the market value of ARMS tends to be more stable than that of long-term fixed-rate securities.

There are two main categories of indices which serve as benchmarks for periodic adjustments to coupon rates on ARMS: those based on U.S. Treasury securities and those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the 11th District Federal Home Loan bank Cost of Funds, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate (“LIBOR”), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity

 

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Treasury Note rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds index, often related to ARMS issued by Federal National Mortgage Association (“FNMA”), tend to lag changes in market rate levels and tend to be somewhat less volatile.

Asset-Backed Securities (non-mortgage)

Asset-backed securities are collateralized by short-term loans such as automobile loans, home equity loans, equipment leases or credit card receivables. The payments from the collateral are generally passed through to the security holder. As noted below with respect to Collateralized Mortgage Obligations (“CMOs”) and Real Estate Mortgage Investment Conduits (“REMICs”), the average life for these securities is the conventional proxy for maturity. Asset-backed securities may pay all interest and principal to the holder, or they may pay a fixed rate of interest, with any excess over that required to pay interest going either into a reserve account or to a subordinate class of securities, which may be retained by the originator. The originator or other party may guarantee interest and principal payments. These guarantees often do not extend to the whole amount of principal, but rather to an amount equal to a multiple of the historical loss experience of similar Underlying Funds.

The collateral behind certain types of collateral tend to have prepayment rates that do not vary with interest rates; the short-term nature of the loans may also tend to reduce the impact of any change in prepayment level. Other asset-backed securities, such as home equity asset-backed securities, have prepayment rates that are sensitive to interest rates. Faster prepayments will shorten the average life and slower prepayments will lengthen it. Asset-backed securities may be pass-through, representing actual equity ownership of the underlying assets, or pay-through, representing debt instruments supported by cash flows from the underlying assets.

The coupon rate of interest on mortgage-related and asset-backed securities is lower than the interest rates paid on the mortgages included in the underlying pool, by the amount of the fees paid to the mortgage pooler, issuer, and/or guarantor. Actual yield may vary from the coupon rate, however, if such securities are purchased at a premium or discount, traded in the secondary market at a premium or discount, or to the extent that the underlying assets are prepaid as noted above.

The principal on asset-backed securities, like mortgage-related securities, may normally be prepaid at any time, which will reduce the yield and market value of these securities. Asset-backed securities and commercial mortgage-backed securities generally experience less prepayment than residential mortgage-related securities. In periods of falling interest rates when liquidity is available to borrowers, the rate of prepayments tends to increase (as does price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower rates. During such periods, reinvestment of the prepayment proceeds by an Underlying Fund will generally be at lower rates of return than the return on the assets which were prepaid. Certain commercial mortgage-backed securities are issued in several classes with different levels of yield and credit protection. The Underlying Fund’s investments in commercial mortgage-backed securities with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate, credit and prepayment risks. Certain commercial mortgage-backed securities are issued in several classes with different levels of yield and credit protection. While asset-backed securities are designed to allocate risk from pools of their underlying assets, the risk allocation techniques may not be successful, which could lead to the credit risk of these investments being greater than indicated by their ratings. The value of asset-backed securities may be further affected by downturns in the credit markets or the real estate market. It may be difficult to value these instruments because of the transparency or liquidity of some underlying investments, and these instruments may not be liquid. Finally, certain asset-backed securities are based on loans that are unsecured, which means that there is no collateral to seize if the underlying borrower defaults.

Banking Industry Obligations/Short-Term Investments

Banking industry obligations include certificates of deposit, bankers’ acceptances and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by

 

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a bank, meaning in effect that the bank unconditionally agrees to pay the face value of the instrument on maturity. Certificates of deposit and bankers’ acceptances acquired by the Underlying Funds will be dollar-denominated obligations of domestic or foreign banks or financial institutions which at the time of purchase have capital, surplus and undivided profits in excess of $100 million (including assets of both domestic and foreign branches), based on latest published reports, or less than $100 million if the principal amount of such bank obligations are fully insured by the U.S. government.

Underlying Funds’ holding instruments of foreign banks or financial institutions may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Domestic banks and foreign banks are subject to different governmental regulations with respect to the amount and types of loans which may be made and interest rates which may be charged. In addition, the profitability of the banking industry depends largely upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operations of the banking industry. Federal and state laws and regulations require domestic banks to maintain specified levels of reserves, limit the amount which they can loan to a single borrower, and subject them to other regulations designed to promote financial soundness. However, such laws and regulations do not necessarily apply to foreign bank obligations that an Underlying Fund may acquire.

For foreign banks, there is a possibility that liquidity could be impaired because of future political and economic developments; the obligations may be less marketable than comparable obligations of U.S. banks; a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations; foreign deposits may be seized or nationalized; foreign governmental restrictions (such as foreign exchange controls) may be adopted which might adversely affect the payment of principal and interest on those obligations; and the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks. In addition, the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to U.S. banks. In that connection, foreign banks are not subject to examination by any U.S. government agency or instrumentality.

In addition to purchasing certificates of deposit and bankers’ acceptances, to the extent permitted under its respective investment objectives and policies stated above and in its Prospectuses, an Underlying Fund may make interest-bearing time or other interest-bearing deposits in commercial or savings banks. Time deposits are non-negotiable deposits maintained at a banking institution for a specified period of time at a specified interest rate.

Corporate Debt Securities

Corporate debt securities include corporate bonds, debentures, notes and other similar corporate debt instruments, including convertible securities. The investment return on a corporate debt security reflects interest earnings and changes in the market value of the security. The market value of a corporate debt security will generally increase when interest rates decline and decrease when interest rates rise. There is also the risk that the issuer of a debt security will be unable to pay interest or principal at the time called for by the instrument. Investments in corporate debt securities that are rated below investment grade are described in “High-Yield Securities” below.

Debt obligations that are deemed investment grade carry a rating of at least Baa from Moody’s Investors Service, Inc. (“Moody’s”) or BBB- from Standard & Poor’s Ratings Services (“S&P”), or a comparable rating from another rating agency or, if not rated by an agency, are determined by the adviser or sub-adviser to be of comparable quality. Bonds rated Baa- or BBB- have speculative characteristics and changes in economic circumstances are more likely to lead to a weakened capacity to make interest and principal payments than higher rated bonds.

 

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Credit-Linked Notes

A credit-linked note (“CLN”) is generally issued by one party with a credit option, or risk, linked to a second party. The embedded credit option allows the first party to shift a specific credit risk to the CLN holder, or the Underlying Fund in this case. The CLN is issued by a trust, a special purpose vehicle, collateralized by AAA-rated securities. The CLN’s price or coupon is linked to the performance of the reference asset of the second party. Generally, the CLN holder receives either fixed or floating coupon rate during the life of the CLN and par at maturity. The cash flows are dependent on specific credit-related events. Should the second party default or declare bankruptcy, the CLN holder will receive an amount equivalent to the recovery rate. The CLN holder bears the risk of default by the second party and any unforeseen movements in the reference asset, which could lead to loss of principal and receipt of interest payments. In return for these risks, the CLN holder receives a higher yield. As with most derivative instruments, valuation of a CLN is difficult due to the complexity of the security (i.e., the embedded option is not easily priced). An Underlying Fund engaging in this type of investment cannot assure that it can implement a successful strategy.

Floating or Variable Rate Instruments

Variable rate demand instruments held by an Underlying Fund may have maturities of more than one year, provided: (1) an Underlying Fund is entitled to the payment of principal at any time, or during specified intervals not exceeding one year, upon giving the prescribed notice (which may not exceed 30 days), and (2) the rate of interest on such instruments is adjusted at periodic intervals not to exceed one year. In determining whether a variable rate demand instrument has a remaining maturity of one year or less, each instrument will be deemed to have a maturity equal to the longer of the period remaining until its next interest rate adjustment or the period remaining until the principal amount can be recovered through demand. An Underlying Fund will be able (at any time or during specified periods not exceeding one year, depending upon the note involved) to demand payment on the principal of a note. If an issuer of a variable rate demand note defaulted on its payment obligation, an Underlying Fund might be unable to dispose of the note and a loss would be incurred to the extent of the default. An Underlying Fund may invest in variable rate demand notes only when the investment is deemed to involve minimal credit risk. The continuing creditworthiness of issuers of variable rate demand notes held by the Underlying Fund will also be monitored to determine whether such notes should continue to be held. Variable and floating rate instruments with demand periods in excess of seven days, which cannot be disposed of promptly within seven business days in the usual course of business, without taking a reduced price, will be treated as illiquid securities.

Government National Mortgage Association Certificates

Government National Mortgage Association Certificates (“GNMA” or “GNMA Certificates”) are mortgage-backed securities representing part ownership of a pool of mortgage loans. GNMA is a U.S. government corporation within the Department of Housing and Urban Development. Such loans are initially made by lenders such as mortgage bankers, commercial banks and savings and loan associations and are either insured by the Federal Housing Administration (“FHA”) or Farmers’ Home Administration (“FMHA”) or guaranteed by the Veteran’s Administration (“VA”). A GNMA Certificate represents an interest in a specific pool of such mortgages which, after being approved by GNMA, is offered to investors through securities dealers. Once approved by GNMA, the timely payment of interest and principal on each certificate is guaranteed by the full faith and credit of the U.S. government.

GNMA Certificates differ from bonds in that principal is scheduled to be paid back by the borrower over the length of the loan rather than returned in a lump sum at maturity. “Modified pass through” type GNMA Certificates, entitle the holder to receive all interest and principal payments owed on the mortgages in the pool (net of issuers’ and GNMA fees), whether or not the mortgagor has made such payment.

GNMA Certificates are created by an “issuer,” which is an FHA-approved mortgage banker who also meets criteria imposed by GNMA. The issuer assembles a pool of FHA, FMHA, or VA insured or guaranteed mortgages with the same interest rate, maturity and type of dwelling. Upon application by the issuer, and after approval by GNMA of the pool, GNMA provides its commitment to guarantee timely payment of principal and interest on the GNMA Certificates backed by the mortgages included in the pool. The GNMA Certificates, endorsed by GNMA, are then sold by the issuer through securities dealers.

 

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GNMA is authorized under the Federal National Housing Act to guarantee timely payment of principal and interest on GNMA Certificates. This guarantee is backed by the full faith and credit of the United States. GNMA may borrow U.S. Treasury funds to the extent needed to make payments under its guarantee. When mortgages in the pool underlying GNMA Certificates are prepaid by mortgagors or by result of foreclosure, such principal payments are passed through to the certificate holders. Accordingly, the life of the GNMA Certificate is likely to be substantially shorter than the stated maturity of the mortgages in the underlying pool. Because of such variation in prepayment rates, it is not possible to predict the life of a particular GNMA Certificate, but FHA statistics indicate that 25 to 30 year single family dwelling mortgages have an average life of approximately 12 years. The majority of GNMA Certificates are backed by mortgages of this type, and accordingly the generally accepted practice has developed to treat GNMA Certificates as 30-year securities which prepay fully in the 12th year.

GNMA Certificates bear a nominal “coupon rate” which represents the effective FHA or VA mortgage rate at the time of issuance, less 0.5% which constitutes the GNMA and issuer’s fees. For providing its guarantees, GNMA receives an annual fee of 0.06% of the outstanding principal on certificates backed by single family dwelling mortgages, and the issuer receives an annual fee of 0.44% for assembling the pool and for passing through monthly payments of interest and principal.

Payments to holders of GNMA Certificates consist of the monthly distributions of interest and principal less the GNMA and issuer’s fees. The actual yield to be earned by a holder of a GNMA Certificate is calculated by dividing such payments by the purchase price paid for the GNMA Certificate (which may be at a premium or a discount from the face value of the certificate). Monthly distributions of interest, as contrasted to semi-annual distributions, which are common for other fixed interest investments, have the effect of compounding and thereby raising the effective annual yield earned on GNMA Certificates. Because of the variation in the life of the pools of mortgages which back various GNMA Certificates, and because it is impossible to anticipate the rate of interest at which future principal payments may be reinvested, the actual yield earned from the Portfolio of GNMA Certificates will differ significantly from the yield estimated by using an assumption of a 12 year life for each GNMA Certificate included in such portfolio, as described.

The actual rate of prepayment for any GNMA Certificate does not lend itself to advance determination, although regional and other characteristics of a given mortgage pool may provide some guidance for investment analysis. Also, secondary-market trading of outstanding GNMA Certificates tends to be concentrated in issues bearing the current coupon rate.

Construction loan securities are issued to finance building costs. The funds are disbursed as needed or in accordance with a prearranged plan. The securities provide for the timely payment to the registered holder of interest at the specified rate plus scheduled installments of principal. Upon completion of the construction phase, the construction loan securities are terminated, and project loan securities are issued. It is the Portfolio’s policy to record these GNMA Certificates on trade date, and to segregate assets to cover its commitments on trade date as well.

GNMA Certificates – When-Issued and Delayed Delivery Transactions

GNMA Certificates may at times be purchased or sold on a delayed-delivery basis or on a when- issued basis. These transactions arise when GNMA Certificates are purchased or sold with payment and delivery taking place in the future, in order to secure what is considered to be an advantageous price and yield to the Underlying Fund. No payment is made until delivery is due, often a month or more after the purchase. The settlement date on such transactions will take place no more than 120 days from the trade date. When an Underlying Fund engages in when-issued and delayed-delivery transactions, it relies on the buyer or seller, as the case may be, to consummate the sale. Failure of the buyer or seller to do so may result in the Underlying Fund missing the opportunity of obtaining a price considered to be advantageous. While when-issued GNMA Certificates may be sold prior to the settlement date, the Underlying Funds intend to purchase such securities with the purpose of actually acquiring them unless a sale appears desirable for investment reasons. At the time an Underlying Fund makes the commitment to purchase a GNMA Certificate on a when-issued basis, it will record the transaction and reflect the value of the security in determining its net asset value (“NAV”). An Underlying Fund may invest in when-issued securities without other conditions. Such securities either will mature or be sold on or about the settlement date. An Underlying Fund may earn interest on such account or securities for the benefit of shareholders.

 

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Government Trust Certificates

Government Trust Certificates represent an interest in a government trust, the property of which consists of: (i) a promissory note of a foreign government no less than 90% of which is backed by the full faith and credit guaranty issued by the federal government of the United States (issued pursuant to Title III of the Foreign Operations, Export, Financing and Related Borrowers Programs Appropriations Act of 1998); and (ii) a security interest in obligations of the U.S. Treasury backed by the full faith and credit of the United States sufficient to support the remaining balance (no more than 10%) of all payments of principal and interest on such promissory note; provided that such obligations shall not be rated less than AAA or less than Aaa by a NRSRO.

Guaranteed Investment Contracts

Guaranteed Investment Contracts (“GICs”) are issued by insurance companies. Pursuant to such contracts, an Underlying Fund makes cash contributions to a deposit fund of the insurance company’s general account. The insurance company then credits to the Underlying Fund on a monthly basis guaranteed interest which is based on an index. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. The insurance company may assess periodic charges against GICs for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. In addition, because an Underlying Fund may not receive the principal amount of GICs from the insurance company on seven days’ notice or less, GICs are considered an illiquid investment and, together with other instruments invested in by an Underlying Fund which are not readily marketable, will not exceed 15% of the Underlying Fund’s net assets. The term of GICs will be one year or less. In determining average weighted portfolio maturity, GICs will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate.

High-Yield Securities

High-yield securities are debt securities that are rated lower than “Baa” by Moody’s or “BBB-” by S&P’s Corporation, or of comparable quality if unrated.

High-yield securities often are referred to as “junk bonds” and include certain corporate debt obligations, higher yielding preferred stock and mortgage-related securities, and securities convertible into the foregoing. Investments in high-yield securities generally provide greater income and increased opportunity for capital appreciation than investments in higher quality debt securities, but they also typically entail greater potential price volatility and principal and income risk.

High-yield securities are not considered to be investment grade. They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet principal and interest payments. Also, their yields and market values tend to fluctuate more than higher-rated securities. Fluctuations in value do not affect the cash income from the securities, but are reflected in an Underlying Fund’s NAV (“NAV”). The greater risks and fluctuations in yield and value occur, in part, because investors generally perceive issuers of lower-rated and unrated securities to be less creditworthy.

The yields earned on high-yield securities generally are related to the quality ratings assigned by recognized rating agencies. The following are excerpts from Moody’s description of its bond ratings: Ba — judged to have speculative elements; their future cannot be considered as well assured. B — generally lack characteristics of a desirable investment. Caa — are of poor standing; such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca — speculative in a high degree; often in default. C — lowest rate class of bonds; regarded as having extremely poor prospects. Moody’s also applies numerical indicators 1, 2 and 3 to rating categories. The modifier 1 indicates that the security is in the higher end of its rating category; 2 indicates a mid-range ranking; and 3 indicates a ranking towards the lower end of the category. The following are excerpts from S&P’s description of its bond ratings: BB, B, CCC, CC, C — predominantly speculative with respect to capacity to pay interest and repay principal in accordance with terms of the obligation; BB indicates the lowest degree of speculation and C the highest. D — in payment default. S&P applies indicators “+,” no character, and “-” to its rating categories. The indicators show relative standing within the major rating categories.

 

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Certain securities held by an Underlying Fund may permit the issuer at its option to call, or redeem, its securities. If an issuer were to redeem securities held by an Underlying Fund during a time of declining interest rates, the Underlying Fund may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed.

Risks Associated with High-Yield Securities

The medium- to lower-rated and unrated securities in which an Underlying Fund invests tend to offer higher yields than those of other securities with the same maturities because of the additional risks associated with them. These risks include:

High-Yield Bond Market - A severe economic downturn or increase in interest rates might increase defaults in high-yield securities issued by highly leveraged companies. An increase in the number of defaults could adversely affect the value of all outstanding high-yield securities, thus disrupting the market for such securities.

Sensitivity to Interest Rate and Economic Changes - High-yield securities are more sensitive to adverse economic changes or individual corporate developments but less sensitive to interest rate changes than are U.S. Treasury or investment grade bonds. As a result, when interest rates rise, causing bond prices to fall, the value of high-yield debt bonds tend not to fall as much as U.S. Treasury or investment grade corporate bonds. Conversely when interest rates fall, high-yield bonds tend to under perform U.S. Treasury and investment grade corporate bonds because high-yield bond prices tend not to rise as much as the prices of these bonds.

The financial stress resulting from an economic downturn or adverse corporate developments could have a greater negative effect on the ability of issuers of high-yield securities to service their principal and interest payments, to meet projected business goals and to obtain additional financing than on more creditworthy issuers. Holders of high-yield securities could also be at a greater risk because high-yield securities are generally unsecured and subordinate to senior debt holders and secured creditors. If the issuer of a high-yield security owned by an Underlying Fund defaults, the Underlying Fund may incur additional expenses to seek recovery. In addition, periods of economic uncertainty and changes can be expected to result in increased volatility of market prices of high-yield securities and an Underlying Fund’s NAV. Furthermore, in the case of high-yield securities structured as zero-coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes and thereby tend to be more speculative and volatile than securities, which pay in cash.

Payment Expectations - High-yield securities present risks based on payment expectations. For example, high-yield securities may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the Underlying Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, the value of high-yield securities may decrease in a rising interest rate market. In addition, there is a higher risk of non-payment of interest and/or principal by issuers of high-yield securities than in the case of investment grade bonds.

Liquidity and Valuation Risks - Lower-rated bonds are typically traded among a smaller number of broker-dealers rather than in a broad secondary market. Purchasers of high-yield securities tend to be institutions, rather than individuals, a factor that further limits the secondary market. To the extent that no established retail secondary market exists, many high-yield securities may not be as liquid as U.S. Treasury and investment grade bonds. The ability to value or sell high-yield securities will be adversely affected to the extent that such securities are thinly traded or illiquid. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high-yield securities more than other securities, especially in a thinly-traded market. To the extent an Underlying Fund owns illiquid or restricted high-yield securities; these securities may involve special registration responsibilities, liabilities and costs, and liquidity and valuation difficulties. At times of less liquidity, it may be more difficult to value high-yield securities because this valuation may require more research, and elements of judgment may play a greater role in the valuation since there is less reliable, objective data available.

 

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Taxation - Special tax considerations are associated with investing in high-yield securities structured as zero-coupon or pay-in-kind securities. An Underlying Fund would report the interest on these securities as income even though it receives no cash interest until the security’s maturity or payment date.

Limitations of Credit Ratings - The credit ratings assigned to high-yield securities may not accurately reflect the true risks of an investment. Credit ratings typically evaluate the safety of principal and interest payments, rather than the market value risk of high-yield securities. In addition, credit agencies may fail to adjust credit ratings to reflect rapid changes in economic or company conditions that affect a security’s market value. Although the ratings of recognized rating services such as Moody’s and S&P are considered, the Adviser or a sub-adviser may primarily rely on its own credit analysis, which includes a study of existing debt, capital structure, ability to service debts and to pay dividends, the issuer’s sensitivity to economic conditions, its operating history and the current trend of earnings. Thus, the achievement of an Underlying Fund’s investment objective may be more dependent on the Adviser’s or sub-adviser’s own credit analysis than might be the case when the Underlying Fund invests in higher quality bonds. The adviser or sub-adviser, when applicable, continually monitors the investments in the Underlying Fund’s portfolio and carefully evaluates whether to dispose of or retain high-yield securities whose credit ratings have changed. An Underlying Fund may retain a security whose rating has been changed.

Congressional Proposals - New laws and proposed new laws may negatively affect the market for high-yield securities. Any such proposals, if enacted, could have a negative effect on an Underlying Fund’s NAV.

Interest/Principal Only Stripped Mortgage-Backed Securities

An Underlying Fund may invest in Interest/Principal only Stripped Mortgage-Backed Securities (“SMBS”) which are created by the Federal Reserve Bank by separating the interest and principal components of an outstanding U.S. Treasury or agency bond and selling them as individual securities. The market prices of SMBS are generally more volatile than the market prices of securities with similar maturities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than the prices of non-zero coupon securities having similar maturities and credit quality.

Mortgage-Related Securities

Mortgage-related securities include mortgage-related debt securities, CMOs and REMICs. Federal mortgage-related securities include obligations issued or guaranteed by the GNMA, the FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC”). GNMA is a wholly-owned corporate instrumentality of the United States, the securities and guarantees of which are backed by the full faith and credit of the U.S. government. FNMA, a federally chartered and privately owned corporation, and FHLMC, a federal corporation, are instrumentalities of the United States with Presidentially appointed board members. The obligations of FNMA and FHLMC are not explicitly guaranteed by the full faith and credit of the federal government. See “U.S. Government Securities.”

Pass-through mortgage-related securities are characterized by monthly payments to the holder, reflecting the monthly payments made by the borrowers who received the underlying loans, represent both principal and interest. Although the underlying mortgage loans are for specified periods of time, often twenty or thirty years, the borrowers can, and typically do, repay such loans sooner. Thus, the security holders frequently receive payments of principal, in addition to the principal that is part of the regular monthly payment. A borrower is more likely to repay a mortgage bearing a relatively high rate of interest. This means that in times of declining interest rates, some higher yielding securities held by an Underlying Fund might be converted to cash, and the Underlying Fund could be expected to reinvest such cash at the then prevailing lower rates. The increased likelihood of prepayment when interest rates decline also limits market price appreciation of mortgage-related securities. If an Underlying Fund buys mortgage-related securities at a premium, mortgage foreclosures or mortgage prepayments may result in losses of up to the amount of the premium paid since only timely payment of principal and interest is guaranteed.

 

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CMOs and REMICs are securities that are collateralized by mortgage pass-through securities. Cash flows from underlying mortgages are allocated to various classes or tranches in a predetermined, specified order. Each sequential tranche has a “stated maturity”—the latest date by which the tranche can be completely repaid, assuming no prepayments—and has an “average life”—the average time to receipt of a principal payment weighted by the size of the principal payment. The average life is typically used as a proxy for maturity because the debt is amortized, rather than being paid off entirely at maturity, as would be the case in a straight debt instrument.

CMOs and REMICs are typically structured as “pass-through” securities. In these arrangements, the underlying mortgages are held by the issuer, which then issues debt collateralized by the underlying mortgage assets. The security holder thus owns an obligation of the issuer and payment of interest and principal on such obligations is made from payments generated by the underlying mortgage assets. The underlying mortgages may or may not be guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government, such as GNMA, or otherwise backed by FNMA or FHLMC. Alternatively, such securities may be backed by mortgage insurance, letters of credit or other credit enhancing features. Both CMOs and REMICs are issued by private entities. They are not directly guaranteed by any government agency and are secured by the collateral held by the issuer. CMOs and REMICs are subject to the type of prepayment risk described above due to the possibility that prepayments on the underlying assets will alter their cash flows.

Risks of Mortgage-Related Investment

Investments in mortgage-related securities involve certain risks. In periods of declining interest rates, prices of fixed-income securities tend to rise. However, during such periods, the rate of prepayment of mortgages underlying mortgage-related securities tends to increase, with the result that such prepayments must be reinvested by the issuer at lower rates. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of the purchase. Unanticipated rates of prepayment on underlying mortgages can be expected to increase the volatility of such securities. In addition, the value of these securities may fluctuate in response to the market’s perception of the creditworthiness of the issuers of mortgage-related securities. Because investments in mortgage-related securities are interest-rate sensitive, the ability of the issuer to reinvest favorably in underlying mortgages may be limited by government regulation or tax policy. For example, action by the Board of Governors of the Federal Reserve System to limit the growth of the nation’s money supply may cause interest rates to rise and thereby reduce the volume of new residential mortgages. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantees and/or insurance, there is no assurance that private guarantors or insurers will be able to meet their obligations. Further, SMBS are likely to experience greater price volatility than other types of mortgage securities. The yield to maturity on the interest-only class is extremely sensitive, both to changes in prevailing interest rates and to the rate of principal payments (including prepayments) or the underlying mortgage assets. Similarly, the yield to maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are made. An Underlying Fund could fail to fully recover its initial investment in a CMO residual or a SMBS. (See “U.S. Government Securities.”)

Municipal Securities

Municipal securities are debt obligations issued by state and local governments, territories and possessions of the U.S. regional government authorities, and their agencies and instrumentalities (“municipal securities”). Municipal securities include both notes (which have maturities of less than one year) and bonds (which have maturities of one year or more) that bear fixed or variable rates of interest.

In general, municipal securities debt obligations are issued to obtain funds for a variety of public purposes, such as the construction, repair, or improvement of public facilities, including airports, bridges, housing, hospitals, mass transportation, schools, streets, water and sewer works. Municipal securities may be issued to refinance outstanding obligations and to raise funds for general operating expenses and lending to other public institutions and facilities.

 

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The two principal classifications of municipal securities are “general obligation” securities and “revenue” securities. General obligation securities are secured by the issuer’s pledge of its full faith, credit, and tax power for the payment of principal and interest. Characteristics and methods of enforcement of general obligation bonds vary according to the law applicable to a particular issuer, and the taxes that can be levied for the payment of debt service may be limited or unlimited as to rates or amounts of special assessments. Revenue securities are payable only from the revenues derived from a particular facility, a class of facilities or, in some cases, from the proceeds of a special excise tax. Revenue bonds are issued to finance a wide variety of capital projects, including electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Although the principal security behind these bonds may vary, many provide additional security in the form of a debt service reserve fund, the assets of which may be used to make principal and interest payments on the issuer’s obligations. Housing finance authorities have a wide range of security; including partially or fully insured mortgages, rent subsidized and collateralized mortgages, and the net revenues from housing or other public projects. Some authorities are provided further security in the form of a state’s assistance (although without obligation) to make up deficiencies in the debt service reserve fund.

Insured municipal debt involves scheduled payments of interest and principal guaranteed by a private, non-governmental or governmental insurance company. The insurance does not guarantee the market value of the municipal debt or the value of the shares of an Underlying Fund.

Securities of issuers of municipal obligations are subject to the provisions of bankruptcy, insolvency and other law affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may become subject to laws enacted in the future by Congress, state legislatures or referenda extending the time for payment of principal or interest, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes. Furthermore, as a result of legislation or other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal obligations may be materially affected.

Moral Obligations Securities - Municipal securities may include “moral obligation” securities which are usually issued by special purpose public authorities. If the issuer of moral obligation bonds cannot fulfill its financial responsibilities from current revenues, it may draw upon a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.

Tax Exempt Industrial Development and Pollution Control Bonds - These are revenue bonds and generally are not payable from the unrestricted revenues of an issuer. They are issued by or on behalf of public authorities to raise money to finance privately operated facilities for business, manufacturing, housing, sport complexes, and pollution control. Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds and any guarantor to meet its financial obligations.

Municipal Lease Obligations - These are lease obligations or installment purchase contract obligations of municipal authorities or entities (“municipal lease obligations”). Although lease obligations do not constitute general obligations of the municipality for which its taxing power is pledged, a lease obligation is ordinarily backed by the municipality’s covenant to budget for, appropriate and make the payment due under the lease obligation. “Certificates of participation” are securities issued by a particular municipality or municipal authority to evidence a proportionate interest in base rental or lease payments relating to a specific project to be made by the municipality, agency or authority. However, certain lease obligations contain “non-appropriation” clauses that provide that the municipality has no obligation to make lease or installment purchase payments in any year unless money is appropriated for such purpose for such year. Although “non-appropriation” lease obligations are secured by the leased property, disposition of the property in the event of default and foreclosure might prove difficult. In addition, these securities represent a relatively new type of financing, and certain lease obligations may therefore be considered to be illiquid securities.

An Underlying Fund will attempt to minimize the special risks inherent in municipal lease obligations and certificates of participation by purchasing only lease obligations which meet the following criteria: (1) rated A

 

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or better by at least one nationally recognized securities rating organization; (2) secured by payments from a governmental lessee that has actively traded debt obligations; (3) determined by the adviser or sub-adviser to be critical to the lessee’s ability to deliver essential services; and (4) contain legal features which the adviser or sub-adviser deems appropriate, such as covenants to make lease payments without the right of offset or counterclaim, requirements for insurance policies, and adequate debt service reserve funds.

Savings Association Obligations

The certificates of deposit (interest-bearing time deposits) in which the Underlying Funds may invest are issued by savings banks or savings and loan associations that have capital, surplus and undivided profits in excess of $100 million, based on latest published reports, or less than $100 million if the principal amount of such obligations is fully insured by the U.S. government.

Short-term Municipal Obligations - These securities include the following:

Tax Anticipation Notes are used to finance working capital needs of municipalities and are issued in anticipation of various seasonal tax revenues, to be payable from these specific future taxes. They are usually general obligations of the issuer, secured by the taxing power of the municipality for the payment of principal and interest when due.

Revenue Anticipation Notes are issued in expectation of receipt of other kinds of revenue, such as federal revenues available under the Federal Revenue Sharing Program. They also are usually general obligations of the issuer.

Bond Anticipation Notes normally are issued to provide interim financing until long-term financing can be arranged. The long-term bonds then provide the money for the repayment of the notes.

Construction Loan Notes are sold to provide construction financing for specific projects. After successful completion and acceptance, many projects receive permanent financing through the FNMA or the GNMA.

Short-Term Discount Notes (tax-exempt commercial paper) are short-term (365 days or less) promissory notes issued by municipalities to supplement their cash flow.

Subordinated Mortgage Securities

Subordinated mortgage securities have certain characteristics and certain associated risks. In general, the subordinated mortgage securities in which an Underlying Fund may invest consist of a series of certificates issued in multiple classes with a stated maturity or final distribution date. One or more classes of each series may be entitled to receive distributions allocable only to principal, principal payments, interest or any combination thereof to one or more other classes, or only after the occurrence of certain events, and may be subordinated in the right to receive such distributions on such certificates to one or more senior classes of certificates. The rights associated with each class of certificates are set forth in the applicable pooling and servicing agreement, form of certificate and offering documents for the certificates.

The subordination terms are usually designed to decrease the likelihood that the holders of senior certificates will experience losses or delays in the receipt of their distributions and to increase the likelihood that the senior certificate holders will receive aggregate distributions of principal and interest in the amounts anticipated. Generally, pursuant to such subordination terms, distributions arising out of scheduled principal, principal prepayments, interest or any combination thereof that otherwise would be payable to one or more other classes of certificates of such series (i.e., the subordinated certificates) are paid instead to holders of the senior certificates. Delays in receipt of scheduled payments on mortgage loans and losses on defaulted mortgage loans are typically borne first by the various classes of subordinated certificates and then by the holders of senior certificates.

In some cases, the aggregate losses in respect of defaulted mortgage loans that must be borne by the subordinated certificates and the amount of the distributions otherwise distributable on the subordinated

 

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certificates that would, under certain circumstances, be distributable to senior certificate holders may be limited to a specified amount. All or any portion of distributions otherwise payable to holders of subordinated certificates may, in certain circumstances, be deposited into one or more reserve accounts for the benefit of the senior certificate holders. Since a greater risk of loss is borne by the subordinated certificate holders, such certificates generally have a higher stated yield than the senior certificates.

A series of certificates may consist of one or more classes as to which distributions allocable to principal will be allocated. The method by which the amount of principal to be distributed on the certificates on each distribution date is calculated and the manner in which such amount could be allocated among classes varies and could be effected pursuant to a fixed schedule, in relation to the occurrence of certain events or otherwise. Special distributions are also possible if distributions are received with respect to the mortgage assets, such as is the case when underlying mortgage loans are prepaid.

A mortgage-related security that is senior to a subordinated residential mortgage security will not bear a loss resulting from the occurrence of a default on an underlying mortgage until all credit enhancement protecting such senior holder is exhausted. For example, the senior holder will only suffer a credit loss after all subordinated interests have been exhausted pursuant to the terms of the subordinated residential mortgage security. The primary credit risk of investing in subordinated residential mortgage securities is potential losses resulting from defaults by the borrowers under the underlying mortgages. An Underlying Fund would generally realize such a loss in connection with a subordinated residential mortgage security only if the subsequent foreclosure sale of the property securing a mortgage loan does not produce an amount at least equal to the sum of the unpaid principal balance of the loan as of the date the borrower went into default, the interest that was not paid during the foreclosure period and all foreclosure expenses.

The adviser or sub-advisers will seek to limit the risks presented by subordinated residential mortgage securities by reviewing and analyzing the characteristics of the mortgage loans that underlie the pool of mortgages securing both the senior and subordinated residential mortgage securities. The adviser or sub-advisers have developed a set of guidelines to assist in the analysis of the mortgage loans underlying subordinated residential mortgage securities. Each pool purchase is reviewed against the guidelines. An Underlying Fund seeks opportunities to acquire subordinated residential mortgage securities when, in the view of the adviser or sub-advisers, the potential for a higher yield on such instruments outweighs any additional risk presented by the instruments. The adviser will seek to increase yield to shareholders by taking advantage of perceived inefficiencies in the market for subordinated residential mortgage securities.

U.S. Government Securities

Investments in U.S. government securities include instruments issued by the U.S. Treasury, such as bills, notes and bonds. These instruments are direct obligations of the U.S. government and, such as, are backed by the full faith and credit of the United States. They differ primarily in their interest rates, the lengths of their maturities and the dates of their issuances. In addition, U.S. government securities include securities issued by instrumentalities of the U.S. government, such as the GNMA, which are also backed by the full faith and credit of the United States. Also included in the category of U.S. government securities are instruments issued by instrumentalities established or sponsored by the U.S. government, such as the Student Loan Marketing Association, the FNMA and the FHLMC. While these securities are issued, in general, under the authority of an Act of Congress, the U.S. government is not obligated to provide financial support to the issuing instrumentalities, although under certain conditions certain of these authorities may borrow from the U.S. Treasury. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate prepayment, and may not be able to assert a claim against the United States itself if the agency or instrumentality does not meet its commitment. An Underlying Fund generally will invest in securities of such agencies or instrumentalities only when the adviser or sub-advisers are satisfied that the credit risk with respect to any instrumentality is comparable to the credit risk of U.S. government securities backed by the full faith and credit of the United States.

 

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Zero-Coupon and Pay-In-Kind Securities

Zero-coupon and deferred interest securities, are debt obligations that do not entitle the holder to any periodic payment of interest prior to maturity or a specified date when the securities begin paying current interest rates (the “cash payment date”) and therefore are issued and traded at a discount from their face amounts or par value. The discount varies, depending on the time remaining until maturity or cash payment date, prevailing interest rates, liquidity of the security and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, decreases as the final maturity or cash payment date of the security approaches. A pay-in-kind bond pays interest during the initial few years in additional bonds rather than in cash. Later the bond may pay cash interest. Pay-in-kind bonds are typically callable at about the time they begin paying cash interest. The market prices of zero-coupon and deferred interest securities generally are more volatile than the market prices of securities with similar maturities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do non zero-coupon securities having similar maturities and credit quality.

The risks associated with lower-rated debt securities apply to these securities. Zero-coupon and pay-in-kind securities are also subject to the risk that in the event of a default, an Underlying Fund may realize no return on its investment, because these securities do not pay cash interest.

OTHER INVESTMENTS

Derivatives

Generally, derivatives can be characterized as financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Types of derivatives include options, futures contracts, options on futures, forward contracts, and swap agreements. Derivative instruments may be used for a variety of reasons; including to enhance return, hedge certain market risks, or provide a substitute for purchasing or selling particular securities. Derivatives may provide a cheaper, quicker or more specifically focused way for an Underlying Fund to invest than “traditional” securities would.

Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular derivative and the portfolio as a whole. Derivatives permit an Underlying Fund to increase or decrease the level of risk, or change the character of the risk, to which its portfolio is exposed in much the same way as an Underlying Fund can increase or decrease the level of risk, or change the character of the risk, of its portfolio by making investments in specific securities.

Derivatives may be purchased on established exchanges or through privately negotiated transactions referred to as over-the-counter derivatives. Exchange-traded derivatives generally are guaranteed by the clearing agency, which is the issuer or counterparty to such derivatives. This guarantee usually is supported by a daily payment system (i.e., margin requirements) operated by the clearing agency to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty credit risk associated with derivatives purchased on an exchange. By contrast, no clearing agency guarantees over-the-counter derivatives. Therefore, each party to an over-the-counter derivative bears the risk that the counterparty will default. Accordingly, the Sub-Adviser, on behalf of the Portfolio and each Underlying Fund, will consider the creditworthiness of counterparties to over-the-counter derivatives in the same manner, as they would review the credit quality of a security to be purchased by the Portfolio or an Underlying Fund. Over-the-counter derivatives are less liquid than exchange-traded derivatives since the other party to the transaction may be the only investor with sufficient understanding of the derivative to be interested in bidding for it.

The value of some derivative instruments in which an the Portfolio or Underlying Fund invests may be particularly sensitive to changes in prevailing interest rates and, like the other investments of the Portfolio or an Underlying Fund, the ability of the Portfolio or Underlying Fund to successfully utilize these instruments may depend in part upon the ability of the Sub-Adviser or an Underlying Fund’s sub-adviser to forecast interest rates and other economic factors correctly. If the adviser or sub-adviser incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Underlying Fund could be exposed to the risk of loss.

 

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The Portfolio or an Underlying Fund might not employ any of the strategies described below, and no assurance can be given that any strategy used will succeed. If the adviser or sub-adviser incorrectly forecasts interest rates, market values or other economic factors in utilizing a derivatives strategy for the Portfolio or an Underlying Fund, the Portfolio or Underlying Fund might have been in a better position if it had not entered into transaction at all. Also, suitable derivative transactions may not be available in all circumstances. The use of these strategies involves certain special risks, including a possible imperfect correlation, or even no correlation, between price movements of derivative instruments and price movements of related investments. While some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in related investments or otherwise, due to the possible inability of the Portfolio or an Underlying Fund to purchase or sell a security at a time that otherwise would be favorable or the possible need to sell a security at a disadvantageous time because the Portfolio or Underlying Fund is required to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments, and the possible inability of the Portfolio or Underlying Fund to close out or to liquidate its derivatives positions. In addition, the Portfolio or an Underlying Fund’s use of such instruments may cause the Portfolio or Underlying Fund to realize higher amounts of short-term capital gains generally (generally taxed at ordinary income tax rates) than if it had not used such instruments.

Exchange-Traded Funds

Exchange-Traded Funds (“ETFs”) are passively managed investment companies traded on a securities exchange whose goal is to track or replicate a desired index. ETFs present risks similar to those of an investment in the underlying securities held by the ETF. Because ETFs trade on an exchange, they may not trade at NAV. Sometimes, the prices of ETFs may vary significantly from the NAVs of the ETF’s underlying securities. Additionally, if an Underlying Fund elects to redeem its ETF shares rather than selling them on the secondary market, an Underlying Fund may receive the underlying securities which it must then sell in order to obtain cash. Additionally, you may pay a proportionate share of the expenses of the ETF in addition to the expenses of the Underlying Fund.

Financial Futures Contracts and Related Options

An Underlying Fund may enter into futures contracts or options thereon that are traded on national futures exchanges and are standardized as to maturity date and underlying financial instrument. The futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission (“CFTC”).

A futures contract provides for the future sale by one party and purchase by another party of a specified amount of a financial instrument or a specific stock market index for a specified price at a designated time, date, and place. Brokerage fees are incurred when a futures contract is bought or sold and at expiration, and margin deposits must be maintained.

Although interest rate futures contracts typically require actual future delivery of and payment for the underlying instruments, those contracts are usually closed out before the delivery date. Stock index futures contracts do not contemplate actual future delivery and will be settled in cash at expiration or closed out prior to expiration. Closing out an open futures contract sale or purchase is effected by entering into an offsetting futures contract purchase or sale, respectively, for the same aggregate amount of the identical type of underlying instrument and the same delivery date. There can be no assurance, however, that an Underlying Fund will be able to enter into an offsetting transaction with respect to a particular contract at a particular time. If the Underlying Fund is not able to enter into an offsetting transaction, it will continue to be required to maintain the margin deposits on the contract.

The prices of futures contracts are volatile and are influenced by, among other things, actual and anticipated changes in interest rates and equity prices, which in turn are affected by fiscal and monetary policies and national and international political and economic events. Small price movements in futures contracts may result in immediate and potentially unlimited loss or gain to an Underlying Fund relative to the size of the margin commitment. A purchase or sale of a futures contract may result in losses in excess of the amount initially invested in the futures contracts.

 

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When using futures contracts as a hedging technique, at best the correlation between changes in prices of futures contracts and of the securities being hedged can be only approximate. The degree of imperfection of correlation depends upon circumstances such as: variations in speculative market demand for futures and for securities, including technical influences in futures trading, and differences between the financial instruments being hedged and the instruments underlying the standard futures contracts available for trading. Even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior or stock market or interest rate trends (as well as expenses associated with creating the hedge). If the values of the assets being hedged do not move in the same amount or direction as the underlying security or index, the hedging strategy for an Underlying Fund might not be successful and the Underlying Fund could sustain losses on its hedging transactions which would not be offset by gains on its portfolio. It is also possible that there are may be a negative correlation between the security underlying a futures or option contract and the portfolio securities being hedged, which could result in losses both on the hedging transaction and the portfolio securities. In such instances, an Underlying Fund’s overall return could be less than if the hedging transactions had not been undertaken.

Investments in futures contracts on fixed-income securities involve the risk that if an adviser or a sub-adviser’s judgment concerning the general direction of interest rates is incorrect, an Underlying Fund’s overall performance may be poorer than if it had not entered into any such contract. For example, if the Underlying Fund has been hedged against the possibility that an increase in interest rates would adversely affect the price of bonds held in its portfolio, and interest rates decrease instead, an Underlying Fund will lose part or all of the benefit of the increased value of its bonds which have been hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Underlying Fund has insufficient cash, it may have to sell bonds from its portfolio to meet daily variation margin requirements, possibly at a time when it may be disadvantageous to do so. Such sale of bonds may be at increased prices, which reflect the rising market.

Most U.S. futures exchanges limit the amount of fluctuation permitted in interest rate futures contract prices during a single trading day, and temporary regulations limiting price fluctuations for stock index futures contracts are also now in effect. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular type contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some persons engaging in futures transactions to substantial losses.

Sales of futures contracts that are intended to hedge against a change in the value of securities held by an Underlying Fund may affect the holding period of such securities and, consequently, the nature of the gain or loss of such securities upon disposition.

“Margin” is the amount of funds that must be deposited with a commodities broker in a custodian account in order to initiate futures trading and to maintain open positions in an Underlying Fund’s future contracts. A margin deposit is intended to assure an Underlying Fund’s performance of the futures contract. The margin required for a particular futures contract is set by the exchange on which the contract is traded and may be significantly modified from time to time by the exchange during the term of the contract.

If the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy the margin requirement, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Underlying Fund. These daily payments to and from an Underlying Fund are called variation margins. At times of extreme price volatility, intra-day variation margin payments may be required. In computing daily NAVs, an Underlying Fund will mark-to-market the current value of its open futures contracts. An Underlying Fund expects to earn interest income on its initial margin deposits.

 

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When an Underlying Fund buys or sells a futures contract, unless it already owns an offsetting position, it will designate cash and/or liquid securities having an aggregate value at least equal to the full “notional” value of the futures contract, thereby insuring that the leveraging effect of such futures contract is minimized, in accordance with regulatory requirements.

An Underlying Fund can buy and write (sell) options on futures contracts.

Potential Lack of a Liquid Secondary Market - Prior to exercise or expiration, a futures or option position may be terminated only by entering into a closing purchase or sale transaction, which requires a secondary market on the exchange on which the position was originally established. While an Underlying Fund will establish a futures or option position only if there appears to be a liquid secondary market, there can be no assurance that such a market will exist for any particular futures or option contract at any specific time. In such event, it may not be possible to close out a position held by an Underlying Fund, which could require the Underlying Fund to purchase or sell the instrument underlying the position, make or receive a cash settlement, or meet ongoing variation margin requirements. The inability to close out futures or option positions also could have an adverse impact on an Underlying Fund’s ability to effectively hedge its portfolio, or the relevant portion thereof.

The trading of futures and options is also subject to the risk of trading halts, suspensions, exchange or clearing house equipments failures, government intervention, insolvency of the brokerage firm or clearing house or other distributions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments.

Foreign Currency Options

The Portfolio or an Underlying Fund may purchase and write puts and calls on foreign currencies that are traded on a securities or commodities exchange or quoted by major recognized dealers in such options for the purpose of protecting against declines in the dollar value of foreign securities and against increases in the dollar cost of foreign securities to be acquired. If a rise is anticipated in the dollar value of a foreign currency in which securities to be acquired are denominated, the increased cost of such securities may be partially offset by purchasing calls or writing put on that foreign currency. If a decline in the dollar value of a foreign currency is anticipated, the decline in value of securities denominated in that currency may be partially offset by writing calls or purchasing puts on that foreign currency. In such circumstances, the Portfolio or an Underlying Fund collateralizes the position by designating cash and/or liquid securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked-to-market daily. In the event of rate fluctuations adverse to the Portfolio or Underlying Fund’s position, it would lose the premium it paid and transactions costs. A call written on a foreign currency by the Portfolio or an Underlying Fund is covered if the Portfolio or Underlying Fund owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration specially designated) upon conversation or exchange of other foreign currency held in its portfolio.

Foreign Futures Contracts and Foreign Options

Participation in foreign futures contracts and foreign options transactions involves the execution and clearing of trades on, or subject to, the rules of a foreign board of trade. Neither the CFTC, the National Futures Association (“NFA”), nor any domestic exchange regulates activities of any foreign boards of trade including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign laws. Generally, the foreign transaction will be governed by applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures contracts or foreign options transaction occurs. Investors that trade foreign futures contracts or foreign options contracts may not be afforded certain of the protective measures provided by domestic exchanges, including the right to use reparations proceedings before the CFTC and arbitration proceedings provided by the NFA. In particular, funds received from customers for foreign futures contracts or foreign options transactions may not be provided the same protections as funds received for transactions on a U.S. futures exchange. The price of any foreign futures contracts or foreign options contract and, therefore, the potential profit and loss thereon, may be affected by any variance in the foreign exchange rate between the time an order is placed and the time it is liquidated, offset or exercised.

 

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Additional Restrictions on the Use of Futures and Option Contracts

The Portfolio or an Underlying Fund expects that at least 75% of futures contract purchases will be “completed”; that is, upon the sale of these long contracts, equivalent amounts of related securities will have been or are then being purchased by the Portfolio or an Underlying Fund in the cash market. With respect to futures contracts or related options that are entered into for purposes that may be considered speculative, the aggregate initial margin for futures contracts and premiums for options will not exceed 5% of the Portfolio’s or an Underlying Fund’s net assets, after taking into account realized profits and unrealized losses on such futures contracts.

Risks of Investing in Options

There are several risks associated with transactions in options on securities and indices. Options may be more volatile than the underlying instruments and, therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves. There are also significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular options may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of option of underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or clearing corporation may not at all times be adequate to handle current trading volume; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class of series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.

A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. The extent to which the Portfolio or an Underlying Fund may enter into options transactions may be limited by the Code requirements for qualification of the Portfolio or Underlying Fund as a regulated investment company. (See “Dividends, Distributions and Taxes”.)

In addition, foreign option exchanges do not afford to participants many of the protections available in U. S. option exchanges. For example, there may be no daily price fluctuation limits in such exchanges or markets, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, the Portfolio or an Underlying Fund as an option writer could lose amounts substantially in excess of its initial investment, due to the margin and collateral requirements typically associated with such option writing. (See “OTC Options”.)

Forward Foreign Currency Contracts

Forward contracts for foreign currency (forward exchange contracts) obligate the seller to deliver and the purchaser to take a specific amount of a specified foreign currency at a future date at a price set at the time of the contract. These contracts are generally traded in the interbank market conducted directly between currency traders and their customers. An Underlying Fund may enter into a forward exchange contract in order to “lock in” the U.S. dollar price of a security denominated in a foreign currency, which it has purchased or sold but which has not yet settled (a transaction hedge); or to lock in the value of an existing portfolio security (a position hedge); or to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and a foreign currency. Forward exchange contracts include standardized foreign

 

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currency futures contracts which are traded on exchanges and are subject to procedures and regulations applicable to futures. An Underlying Fund may also enter into a forward exchange contract to sell a foreign currency that differs from the currency in which the underlying security is denominated. This is done in the expectation that there is a greater correlation between the foreign currency of the forward exchange contact and the foreign currency of the underlying investment than between the U.S. dollar and the foreign currency of the underlying investment. This technique is referred to as “cross hedging.” The success of cross hedging is dependent on many factors, including the ability of the sub-adviser to correctly identify and monitor the correlation between foreign currencies and the U.S. dollar. To the extent that the correlation is not identical, the Underlying Funds may experience losses or gains on both the underlying security and the cross currency hedge.

Forward exchange contracts may be used to protect against uncertainty in the level of future exchange rates. The use of forward exchange contracts does not eliminate fluctuations in the prices of the underlying securities the Underlying Fund owns or intends to acquire, but it does fix a rate of exchange in advance. In addition, although forward exchange contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase.

The precise matching of the forward contact amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of these securities between the date the forward contract is entered into and the date it is sold. Accordingly, it may be necessary for an Underlying Fund to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase), if the market value of the security is less than the amount of foreign currency the Underlying Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency an Underlying Fund is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Forward contracts involve the risk that anticipated currency movements will not be accurately predicted, causing the Underlying Fund to sustain losses on these contacts and transactions costs.

At or before the maturity of a forward exchange contract requiring an Underlying Fund to sell a currency, the Underlying Fund may either sell the security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Underlying Fund will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. Similarly, an Underlying Fund may close out a forward contract requiring it to purchase a specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. An Underlying Fund will realize a gain or loss as a result of entering into such an offsetting forward contract under either circumstance to the extent the exchange rate(s) between the currencies involved moved between the execution dates of the first contract and the offsetting contract.

The cost of engaging in forward exchange contracts varies with factors such as currencies involved, the length of the contract period and the market conditions then prevailing. Because forward contracts are usually entered into on a principal basis, no fees or commissions are involved. Because such contracts are not traded on an exchange, the adviser or sub-adviser must evaluate the credit and performance risk of each particular counterparty under a forward contract.

Although an Underlying Fund values its assets daily in terms of U.S. dollars, it does not intend to convert their holdings of foreign currencies into U.S. dollars on a daily basis. An Underlying Fund may convert foreign currency from time to time. Foreign exchange dealers do not charge a fee for conversion, but they do seek to realize a profit based on the difference between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to an Underlying Fund at one rate, while offering a lesser rate of exchange should the Underlying Funds desire to resell that currency to the dealer.

 

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Holding Company Depositary Receipts (“HOLDRs”)

HOLDRs are trust-issued receipts that represent an Underlying Fund’s beneficial ownership of a specific group of stock. HOLDRs involve risks similar to the risks of investing in common stock. For example, the Underlying Fund’s investments will decline in value if the underlying stock decline in value. Because HOLDRs are not subject to concentration limits, the relative weight of an individual stock may increase substantially, causing the HOLDRs to be less diverse and creating more risk.

Hybrid Loans

The growth of the syndicated loan market has produced loan structures with characteristics similar to Senior Loans but which resemble bonds in some respects, and generally offer less covenant or other protections than traditional Senior Loans while still being collateralized (“Hybrid Loans”). With Hybrid Loans, an Underlying Fund may not possess a senior claim to all of the collateral securing the Hybrid Loan. Hybrid Loans also may not include covenants that are typical of Senior Loans, such as covenants requiring the maintenance of minimum interest coverage ratios. As a result, Hybrid Loans present additional risks besides those associated with traditional Senior Loans, although they may provide a relatively higher yield. Because the lenders in Hybrid Loans waive or forego certain loan covenants, their negotiating power or voting rights in the event of a default may be diminished. As a result, the lenders’ interests may not be represented as significantly as in the case of a conventional Senior Loan. In addition, because an investment company’s security interest in some of the collateral may be subordinate to other creditors, the risk of nonpayment of interest or loss of principal may be greater than would be the case with conventional Senior Loans.

Index-, Currency- and Equity-Linked Securities

Indexed-linked notes are debt securities of companies that call for interest payments and/or payment at maturity in different terms than the typical note where the borrower agrees to make fixed interest payments and to pay a fixed sum at maturity. Principal and/or interest payments on an index-linked note depend on the performance of one or more market indices, such as the S&P 500® Composite Stock Price Index (“S&P 500® Index”). At maturity, the principal amount of an equity-linked debt security is exchanged for common stock of the issuer or is payable in an amount based on the issuer’s common stock price at the time of maturity. Currency-linked debt securities are short-term or intermediate-term instruments having a value at maturity, determined by reference to one or more foreign currencies. Payment of principal or periodic interest may be calculated as a multiple of the movement of one currency against another currency, or against an index.

Index- and currency-linked securities are derivative instruments that may entail substantial risks. Such instruments may be subject to significant price volatility. The company issuing the instrument may fail to pay the amount due on maturity. The underlying investment or security may not perform as expected by the adviser or sub-adviser. Markets, underlying securities and indices may move in a direction that was not anticipated by the adviser or sub-adviser. Performance of the derivatives may be influenced by interest rate and other market changes in the United States and abroad. Certain derivative instruments may be illiquid.

Investment Companies that Invest in Senior Loans

Other investment companies include those that invest primarily in interests in variable or floating rate loans or notes (“Senior Loans”). Senior Loans, in most circumstances, are fully collateralized by assets of a corporation, partnership, limited liability company, or other business entity. Senior Loans vary from other types of debt in that they generally hold a senior position in the capital structure of a borrower. Thus, Senior Loans are generally repaid before unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and preferred or common stockholders.

Substantial increases in interest rates may cause an increase in loan defaults as borrowers may lack resources to meet higher debt service requirements. The value of the Portfolio or Underlying Fund’s assets may also be affected by other uncertainties such as economic developments affecting the market for Senior Loans or affecting borrowers generally.

 

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Senior Loans usually include restrictive covenants that must be maintained by the borrower. Under certain interests in Senior Loans, an investment company investing in a Senior Loan may have an obligation to make additional loans upon demand by the borrower. Senior Loans, unlike certain bonds, usually do not have call protection. This means that interests, while having a stated one to ten-year term, may be prepaid, often without penalty. The rate of such prepayments may be affected by, among other things, general business and economic conditions, as well as the financial status of the borrower. Prepayment would cause the actual duration of a Senior Loan to be shorter than its stated maturity.

Credit Risk

Information about interests in Senior Loans generally is not in the public domain, and interests are generally not currently rated by any nationally recognized rating service. Senior Loans are subject to the risk of nonpayment of scheduled interest or principal payments. Issuers of Senior Loans generally have either issued debt securities that are rate lower than investment grade, or, if they had issued debt securities, such debt securities would likely be rated lower than investment grade. However, unlike other types of debt securities, Senior Loans are generally fully collateralized.

In the event of a failure to pay scheduled interest or principal payments on Senior Loans, an investment company investing in that Senior Loan could experience a reduction in its income, and would experience a decline in the market value of the particular Senior Loan so affected, and may experience a decline in the NAV or the amount of the dividends. In the event of a bankruptcy of the borrower, the investment company could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing the Senior Loan.

Collateral

Senior Loans typically will be secured by pledges of collateral from the borrower in the form of tangible assets and intangible assets. In some instances, an investment company may invest in Senior Loans that are secured only by stock of the borrower or its subsidiaries or affiliates. The value of the collateral may decline below the principal amount of the Senior Loan subsequent to an investment in such Senior Loans. In addition, to the extent that collateral consists of stock of the borrower or its subsidiaries or affiliates, there is a risk that the stock may decline in value, be relatively illiquid, or may lose all or substantially all of its value, causing the Senior Loan to be under-collateralized.

Limited Secondary Market

Although it is growing, the secondary market for Senior Loans is currently limited. There is no organized exchange or board of trade on which Senior Loans may be traded; instead, the secondary market for Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly, Senior Loans may be illiquid. In addition, Senior Loans generally require the consent of the borrower prior to sale or assignment. These consent requirements may delay or impede an Underlying Fund’s ability to sell Senior Loans. In addition, because the secondary market for Senior Loans may be limited, it may be difficult to value Senior Loans. Market quotations may not be available and valuation may require more research than for liquid securities. In addition, elements of judgment may play a greater role in the valuation, because there is less reliable, objective data available.

Options on Futures

A futures option gives an Underlying Fund the right, in return for the premium paid, to assume a long position (in the case of a call) or short position (in the case of a put) in a futures contract at a specified exercise price prior to the expiration of the option. Upon exercise of a call option, the purchaser acquires a long position in the futures contract and the writer of the option is assigned the opposite short position. In the case of a put option, the converse is true. A futures option may be closed out (before exercise or expiration) by an offsetting purchase or sale of a futures option by the Underlying Fund.

 

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Other Investment Companies

An investment company is a company engaged in the business of pooling investors’ money and trading in securities for them. Examples include face-amount certificate companies, unit investment trusts and management companies. When the Portfolio or an Underlying Fund invests in other investment companies, shareholders of the Portfolio or an Underlying Fund bear their proportionate share of the underlying investment companies’ fees and expenses.

An Underlying Fund may invest in other investment companies to the extent permitted under the 1940 Act and the rules and regulations thereunder. An Underlying Fund may also make indirect foreign investments through other investment companies that have comparable investment objectives and policies as that Underlying Fund. No Underlying Fund will invest in other investment companies in reliance on Section 12(d)(1)(F) or (G) of the 1940 Act.

There are some potential disadvantages associated with investing in other investment companies. In addition to the advisory and operational fees the Portfolio and Underlying Funds bear directly in connection with their own operation, the Portfolio or Underlying Funds would also bear their pro rata portion of each other investment company’s advisory and operational expenses. When the Portfolio or Underlying Funds invest in other investment companies, you indirectly pay a proportionate share of the expenses of that other investment company (including management fees, administration fee, and custodial fees) in addition to the expenses of the Portfolio or Underlying Fund.

Over the Counter Options

The staff of the SEC has taken the position that purchased over-the-counter options (“OTC Options”) and the assets used as cover for written OTC Options are illiquid securities. The Underlying Fund intends to establish standards for the creditworthiness of dealers with which it may enter into OTC Option contracts and those standards, as modified from time to time, will be implemented and monitored by the adviser. Under these special arrangements, an Underlying Fund will enter into contracts with dealers that provide that the Underlying Fund has the absolute right to repurchase an option it writes at any time at a repurchase price which represents the fair market value, as determined in good faith through negotiation between the parties, but that in no event will exceed a price determined pursuant to a formula contained in the contract. Although the specific details of the formula may vary between contracts with different dealers, the formula will generally be based on multiple of the premium received by the Underlying Fund for writing the option, plus the amount, if any, by which the options is “in-the-money.” The formula will also include a factor to account for the difference between the price of the security and the strike price of the option if the option is written “out-of-the-money.” “Strike price” refers to the price at which an option will be exercised. “Cover Assets” refers to the amount of cash, liquid assets or high quality debt instruments that must be segregated to collateralize the value of the futures contracts written by an Underlying Fund. Under such circumstances, an Underlying Fund will treat as illiquid that amount of the cover assets equal to the amount by which the formula price for the repurchase of the option is greater than the amount by which the market value of the security subject to the option exceeds the exercise price of the option (the amount by which the option is “in-the-money”). Although each agreement will provide that the Underlying Fund’s repurchase price shall be determined in good faith (and that it shall not exceed the maximum determined pursuant to the formula), the formula price will not necessarily reflect the market value of the option written. Therefore, the Underlying Fund might pay more to repurchase the OTC Option contract than an Underlying Fund would pay to close out a similar exchange traded option.

Private Funds

U.S. or foreign private limited partnerships or other investment funds are referred to herein as Private Funds (“Private Funds”). Investments in Private Funds may be highly speculative and volatile. Because Private Funds generally are investment companies for purposes of the 1940 Act, an Underlying Fund’s ability to invest in them will be limited. In addition, Underlying Fund’s shareholders will remain subject to the Underlying Fund’s expenses while also bearing their pro rata share of the operating expenses of the Private Funds. The ability of an Underlying Fund to dispose of interests in Private Funds is very limited and involves risks, including loss of the Underlying Fund’s entire investment in the Private Fund.

 

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Private Funds include a variety of pooled investments. Generally, these pooled investments are structured as a trust, a special purpose vehicle, and are exempted from registration under the 1940 Act. As an investor, an Underlying Fund owns a proportionate share of the trust. Typically, the trust does not employ a professional investment manager. Instead, the pooled investment tracks some index by investing in the issuers or securities that comprise the index. An Underlying Fund receives a stream of cash flows in the form of interest payments from the underlying assets. However, some pooled investments may not dispose of the underlying securities regardless of the adverse events affecting the issuers depending on the investment strategy utilized. In this type of strategy, the pooled investment continues to hold the underlying securities as long as the issuers of the securities remain members of the tracked index.

The pooled investments allow an Underlying Fund to synchronize the receipt of interest and principal payments and also, diversify some of the risks involved with investing in fixed-income securities. Because the trust holds securities of many issuers, the default of a few issuers would not impact an Underlying Fund significantly. However, the Underlying Fund bears any expenses incurred by the trust. In addition, an Underlying Fund assumes the liquidity risks generally associated the privately offered pooled investments.

Pooled investments that are structured as a trust contain many similarities to Private Funds that are structured as limited partnerships. The primary difference between the trust and the limited partnership structure is the redemption of the ownership interest. Typically, the ownership interests in a typical Private Fund are redeemable only by the general partners and thus, are restricted from transferring from one party to another. Conversely, the ownership interests in the trust are generally not redeemable by the trust, except under certain circumstances, and are transferable among the general public for publicly offered securities and “qualified purchasers” or “qualified institutional buyers” for privately offered securities.

An Underlying Fund cannot assure that it can achieve better results by investing in a pooled investment versus investing directly in the individual underlying assets.

Private Funds also include investments in certain structured securities. Structured securities include notes, bonds or debentures that provide for the payment of principal of, and/or interest in, amounts determined by reference to changes in the value of specific currencies, interest rates, commodities, indices or other financial indicators (the “Reference”) or the relative change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. The terms of structured securities may provide that under certain circumstances no principal is due at maturity and, therefore, may result in the loss of an Underlying Fund’s investment. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, the change in interest rate or the value of the security at maturity may be a multiple of the change in the value of the Reference. Consequently, leveraged structure securities entail a greater degree of market risk than other types of debt obligations. Structured securities may also be more volatile, less liquid, and more difficult to accurately price than less complex fixed-income investments.

Put and Call Options

A call option gives the holder (buyer) the right to buy and to obligate the writer (seller) to sell a security or financial instrument at a stated price (strike price) at any time until a designated future date when the option expires (expiration date). A put option gives the holder (buyer) the right to sell and to obligate the writer (seller) to purchase a security or financial instrument at a stated price at any time until the expiration date. An Underlying Fund may write or purchase put or call options listed on national securities exchanges in standard contracts or may write or purchase put or call options with or directly from investment dealers meeting the creditworthiness criteria of the sub-adviser.

An Underlying Fund will not write call options on when-issued securities. Underlying Funds may purchase call options primarily as a temporary substitute for taking positions in certain securities or in the securities that comprise a relevant index. An Underlying Fund may also purchase call options on an index to protect against increases in the price of securities underlying that index that the Underlying Fund intends to purchase pending its ability to invest in such securities in an orderly manner.

 

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So long as the obligation of the writer of a call option continues, the writer may be assigned an exercise notice by the broker-dealer through which such option was settled, requiring the writer to deliver the underlying security against payment of the exercise price. This obligation terminates upon the expiration of the call option, by the exercise of the call option, or by entering into an offsetting transaction.

When writing a call option, in return for the premium, the writer gives up the opportunity to profit from the price increase in the underlying security above the exercise price, but conversely retains the risk of loss should the price of the security decline. If a call option expires unexercised, the writer will realize a gain in the amount of the premium; however, such a gain may be offset by a decline in the market value of the underlying security during the option period. If the call option is exercised, the writer would realize a gain or loss from the transaction depending on what it received from the call and what it paid for the underlying security.

The Portfolio may write (sell) call options on selected indices and ETFs (each, and Index” and collectively, the “Indices”) to secure gains and enhance the stability of returns over a market cycle. The performance of each Index that is the subject of such a call option will be expected to correlate closely with the performance of one or more Underlying Funds. The Portfolio will seek to maintain written call options positions on Indices whose price movements, taken in the aggregate, are closely correlated with the price movements of Underlying Funds. To the extent that there is a lack of correlation, for example if the Portfolio were to sell all or a portion of the relevant Underlying Fund and the value of the Index referenced by the call option appreciates more than the relevant Underlying Fund, this may result in losses or limit gains to the Portfolio.

An option on an index (or a particular security) is a contract that gives the purchaser of the option, in return for the premium paid, the right to receive from the writer of the option cash equal to the difference between the closing price of the index (or security) and the exercise price of the option, expressed in dollars, times a specified multiple (the multiplier).

An Underlying Fund may write calls on and futures contracts provided that it enters into an appropriate offsetting position or that it designates liquid assets or high-quality debt instruments in an amount sufficient to cover the underlying obligation in accordance with regulatory requirements. The risk involved in writing call options on futures contracts or market indices is that an Underlying Fund would not benefit from any increase in value above the exercise price. Usually, this risk can be eliminated by entering into an offsetting transaction. However, the cost to do an offsetting transaction and terminate an Underlying Fund’s obligation might be more or less than the premium received when it originally wrote the option. Further, the Underlying Fund might occasionally not be able to close the option because of insufficient activity in the options market.

In the case of a put option, as long as the obligation of the put writer continues, it may be assigned an exercise notice by the broker-dealer through which such option was sold, requiring the writer to take delivery of the underlying security against payment of the exercise price. A writer has no control over when it may be required to purchase the underlying security, since it may be assigned an exercise notice at any time prior to the expiration date. This obligation terminates earlier if the writer effects a closing purchase transaction by purchasing a put of the same series as that previously sold.

If a put option is sold by an Underlying Fund, the Underlying Fund will designate liquid securities with a value equal to the exercise price, or else will hold an offsetting position in accordance with regulatory requirements. In writing puts, there is the risk that the writer may be required to by the underlying security at a disadvantageous price. The premium the writer receives from writing a put option represents a profit, as long as the price of the underlying instrument remains above the exercise price. If the put is exercised, however, the writer is obligated during the option period to buy the underlying instrument from the buyer of the put at exercise price, even though the value of the investment may have fallen below the exercise price. If the put lapse unexercised, the writer realizes a gain in the amount of the premium. If the put is exercised, the writer may incur a loss, equal to the difference between the exercise price and the current market value of the underlying instrument.

 

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The purchase of put options may be used to protect an Underlying Fund’s holdings in an underlying security against a substantial decline in market value. Such protection, of course, only provided during the life of the put option when the Underlying Fund, as the holder of the put option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security’s market price. By using put options in this manner, an Underlying Fund will reduce any profit it might otherwise have realized in its underlying security by the premium paid for the put option and by transaction costs. The purchase of put options also may be used by the Underlying Fund when it does not hold the underlying security.

The premium received from writing a call or put option, or paid for purchasing a call or put option will reflect, among other things, the current market price of the underlying security, the relationship of the exercise price to such market price, the historical price volatility of the underlying security, the length of the option period, and the general interest rate environment. The premium received by the Portfolio or an Underlying Fund for writing call options will be recorded as a liability in the statement of assets and liabilities of the Portfolio or Underlying Fund. This liability will be adjusted daily to the option’s current market value. The liability will be extinguished upon expiration of the option, by the exercise of the option, or by entering into an offsetting transaction. Similarly, the premium paid by an Underlying Fund when purchasing a put option will be recorded as an asset in the statement of assets and liabilities of that Underlying Fund. This asset will be adjusted daily to the option’s current market value. The asset will be extinguished upon expiration of the option, by selling an identical option in a closing transaction, or by exercising the option.

Closing transactions will be effected in order to realize a profit on an outstanding call or put option, to prevent an underlying security from being called or put, or to permit the exchange or tender of the underlying security. Furthermore, effecting a closing transaction will permit an Underlying Fund to write another call option, or purchase another call option, on the underlying security with either a different exercise price or expiration date or both. If the Portfolio or Underlying Fund desires to sell a particular security from its portfolio on which it has written a call option, or purchased a put option, it will seek to effect a closing transaction prior to, or concurrently with, the sale of the security. There is, of course, no assurance that the Portfolio or an Underlying Fund will be able to affect a closing transaction at a favorable price. If the Portfolio or an Underlying Fund cannot either enter into such a transaction, it maybe required to hold a security that it might otherwise have sold, in which case it would continue to be at market risk on the security. An Underlying Fund will pay brokerage commissions in connection with the sale or purchase of options to close out previously established option positions. These brokerage commissions are normally higher as a percentage of underlying asset values than those applicable to purchases and sales of portfolio securities.

Real Estate Securities

An Underlying Fund’s investments in real estate securities include investment in Real Estate Investment Trusts (“REITs”) and other Real Estate Operating Companies (“REOCs”). A REOC is a company that derives at least 50% of its gross revenues or net profits from either (1) the ownership, development, construction, financing, management or sale of commercial, industrial or residential real estate, or (2) products or services related to the real estate industry, such as building supplies or mortgage servicing. A REIT is a corporation or business trust that meets the definitional requirements of the Code. Investing in REITs involve certain unique risks in addition to those risks associated with investing in the real estate industry in general. Although the Underlying Fund will not invest directly in real estate, the Underlying Fund may invest in equity securities of issuers primarily engaged in or related to the real estate industry. Therefore, an investment in REITs is subject to certain risks associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning laws; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in rents; changes in interest rates; and acts of terrorism, war or other acts of violence. To the extent that assets underlying the REITs’ investments are concentrated geographically, by property type or in certain other respects, the REITs may subject to certain of the foregoing risks to a greater extent. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified, are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs are also subject to the possibilities of failing to qualify for tax-free pass-through of income under the Code and failing to maintain their exemptions from registration under the 1940 Act.

 

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REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REIT’s investment in fixed-rate obligations can be expected to rise. During periods of declining interest rates, certain mortgage REITs may hold mortgages that the mortgages elect to prepay, which prepayment may diminish the yield on securities issued by such mortgage REITs. Conversely, when interest rates rise, the value of a REIT’s investment in fixed-rate obligations can be expected to decline. In contrast, as interest rates on adjustable rate mortgage loans are reset periodically, yields on a REIT’s investment in such loans will gradually align themselves to reflect changes in market interest rates, causing the value of such investments to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed-rate obligations. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Mortgage REITs may also be affected by the ability of borrowers to repay when due the debt extended by the REIT and equity REITs may be affected by the ability of tenants to pay rent.

Investing in REITs involves risks similar to those associated with investing in small capitalization companies. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than larger company securities. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through an Underlying Fund, a shareholder will bear not only his/her proportionate share of the expenses of the Underlying Fund, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.

Restricted and Illiquid Securities

An Underlying Fund may invest in a restricted security or an illiquid security if the adviser and sub-advisers believe that it presents an attractive opportunity. Generally, a security is considered illiquid if it cannot be disposed of within seven days. Its illiquidity might prevent the sale of such a security at a time when the adviser or a sub-adviser might wish to sell, and these securities could have the effect of decreasing the overall level of the Underlying Fund’s liquidity. Further, the lack of an established secondary market it may make it more difficult to value illiquid securities, requiring an Underlying Fund to rely on judgments that may be somewhat subjective in determining value, which could vary from the amount that an Underlying Fund could realize upon disposition.

Because of the nature of these securities, a considerable period of time may elapse between the Underlying Fund’s decision to dispose of these securities and the time when the Underlying Fund is able to dispose of them, during which time the value of the securities could decline. The expenses of registering restricted securities (excluding securities that may be resold by pursuant to Rule 144A under the 1933 Act) may be negotiated at the time such securities are purchased by an Underlying Fund. When registration is required before the securities may be resold, a considerable period may elapse between the decision to sell the securities and the time when the Underlying Fund would be permitted to sell them. Thus, the Underlying Fund may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. Some securities are eligible for purchase or sale without SEC registration by certain “qualified institutional buyers.” Such restricted securities could be treated as liquid because a trading market exists. However, these securities could be less liquid than registered securities traded on established secondary markets. Some liquid and restricted securities include Private Funds.

An Underlying Fund may also acquire securities through private placements. Such securities may have contractual restrictions on their resale, which might prevent their resale by the Underlying Fund at a time when such resale would be desirable. Securities that are not readily marketable will be valued by an Underlying Fund in good faith pursuant to procedures adopted by the Company’s Board.

Restricted securities, including private placements, are subject to legal or contractual restrictions on resale. They can be eligible for purchase without SEC registration by certain institutional investors known as

 

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“qualified institutional buyers,” and under an Underlying Fund’s procedures, restricted securities could be treated as liquid. However, some restricted securities may be illiquid and restricted securities that are treated as liquid could be less liquid than registered securities traded on established secondary markets.

Stock Index Options

Stock index options include put and call options with respect to the S&P 500® Index and other stock indices. These may be purchased as a hedge against changes in the values of portfolio securities or securities which it intends to purchase or sell, or to reduce risks inherent in the ongoing management of an Underlying Fund.

The distinctive characteristics of options on stock indices create certain risks not found in stock options generally. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether an Underlying Fund will realize a gain or loss on the purchase or sale of an option on an index depends upon movements in the level of stock prices in the stock market generally rather than movements in the price of a particular stock. Accordingly, successful use by an Underlying Fund of options on a stock index depends on the adviser’s or sub-adviser’s ability to predict correctly movements in the direction of the stock market generally. This requires different skills and techniques than predicting changes in the price of individual stock.

Index prices may be distorted if circumstances disrupt trading of certain stock included in the index, such as if trading were halted in a substantial number of stock included in the index. If this happens, the Underlying Fund could not be able to close out options, which it had purchased, and if restrictions on exercise were imposed, the Underlying Fund might be unable to exercise an option it holds, which could result in substantial losses to the Underlying Fund. An Underlying Fund purchases put or call options only with respect to an index which the adviser or sub-adviser believes includes a sufficient number of stock to minimize the likelihood of a trading halt in the index.

Straddles

A straddle consists of a combination of a call and a put written on the same underlying security. A straddle is “covered” when sufficient assets are deposited to meet the Underlying Fund’s immediate obligations. An Underlying Fund may use the same liquid assets or high-quality debt instruments to cover both the call and put options when the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Underlying Fund will segregate liquid assets or high quality debt instruments equivalent to the amount, if any, by which the put is “in the money.”

Subordinated and Unsecured Loans

The primary risk arising in connection with subordinated loans is that because the holder’s interested in subordinated, there is the potential for loss in the event of default by the issuer of the loans. Subordinated loans in an insolvency bear an increased share, relative to senior secured lenders, of the ultimate risk that the borrower’s assets are insufficient to meet its obligations to its creditors. Unsecured loans are not secured by any specific collateral of the borrower. They do not enjoy the security associated with collateralization and may pose a greater risk of nonpayment of interest or loss of principal than do secured loans.

To Be Announced Sale Commitments

An Underlying Fund may enter into To Be Announced (“TBA”) sale commitments wherein the unit price and the estimated principal amount are established upon entering into the contract, with the actual principal amount being within a specified range of the estimate. An Underlying Fund will enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, an Underlying Fund will maintain, in a segregated account, cash or marketable securities in an amount sufficient to meet the purchase price. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the Underlying Fund realizes a gain or

 

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loss of the commitment without regard to any unrealized gain or loss on the underlying security. If an Underlying Fund delivers securities under the commitment, the Underlying Fund realizes a gain or loss from the sale of the securities, based upon the unit price established at the date the commitment was entered into.

Warrants

A warrant gives the holder a right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay a fixed dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of the Underlying Fund’s entire investment therein).

INVESTMENT TECHNIQUES

Borrowing

If an Underlying Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If an Underlying Fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage. Under the 1940 Act, the Underlying Fund is required to maintain continuous asset coverage of 300% with respect to such borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of an Underlying Fund’s holdings may be disadvantageous from an investment standpoint.

When an Underlying Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If an Underlying Fund makes additional investments while borrowings are outstanding, this may be construed as a form of leverage.

Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of the portfolio securities or an Underlying Fund’s NAV, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the income received from the securities purchased with borrowed funds.

Lending of Portfolio Securities

In order to generate additional income, an Underlying Fund may lend portfolio securities to broker-dealers, major banks, or other recognized domestic institutional borrowers of securities provided that the value of the loaned securities do not exceed 33 1/3% of an Underlying Fund’s total assets. No lending may be made to any companies affiliated with the adviser. These loans earn income for the Underlying Funds and are collateralized by cash, securities or letters of credit. An Underlying Fund might experience a loss if the financial institution defaults on the loan. Underlying Funds seek to mitigate this risk through contracted indemnification upon default.

The borrower at all times during the loan must maintain, with an Underlying Fund, cash or cash equivalent collateral, or provide to an Underlying Fund an irrevocable letter of credit equal in value to at least 100% of the value of the securities loaned. During the time portfolio securities are on loan, the borrower pays an Underlying Fund any interest paid on such securities, and the Underlying Fund may invest the cash collateral and earn additional income, or it may receive an agreed-upon amount of interest income from the borrower who has delivered equivalent collateral or a letter of credit. Loans are subject to termination at the option of an Underlying Fund or the borrower at any time. An Underlying Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the income earned on the cash to the borrower or placing broker. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially. There is the risk that when lending portfolio securities, the securities may not be available to the Underlying Fund on a timely basis and the Underlying

 

39


Fund may, therefore, lose the opportunity to sell the securities at a desirable price. Engaging in securities lending could have a leveraging effect, which may intensify the market risk, credit risk or other risks associated with investments in the Portfolio. When an Underlying Fund lends its securities, it is responsible for investing the cash collateral it receives from the borrower of the securities. An Underlying Fund could incur losses in connection with the investment of such collateral.

Repurchase Agreements

Repurchase agreements may be considered to be loans by the Underlying Funds for purposes of the 1940 Act. Each repurchase agreement must be collateralized fully, in accordance with the provisions of Rule 5b-3 under the 1940 Act, at all times. Pursuant to such repurchase agreements, an Underlying Fund acquires securities from financial institutions such as brokers, dealers and banks, subject to the seller’s agreement to repurchase and an Underlying Fund’s agreement to resell such securities at a mutually agreed upon date and price. The term of such an agreement is generally quite short, possibly overnight or for a few days, although it may extend over a number of months (up to one year) from the date of delivery. The repurchase price generally equals the price paid by an Underlying Fund plus interest negotiated on the basis of current short-term rates (which may be more or less than the rate on the underlying portfolio security). The securities underlying a repurchase agreement will be marked to market every business day so that the value of the collateral is at least equal to the value of the loan, including the accrued interest thereon, and the adviser or sub-adviser will monitor the value of the collateral. Securities subject to repurchase agreements will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent foreign system. If the seller defaults on its repurchase obligation, an Underlying Fund holding the repurchase agreement will suffer a loss to a extent that the proceeds from a sale of the underlying securities is less than the repurchase price under the agreement. Bankruptcy or insolvency of such a defaulting seller may cause an Underlying Fund’s rights with respect to such securities to be delayed or limited. Repurchase agreements maturing in more than seven days will not exceed 10% of the total assets of the Underlying Fund.

Reverse Repurchase Agreements and Dollar roll Transactions

Reverse repurchase agreement transactions involve the sale of U.S. government securities held by an Underlying Fund, with an agreement that an Underlying Fund will repurchase such securities at an agreed upon price and date. An Underlying Fund will employ reverse repurchase agreements when necessary to meet unanticipated net redemptions so as to avoid liquidating other Underlying Fund investments during unfavorable market conditions. At the time it enters into a reverse repurchase agreement, an Underlying Fund will place in a segregated custodial account cash, liquid assets and/or high quality debt instruments having a dollar value equal to the repurchase price. Reverse repurchase agreements are considered to be borrowings under the 1940 Act. Reverse repurchase agreements, together with other permitted borrowings, may constitute up to 33 1/3% of an Underlying Fund’s total assets. Under the 1940 Act, an Underlying Fund is required to maintain continuous asset coverage of 300% with respect to borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of an Underlying Fund’s holdings may be disadvantageous from an investment standpoint. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of the portfolio securities or an Underlying Fund’s NAV, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the income received from the securities purchased with borrowed funds.

In order to enhance portfolio returns and manage prepayment risks, certain Underlying Funds may engage in dollar roll transactions with respect to mortgage securities issued by GNMA, FNMA, and FHLMC. In a dollar roll transaction, an Underlying Fund sells a mortgage security held in the Underlying Fund to a financial institutional such as bank or broker-dealer, and simultaneously agrees to repurchase a substantially similar security (same type, coupon and maturity) from the institution at a later date at an agreed upon price. The mortgage securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. During the period between the sale and the repurchase, an Underlying Fund will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in short-term instruments, and the income from

 

40


these investments, together with any additional fee income received on the sale, could generate income for an Underlying Fund exceeding the yield on the sold security. When an Underlying Fund enters into a dollar roll transaction, cash, liquid assets and/or high quality debt instruments of an Underlying Fund, in a dollar amount sufficient to make payment for the obligations to be repurchased, are segregated with its custodian at the trade date. These securities are marked daily and are maintained until the transaction is settled.

Whether a reverse purchase agreement or dollar roll transaction produces a gain for an Underlying Fund depends upon the “costs of the agreements” (e.g., a function of the difference between the amount received upon the sale of its securities and the amount to be spent upon the purchase of the same or “substantially the same” security) and the income and gains of the securities purchased with the proceeds received from the sale of the mortgage security. If the income and gains on the securities purchased with the proceeds of the agreements exceed the costs of the agreements, then an Underlying Fund’s NAV will increase faster than otherwise would be the case; conversely, if the income and gains on such securities purchased fail to exceed the costs of the structure, NAV will decline faster than otherwise would be the case. Reverse repurchase agreements and dollar roll transactions, as leveraging techniques, may increase an Underlying Fund’s yield in the manner described above; however, such transactions also increase an Underlying Fund’s risk of loss and may result in the shareholder’s loss of principal.

Securities, Interest Rate and Currency Swaps

Interest rate swaps, currency swaps and other types of swap agreements, including swaps on securities and indices in which the Portfolio may invest are described in the Prospectus. The Underlying Fund will enter into swap transactions with appropriate counterparties pursuant to master netting agreements. A master netting agreement provides that all swaps done between an Underlying Fund and that counterparty under that master agreement shall be regarded as parts of an integral agreement. If on any date amounts are payable in the same currency in respect of one or more swap transactions, the net amount payable on that date in the currency shall be paid. In addition, the master netting agreement may provide that if one party defaults generally or on one swap, the counterparty may terminate the swaps with that party. Under such agreements, if there is a default resulting in a loss to one party, the measure of that party’s damages is calculated by reference to the average cost of a replacement swap with respect to each swap (i.e., the mark-to-market value at the time of the termination of each swap). The gains and losses on all swaps are then netted, and the result is the counterparty’s gain or loss on termination. The termination of all swaps and the netting of gains and losses on termination are generally referred to as “aggregation.”

Short Sales

An Underlying Fund may make a short sale of securities it already owns or have the right to acquire at no added cost through conversion or exchange of other securities it owns (referred to as short sales “against the box”). In a short sale that is not “against the box,” an Underlying Fund sells a security, which it does not own, in anticipation of a decline in the market value of the security. To complete the sale, an Underlying Fund must borrow the security (generally from the broker through which the short sale is made) in order to make delivery to the buyer. An Underlying Fund must replace the security borrowed by purchasing it at the market price at the time of replacement. An Underlying Fund is said to have a “short position” in the securities sold until it delivers them to the broker. The period during which an Underlying Fund has a short position can range from one day to more than a year. Until an Underlying Fund replaces the security, the proceeds of the short sale are retained by the broker, and an Underlying Fund must pay to the broker a negotiated portion of any dividends or interest, which accrue during the period of the loan. To meet current margin requirements, an Underlying Fund must deposit with the broker additional cash or securities so that it maintains with the broker a total deposit equal to 150% of the current market value of the securities sold short (100% of the current market value if a security is held in the account that is convertible or exchangeable into the security sold short within ninety (90) days without restriction other than the payment of money).

Short sales by an Underlying Fund that are not made against the box create opportunities to increase an Underlying Fund’s return but, at the same time, involve specific risk considerations and may be considered a speculative technique. Since an Underlying Fund in effect profits from a decline in the price of the securities sold short without the need to invest the full purchase price of the securities on the date of the short sale, an

 

41


Underlying Fund’s NAV per share tends to increase more when the securities it has sold short decrease in value, and to decrease more when the securities it has sold short increase in value, than would otherwise be the case if it had not engaged in such short sales. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, dividends or interest an Underlying Fund may be required to pay in connection with the short sale. Short sales theoretically involve unlimited loss potential, as the market price of securities sold short may continually increase, although an Underlying Fund may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions an Underlying Fund might have difficulty purchasing securities to meet its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.

If an Underlying Fund makes a short sale “against the box,” the Underlying Fund would not immediately deliver the securities sold and would not receive the proceeds from the sale. The seller is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. To secure its obligation to deliver securities sold short, an Underlying Fund will deposit in escrow in a separate account with the Custodian an equal amount of the securities sold short or securities convertible into or exchangeable for such securities. An Underlying Fund can close out its short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by an Underlying Fund, because an Underlying Fund might want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short.

An Underlying Fund’s decision to make a short sale “against the box” may be a technique to hedge against market risks when the adviser or sub-adviser believes that the price of a security may decline, causing a decline in the value of a security owned by an Underlying Fund or a security convertible into or exchangeable for such security. In such case, any future losses in an Underlying Fund’s long position would be reduced by a gain in the short position. The extent to which such gains or losses in the long position are reduced will depend upon the amount of securities sold short relative to the amount of the securities an Underlying Fund owns, either directly or indirectly, and, in the case where an Underlying Fund owns convertible securities, changes in the investment values or conversion premiums of such securities.

In the view of the SEC, a short sale involves the creation of a “senior security” as such term is defined in the 1940 Act, unless the sale is against the box and the securities sold short are placed in a segregated account (not with the broker), or unless an Underlying Fund’s obligation to deliver the securities sold short is “covered” by placing in a segregated account (not with the broker) cash, U.S. government securities or other liquid debt or equity securities in an amount equal to the difference between the market value of the securities sold short at the time of the short sale and any such collateral required to be deposited with a broker in connection with the sale (not including the proceeds from the short sale), which difference is adjusted daily for changes in the value of the securities sold short. The total value of the cash, U.S. government securities or other liquid debt or equity securities deposited with the broker and otherwise segregated may not at any time be less than the market value of the securities sold short at the time of the short sale. An Underlying Fund will comply with these requirements. In addition, as a matter of policy, each Underlying Fund’s Board has determined that no Underlying Fund will make short sales of securities or maintain a short position if to do so could create liabilities or require collateral deposits and segregation of assets aggregating more than 25% of an Underlying Fund’s total assets, taken at market value.

The extent to which an Underlying Fund may enter into short sales transactions may be limited by the Code requirements for qualification of an Underlying Fund as a regulated investment company. (See “Dividends, Distributions and Taxes.”)

Swap Transactions

Swap transactions, include, but are not limited to, swap agreements on interest rates, security or commodity indices, specific securities and commodities, credit default swaps and event-linked swaps. To the extent an Underlying Fund may invest in foreign currency-denominated securities, it may also invest in currency exchange rate swap agreements. An Underlying Fund may also enter into options on swap agreements (“swap options”).

 

42


An Underlying Fund may enter into swap transactions for any legal purpose consistent with its investment objective and policies, such as for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets, to protect against currency fluctuations, as a duration management technique, to protect against any increase in the price of securities the Underlying Fund anticipates purchasing at a later date, or to gain exposure to certain markets in the most economical way possible.

Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket” of securities or commodities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum levels. Consistent with an Underlying Fund’s investment objectives and general investment policies, certain of the Underlying Funds may invest in commodity swap agreements. For example, an investment in a commodity swap agreement may involve the exchange of floating-rate interest payments for the total return on a commodity index. In a total return commodity swap, an Underlying Fund will receive the price appreciation of a commodity index, a portion of the index, or a single commodity in exchange for paying an agreed-upon fee. If the commodity swap is for one period, an Underlying Fund may pay a fixed fee, established at the outset of the swap. However, if the term of the commodity swap is more than one period, with interim swap payments, an Underlying Fund may pay an adjustable or floating fee. With a “floating” rate, the fee may be pegged to a base rate, such as the LIBOR, and is adjusted each period. Therefore, if interest rates increase over the term of the swap contract, an Underlying Fund may be required to pay a higher fee at each swap reset date.

An Underlying Fund may enter into credit swap agreements. The “buyer” in a credit contract is obligated to pay the “seller” a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or “par value,” of the reference obligation in exchange for the reference obligation. An Underlying Fund may be either the buyer or seller in a credit default swap transaction. If an Underlying Fund is a buyer and no event of default occurs, an Underlying Fund will lose its investment and recover nothing. However, if an event of default occurs, an Underlying Fund (if the buyer) will receive the full notional value of the reference obligation that may have little or no value. As a seller, an Underlying Fund receives a fixed rate of income throughout the term of the contract, which typically is between six months and three years, provided that there is no default event. If an event of default occurs, the seller must pay the buyer the full notional value of the reference obligation. Credit default swap transactions involve greater risks than if an Underlying Fund had invested in the reference obligation directly.

A swap option is a great contract that gives a counterparty the right (but not the obligation) in return for payment of a premium, to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. An Underlying Fund that may engage in swaps may write (sell) and purchase put and call swap options.

Most swap agreements entered into by an Underlying Fund’s involve calculating the obligations of the parties to the agreement on a “net basis.” Consequently, an Underlying Fund’s current obligations (or rights) under a swap agreement 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 party to the agreement (the “net amount”). An Underlying Fund’s current obligations under a swap agreement will be accrued daily (offset against any amounts owed to an Underlying Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the segregation of assets determined to be liquid by the sub-adviser in accordance with

 

43


procedures established by the Board, to avoid any potential leveraging of an Underlying Fund’s portfolio. Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes of an Underlying Fund’s investment restriction concerning senior securities.

Whether an Underlying Fund’s use of swap agreements or swap options will be successful in furthering its investment objective of total return will depend on the sub-adviser’s ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they generally have terms of greater than seven days, swap agreements generally are considered to be illiquid. Moreover, an Underlying Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. An Underlying Fund will enter into swap agreements only with counterparties that meet certain standards of creditworthiness (generally, such counterparties would have to be eligible counterparties under the terms of each Underlying Fund’s repurchase agreement guidelines). Certain restrictions imposed on the Underlying Fund’s by the Code may limit an Underlying Fund’s ability to use swap agreements. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect an Underlying Fund’s ability to terminate existing swap agreements or to realize amounts to be received under such agreements.

Depending on the terms of the particular option agreement, an Underlying Fund will generally incur a greater degree of risk when it writes a swap option than it will incur when it purchases a swap option. When an Underlying Fund purchases a swap option, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when an Underlying Fund writes a swap option, upon exercise of the option an Underlying Fund will become obligated to make payments according to the terms of the underlying agreement.

Certain swap agreements are exempt from most provisions of the Commodity Exchange Act (“CEA”) and, therefore, are not regulated as futures or commodity option transactions under the CEA, pursuant to regulations approved by the CFTC. To qualify for this exemption, a swap agreement must be entered into by “eligible participants,” which include the following, provided the participants’ total assets exceed established levels: a bank or trust company, savings association or credit union, insurance company, investment company subject to regulation under the 1940 Act, commodity pool, corporation, partnership, proprietorship, organization, trust or other entity, employee benefit plan, governmental entity, broker-dealer, futures commissions merchant, natural person, or regulated foreign person. To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee benefit plans must have assets exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First, the swap agreement may not be part of a fungible class of agreements that are standardized as to their material economic terms. Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement terms. Third, swap agreements may not be entered into and traded on or through a multilateral transaction execution facility.

This exemption is not exclusive, and participants may continue to rely on existing exclusions foe swaps, such as the Policy Statement issued in July 1989 which recognized a safe harbor for swap transactions from regulation as futures or commodity option transactions under the CEA or its regulations. The Policy Statement applies to swap transactions settled in cash that (1) have individually tailored terms, (2) lack exchange-style offset and the use of a clearing organization or margin system, (3) are undertaken in conjunction with a line of business, and (4) are not marketed to the public.

Temporary Defensive Positions

An Underlying Fund may invest in short-term, high-quality debt instruments and in U.S. government securities for the following purposes: (i) to meet anticipated day-to-day operating expenses; (ii) to invest cash flow pending the adviser’s or the sub-adviser’s determination to do so within the investment guidelines and policies of an Underlying Fund; (iii) to permit an Underlying Fund to meet redemption requests; and (iv) to take a temporary defensive position. Although it is expected that an Underlying Fund will normally be invested consistent with its investment objectives and policies, the short-term instruments in which an Underlying Fund

 

44


may invest for temporary defensive purposes include (i) short-term obligations of the U.S. government and its agencies, instrumentalities, authorities or political subdivisions; (ii) other short- term debt securities; (iii) commercial paper, including master notes; (iv) bank obligations, including certificates of deposit, time deposits and bankers’ acceptances; and (v) repurchase agreements. An Underlying Fund will invest in short-term instruments that do not have a maturity of greater than one year.

Trust-Preferred Securities

Trust-preferred securities, also known as trust-issued securities, are those that have the characteristics of both debt and equity instruments. Generally, trust-preferred securities are cumulative preferred stock issued by a trust that is wholly-owned by a financial institution, usually, a bank holding company. The financial institution creates the trust and will subsequently own the trust’s common securities, which represents 3% of the trust’s assets. The remaining 97% consists of trust-preferred securities, which are then sold to investors. The trust uses the sale proceeds to purchase a subordinated debt issued by the financial institution. The financial institution uses the proceeds from the subordinated debt sale to increase its capital while the trust receives periodic interest payments from the financial institution for holding the subordinated debt. The trust will use the funds received to make dividend payments to the holders of the trust-preferred securities. The primary advantage for this particular structure is that the trust-preferred securities are treated by the financial institution as debt securities for tax purposes, and as equity for the purpose of calculating capital requirements.

In certain instances, these structures involve more than one financial institution and, accordingly, more than one trust. In this pooled offering, a separate trust is created that issues securities to investors and uses the proceeds to purchase the trust-preferred securities issued by the special-purpose trust subsidiaries of the participating financial institutions. Therefore, the trust-preferred securities held by investors are backed by the trust- preferred securities issued by the trust subsidiaries.

In identifying the risks of trust-preferred securities, the adviser and sub-advisers evaluate the financial condition of the financial institution, as the trust typically has no business operations other than to issue the trust-preferred securities. If the financial institution is unsound and defaults on interest payments to the trust, the trust will not be able to make dividend payments to an Underlying Fund.

When-Issued Securities and Delayed-Delivery Securities

In order to secure prices or yields deemed advantageous at the time an Underlying Fund may purchase or sell securities on a when-issued or a delayed-delivery basis generally 15 to 45 days after the commitment is made. An Underlying Fund may also enter into forward commitments. An Underlying Fund will enter into a when-issued transaction for the purpose of acquiring portfolio securities and not for the purpose of leverage. In such transactions, delivery of the securities occurs beyond the normal settlement periods, but no payment or delivery is made by, and no interest accrues to, an Underlying Fund prior to the actual delivery or payment by the other party to the transaction. Due to fluctuations in the value of the securities purchased on a when-issued or a delayed-delivery basis, the yields obtained on such securities may be higher or lower than the yields available in the market on the dates when the investments are actually delivered to the buyers. Similarly, the sale of securities for delayed delivery can involve the risk that the prices available in the market when delivery is made may actually be higher than those obtained in the transaction itself. An Underlying Fund will segregate on its books or those of its custodian assets consisting of cash, liquid assets and/or higher quality debt instruments in an amount equal to the amount of its when-issued and delayed-delivery commitments which will be “marked to market” daily. An Underlying Fund will only make commitments to purchase such securities with the intention of actually acquiring the securities, but an Underlying Fund may sell these securities before the settlement date if deemed an advisable investment strategy. In these cases, an Underlying Fund may realize a capital gain or loss. When an Underlying Fund engages in when-issued, forward commitment, and delayed delivery transactions, it relies on the other party to consummate the trade. Failure to do so may result in an Underlying Fund’s incurring a loss or missing an opportunity to obtain a price credited to be advantageous.

 

45


When the time comes to pay for the securities acquired on a delayed-delivery basis, an Underlying Fund will meet its obligations from the available cash flow, sale of the securities held in the segregated account, sale of other securities or, although it would not normally expect to do so, from sale of the when-issued securities themselves (which may have a market value greater or less than an Underlying Fund’s payment obligation). Depending on market conditions, an Underlying Fund could experience fluctuations in share price as a result of delayed-delivery or when-issued purchases.

Portfolio Turnover

A change in securities held in the Portfolio is known as “portfolio turnover” and may involve the payment by the Portfolio of dealer mark-ups or brokerage or underwriting commissions and other transaction costs on the sale of securities, as well as on the reinvestment of the proceeds in other securities. Portfolio turnover rate for a fiscal year is the percentage determined by dividing the lesser of the cost of purchases or proceeds from sales of portfolio securities by average of the value of portfolio securities during such year, all excluding securities whose maturities at acquisition were one year or less. The Portfolio cannot accurately predict its turnover rate, however the rate will be higher when the Portfolio finds it necessary to significantly change its portfolio to adopt a temporary defensive position or respond to economic or market events. A high turnover rate would increase expenses and may involve realization of capital gains by the Portfolio.

 

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DIRECTORS AND OFFICERS

Management of the Company

Set forth in the table below is information about each Director of the Company.

 

Name, Address and Age

  

Position(s) Held
with each Company

  

Term of Office and
Length of Time
Served(1)

  

Principal
Occupation(s)
During the Past

5 Years

  

Number of
Portfolios in Fund
Complex Overseen
by Director(2)

  

Other Board
Memberships held
by Director

Directors who are “Non-Interested Persons”

Albert E. DePrince, Jr.

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 67

   Director   

June 1998 –

Present

   Professor of Economics and Finance, Middle Tennessee State University (August 1991 – Present). Formerly, Director of Business and Economic Research Center, Middle Tennessee State University (August 1999 - August 2003).    35    Academy of Economics and Finance (February 2002 – Present); International Atlantic Economic Society (October 2002 - October 2005); Tennessee Tax Structure Commission (December 2002 - -December 2004); and Director, Business and Economic Research Center (August 1999 -August 2003).

Maria Teresa Fighetti

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 64

   Director   

April 1994 –

Present

   Retired. Formerly, Associate Commissioner/Attorney, New York City Department of Mental Health (June 1973 – October 2002).    35    None.

Russell Jones

7337 East Doubletree Ranch Rd.

Scottsdale, AZ 85258

Age 64

   Director   

December 2007 –

Present

   Senior Vice President, Chief Investment Officer and Treasurer, Kaman Corporation (1973 - Present).    34    None

Sidney Koch

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 73

   Director   

April 1994 –

Present

   Self-Employed Consultant (June 2000 – Present).    35    None.

Corine T. Norgaard

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 70

   Director   

June 1991 –

Present

   Retired. Formerly, President, Thompson Enterprises (September 2004 – September 2005); and Dean of the Barney School of Business, University of Hartford (August 1996 – June 2004).    35    Mass Mutual Corporate and Participation Investors (April 1997 – Present); Mass Mutual Premier Series (December 2004 – Present); and Mass Mutual MML Series II (December 2005 – Present).

Joseph E. Obermeyer

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 50

   Director   

January 2003 –

Present

  

President, Obermeyer & Associates, Inc.

(November 1999 – Present).

   35    None.

 

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Name, Address and Age

  

Position(s) Held
with each Company

  

Term of Office and
Length of Time
Served(1)

  

Principal
Occupation(s)
During the Past

5 Years

  

Number of
Portfolios in Fund
Complex Overseen
by Director(2)

  

Other Board
Memberships held
by Director

Directors who are “Interested Persons”

Shaun Mathews(3)(4)

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 52

   Director   

December 2007 –

Present

   President and Chief Executive Officer, ING Investments, LLC (December 2006 – Present). Formerly, Head of ING USFS Mutual Funds and Investment Products (November 2004 – December 2006). CMO, ING USFS (April 2002 – October 2004), and Head of Rollover/Payout (October 2001 – December 2003).    211    Mark Twain House & Museum (September 2002 – Present); Connecticut Forum (May 2002 – Present); Capital Community College Foundation (February 2002 – Present); ING Services Holding Company, Inc. (May 2000 – Present); Southland Life Insurance Company (June 2002 – Present); and ING Capital Corporation, LLC, ING Funds Distributor, LLC, ING Funds Services, LLC, ING Investments, LLC and ING Pilgrim Funding, Inc. (March 2006 – Present).

Fredric A. Nelson III(4)

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 51

   Director   

December 2007 -

Present

   Chief Investment Officer, ING (April 2003 – Present).    34    None.

 

(1)

Directors serve until their successors are duly elected and qualified.

 

(2) For the purposed of this table, “Fund “Fund Complex” means the following investment companies: ING GET Fund; ING Series Fund, Inc.; ING Strategic Allocation Portfolios, Inc.; ING VP Balanced Portfolio, Inc.; ING VP Intermediate Bond Portfolio; ING VP Money Market Portfolio; ING Variable Funds; ING Variable Portfolios, Inc. The number in the Fund Complex is as of March 31, 2008.

 

(3) Mr. Mathews is also a director of the following investment companies: ING Asia Pacific High Dividend Equity Income Fund, ING Equity Trust; ING Funds Trust; ING Global Equity Dividend and Premium Opportunity Fund; ING Global Advantage and Premium Opportunity Fund; ING International High Dividend Equity Income Fund; ING Investors Trust; ING Mayflower Trust; ING Mutual Funds; ING Prime Rate Trust; ING Risk Managed Natural Resources Fund; ING Senior Income Fund; ING Separate Portfolios Trust; ING Variable Insurance Trust; ING Variable Products Trust; ING Partners, Inc.. Therefore, for the purposes of this table with reference to Mr. Mathews, “Fund Complex” includes these investment companies.

 

(4) “Interested person,” as defined in the 1940 Act, by virtue of this Director’s affiliation with any of the Underlying Funds, ING or any of ING’s affiliates.

 

48


Officers

Information about the Company’s Officers are set forth in the table below:

 

Name, Address and Age

  

Position Held with the

Company

  

Term of Office and Length

of Time Served (1)

  

Principal Occupation(s) During
the Last Five Years

Shaun P. Mathews

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 52

   President and Chief Executive Officer    December 2006 – Present    President and Chief Executive Officer, ING Investments, LLC(2) and ING Funds Services, LLC 3 (December 2006 – Present). Formerly, Head of ING USFS Mutual Funds and Investment Products (November 2004 – November 2006); CMO, ING USFS (April 2002 – October 2004); and Head of Rollover/Payout (October 2001 – December 2003).

Michael J. Roland

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 50

   Executive Vice President    April 2002 – Present    Head of Mutual Fund Platform (February 2007 – Present); and Executive Vice President ING Investments, LLC(2) and ING Funds Services, LLC3 (December 2001 – Present). Formerly, Head of Product Management (January 2005 – January 2007); Chief Compliance Officer, ING Investments, LLC (2) and Directed Services LLC(4) (October 2004 – December 2005); and Chief Financial Officer and Treasurer, ING Investments, LLC (2) (December 2001 – March 2005).

Stanley D. Vyner

230 Park Avenue

New York, NY 10169

Age: 58

   Executive Vice President    March 2002 – Present    Executive Vice President, ING Investments, LLC (2) (July 2000 – Present); and Chief Investment Risk Officer, ING Investments, LLC (January 2003 – Present). Formerly, Chief Investment Officer of International Investments (August 2000 – January 2003).

Joseph M. O’Donnell

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 53

  

Chief Compliance Officer

Executive Vice President

  

November 2004 – Present

March 2006 – Present

   Chief Compliance Officer of the ING Funds (November 2004 – Present); and ING Investments, LLC(2) and Directed Services LLC(4) (March 2006 – Present); and Executive Vice President of the ING Funds (March 2006 – Present). Formerly, Chief Compliance Officer of ING Life Insurance and Annuity Company (March 2006 – December 2006); and Vice President, Chief Legal Counsel, Chief Compliance Officer and Secretary of Atlas Securities, Inc., Atlas Advisers, Inc. and Atlas Funds (October 2001 – October 2004).

Todd Modic

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 40

  

Senior Vice President,

Chief/Principal Financial Officer and Assistant Secretary

   March 2005 – Present    Senior Vice President, ING Funds Services, LLC (3) (April 2005 – Present). Formerly, Vice President, ING Funds Services, LLC (3) (September 2002 – March 2005).

Robert Terris

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 37

   Senior Vice President    June 2006 – Present    Senior Vice President, Head of Division Operations, ING Funds (May 2006 – Present), and Vice President, Head of Division Operations, ING Funds Services, LLC(3) (March 2006 – Present). Formerly, Vice President of Administration, ING Funds Services, LLC(3) (October 2001 – March 2006).

Kimberly A. Anderson

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 43

   Senior Vice President    December 2003 – Present    Senior Vice President, ING Investments, LLC (2) (October 2003 – Present). Formerly, Vice President and Assistant Secretary, ING Investments, LLC (2) (January 2001 – October 2003).

Robyn L. Ichilov

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 40

   Vice President and Treasurer    March 2002 – Present    Vice President and Treasurer, ING Funds Services, LLC (3) (November 2005 – Present).

 

49


Name, Address and Age

  

Position Held with the

Company

  

Term of Office and Length

of Time Served (1)

  

Principal Occupation(s) During
the Last Five Years

Lauren D. Bensinger

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 54

   Vice President    March 2003 – Present   

Vice President and Chief Compliance Officer, ING Funds Distributor,

LLC (5) (August 1995 – Present); and Vice President, ING Investments, LLC (2) (February 1996 – Present); and Director of Compliance, ING Investments, LLC (2) (October 2004 – Present). Formerly, Chief Compliance Officer, ING Investments, LLC (2) (October 2001 – October 2004).

Maria M. Anderson

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 50

   Vice President    September 2004 – Present    Vice President, ING Funds Services, LLC (3) (September 2004 – Present). Formerly, Assistant Vice President, ING Funds Services, LLC (3) (October 2001 – September 2004).

William Evans

10 State House Square

Hartford, Connecticut 06103

Age: 35

   Vice President    September 2007 – Present    Vice President, Head of Mutual Fund Advisory Group (April 2007 – present), Vice President, U.S. Mutual Funds and Investment Products (May 2005-April 2007), Senior Fund Analyst, U.S. Mutual Funds and Investment Products (May 2002-May 2005).

Denise Lewis

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 43

   Vice President    April 2007 – Present    Vice President, ING Funds Services, LLC (December 2006 – Present). Formerly, Senior Vice President, UMB Investment Services Group, LLC (November 2003 – December 2006); and Vice President, Wells Fargo Funds Management, LLC (December 2000 – August 2003).

Kimberly K. Springer

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 51

   Vice President    March 2006 – Present    Vice President, ING Funds Services, LLC (3) (March 2006 – Present). Formerly, Assistant Vice President, ING Funds Services, LLC (3) (August 2004 – March 2006); Manager, Registration Statements, ING Funds Services, LLC (3) (May 2003 – August 2004); Associate Partner, AMVESCAP PLC (October 2000 – May 2003); and Director of Federal Filings and Blue Sky Filings, INVESCO Funds Group, Inc. (March 1994 – May 2003).

Susan P. Kinens

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 31

   Assistant Vice President    March 2003 – Present    Assistant Vice President, ING Funds Services, LLC (3) (December 2002 – Present); and has held various other positions with ING Funds Services, LLC for more than the last five years.

Theresa K. Kelety

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 45

   Secretary    September 2003 – Present    Senior Counsel, ING Americas, U.S. Legal Services (April 2003 – Present). Formerly, Senior Associate with Shearman & Sterling (February 2000 – April 2003).

Huey P. Falgout, Jr.

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 44

   Assistant Secretary    September 2003 – Present    Chief Counsel, ING Americas, U.S. Legal Services (September 2003 – Present). Formerly, Counsel, ING Americas, U.S. Legal Services (November 2002 – September 2003).

 

(1) The Officers hold office until the next annual meeting of Directors and until their successors shall have been elected and qualified.

 

(2) ING Investments, LLC was previously named ING Pilgrim Investments, LLC. ING Pilgrim Investments, LLC is the successor in interest to ING Pilgrim Investments, Inc., which was previously known as Pilgrim Investments, Inc. and before that, was known as Pilgrim America Investments, Inc.

 

(3) ING Funds Services, LLC was previously named ING Pilgrim Group, LLC. ING Pilgrim Group, LLC is the successor in interest to ING Pilgrim Group, Inc., which was previously known as Pilgrim Group, Inc. and before that, was known as Pilgrim America Group, Inc.

 

(4) Directed Services LLC is the successor in interest to Directed Services Inc.

 

(5) ING Funds Distributor, LLC is the successor in interest to ING Funds Distributor, Inc., which was previously known as ING Pilgrim Securities, Inc., and before that, was known as Pilgrim Securities.

 

50


BOARD

The Board governs the Portfolio and is responsible for protecting the interests of shareholders. The Directors are experienced executives who oversee the Portfolio’s activities, review contractual arrangements with companies that provide services to the Portfolio, and review the Portfolio’s performance.

Frequency

The Board currently conducts regular meetings five (5) times a year. The Audit Committee also meets regularly four (4) times per year, and the remaining Committees meet as needed. In addition, the Board or the Committees may hold special meetings by telephone or in person to discuss specific matters that may require action prior to the next regular meeting. Each Committee listed below operates pursuant to a Charter approved by the Board.

Committees

The Board has established an Audit Committee whose function includes, among other things, meeting with the independent registered public accounting firm of the Portfolio to review the scope of the Portfolio’s audit, its financial statements and interim accounting controls, and to meet with management concerning these matters. The Audit Committee currently consists of Dr. DePrince, Ms. Fighetti, Mr. Jones, Mr. Koch, Dr. Norgaard and Mr. Obermeyer. Mr. Obermeyer currently serves as Chairperson and Dr. Nogaard currently serves as Vice Chairperson of the Audit Committee. The Audit Committee held four (4) meetings during the fiscal year ended December 31, 2007.

The Board has established a Contracts Committee whose function is to consider, evaluate and make recommendations to the full Board concerning contractual arrangements with service providers to the Portfolio and all other matters in which the investment adviser or any affiliated entity has an actual or potential conflict of interest with the Portfolio or its shareholders. The Contracts Committee currently consists of Dr. DePrince, Ms. Fighetti, Mr. Jones, Mr. Koch, Dr. Norgaard and Mr. Obermeyer. Mr. Koch currently serves as Chairperson and Dr. DePrince currently serves as Vice Chairperson of the Contracts Committee. The Contracts Committee held seven (7) meetings during the fiscal year ended December 31, 2007.

The Board has established a Nominating Committee for the purpose of considering and presenting to the Board candidates it proposes for nomination to fill Independent Director vacancies on the Board. The Nominating Committee currently consists of Dr. DePrince, Ms. Fighetti, Mr. Jones, Mr. Koch, Dr. Norgaard and Mr. Obermeyer. Dr. DePrince currently serves as Chairperson and there is no Vice Chairperson of the Nominating Committee. The Nominating Committee is willing to consider nominations for vacancies received from shareholders in the same manner as it reviews its own nominees. Shareholders wishing to submit a nomination for Director at an annual or special meeting of shareholders must provide such recommendation in a sufficiently timely manner (and in any event no later than the date specified for receipt of shareholder proposals in any applicable proxy statement with respect to the Portfolio) in writing to the Nominating Committee, c/o the Secretary of the Portfolio, ING Variable Products Funds, 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258. Any recommendation made by a shareholder must contain sufficient information for the Nominating Committee to make an assessment of the candidate’s suitability for the position of Independent Director. The Nominating Committee held one (1) meeting during the fiscal year ended December 31, 2007.

The Board has established a Valuation Committee for the purpose of approving fair value determinations at the time they are being considered by management. The Valuation Committee currently consists of Mr. Jones, Mr. Koch, Dr. DePrince, Ms. Fighetti, Dr. Norgaard, Mr. Nelson, Mr. Mathews and Mr. Obermeyer. There is not an elected Chairperson or Vice Chairperson of the Valuation Committee. The Valuation Committee held no meetings during the fiscal year ended December 31, 2007.

 

51


The Board has established a Compliance Committee for the purposes of (1) providing oversight with respect to compliance by the Portfolio and its service providers with applicable laws, regulations and internal policies and procedures affecting the operations of the Portfolio and (2) to serve as a committee, and in such capacity to receive, retain and act upon reports of evidence of possible material violations of applicable U.S. federal or state securities laws and breaches of fiduciary duty arising under U.S. federal or state laws. The Compliance Committee currently consists of Dr. DePrince, Ms. Fighetti, Mr. Jones, Mr. Koch, Dr. Norgaard and Mr. Obermeyer. Dr. Norgaard currently serves as Chairperson and Mr. Obermeyer serves as the Vice Chairperson of the Compliance Committee. The Compliance Committee meets as needed. The Compliance Committee held four (4) meetings during the fiscal year ended December 31, 2007.

DIRECTOR OWNERSHIP OF SECURITIES

Set forth in the table below is the dollar range of equity securities owned by each Director for the calendar year ended December 31, 2007.

 

Name of Director

  

Dollar Range of shares
in the Fund

  

Aggregate Dollar Range of Securities in all
Registered Investment Companies Overseen by
Director in Family of Investment Companies

Independent Directors

Albert E. DePrince, Jr.

   None   

Over $100,000

Over $100,000(1)

Maria T. Fighetti

   None    Over $100,000(1)

Russell H. Jones(2)

   None    $10,001-$50,000(1)

Sidney Koch

   None    Over $100,000

Corine T. Norgaard

   None    Over $100,000

Joseph E. Obermeyer

   None    Over $100,000(1)

Interested Directors

Shaun P. Mathews(2)

   None   

Over $100,000

Over $100,000(1)

Rick A. Nelson(2)

   None   

Over $100,000

Over $100,000.00(1)

 

(1) Includes the value of shares in which a Director has an indirect interest through a deferred compensation and/or a 401K plan.

 

(2) Messrs. Jones, Mathews and Nelson commenced services as Directors effective December 19, 2007.

Independent Director Ownership of Securities

Set forth in the table below is the information regarding each Independent Director’s (and his/her immediate family members) share ownership as of December 31, 2007 in securities of the Portfolio’s Adviser or principal underwriter, and the ownership of securities in an entity controlling, controlled by or under common control with the Adviser or Principal Underwriter of the Portfolio (not including registered investment companies).

 

Name of Director

   Name of
Owner and
Relationship
to Director
   Company    Title of Class    Value of
Securities
   Percentage of Class

Albert E. DePrince, Jr.

   N/A    N/A    N/A    $ —      N/A

Maria Teresa Fighetti

   N/A    N/A    N/A    $ —      N/A

Russell Jones(1)

   N/A    N/A    N/A    $ —      N/A

Sidney Koch

   N/A    N/A    N/A    $ —      N/A

Corine T. Norgaard

   N/A    N/A    N/A    $ —      N/A

Joseph E. Obermeyer

   N/A    N/A    N/A    $ —      N/A

 

(1) Mr. Jones commenced services as Director effective December 19, 2007.

 

52


DIRECTOR COMPENSATION

The Fund pays each Director who is not an interested person a pro rata share, as described below, of: (i) an annual retainer of $66,000; (ii) $7,500 for each in person meeting of the Board; (iii) $7,500 for each Contracts Committee attended in person; (iv) $3,500 per attendance of any Committee meeting (except Contracts Committee) held in conjunction with a meeting of the Board and $5,000 for meetings (except Contracts Committee) not held in conjunction with a meeting of the Board; (v) $2,500 per telephonic meeting; (vi) $45,000 annual fee to the Chairperson of the Contracts Committee, $15,000 annual fee to the Chairpersons of the Audit and Compliance Committees, $5,000 annual fee to the Chairperson of the Nominating Committee (for periods in which the Committee has operated); and (vii) $25,000 annual fee to the Vice Chairperson of the Contracts Committee and $7,500 annual fee to the Vice Chairperson of both the Audit and Compliance Committees. The pro rata share paid by the Fund is based on the Fund’s average net assets as a percentage of the average net assets of all the funds managed by the Adviser for which the Directors serve in common as Directors.

The following table sets forth information provided by the Portfolio’s adviser regarding estimated future compensation of Directors by the Portfolio for the fiscal year ended December 31, 2008 and actual compensation of Directors by other funds managed by ING Investments, LLC and its affiliates for the fiscal year ended December 31, 2007. Officers of the company and Directors who are interested persons of the company do not receive any compensation from the Portfolio or any other funds managed by ING Investments, LLC or its affiliates. None of the Directors was entitled to receive pension or retirement benefits.

 

Name of Director

   Aggregate
Compensation
from the
Portfolio
   Total
Compensation
from the
Portfolio and
ING Mutual
Funds
Complex Paid
to Directors

Corine Norgaard

   $      $ 200,000

Russell Jones(1)

   $        N/A

Sidney Koch

   $      $ 215,000

Maria Teresa Fighetti(2)

   $      $ 177,000

Albert E. DePrince, Jr.

   $      $ 199,375

Edward T. O’Dell(3)

   $      $ 185,625

Joseph E. Obermeyer(2)

   $      $ 193,125

 

(1) Mr. Jones commenced services as Director effective December 17, 2007.

 

(2) Includes amounts deferred pursuant to a deferred compensation plan during the fiscal year ended December 31, 2007, Ms. Fighetti, and Mr. Obermeyer deferred $30,000.00, and $39,600.00 respectively, of their compensation from an Underlying Funds.

 

(3) Mr. O’Dell retired as Director effective March 31, 2007.

The Board has adopted a retirement policy under with each Independent Director is subject to mandatory retirement as of the later of (i) the March 31 next occurring after he or she attains the age of 72 and (ii) the date his or her successor is elected or appointed to the Board, provided that each Independent Director under the age of 72 as of March 31, 2002 who held office as of that date may, upon the vote of the other Independent Directors, be granted up to three one-year extensions commencing as of the March 31 next occurring after he or she attains the age of 72. The Independent Directors voted to grant Mr. Koch such extension at the Board meeting held on March 13, 2008.

CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS

Control is defined by the 1940 Act to include the beneficial ownership, either directly or through one or more controlled companies, of more than 25% of the voting securities of a company. A control person may be able to take action regarding the Portfolio without the consent or approval of shareholders.

As of the date of this SAI, no officers and Directors owned any of the outstanding shares of the Portfolio. As the Portfolio had not commenced operations as of the date of this SAI, the only outstanding shares of the Portfolio are held by the adviser as the Portfolio’s sole shareholder.

Shares of the Portfolios are issued in connection with investments in VA Contracts and VLI Policies issued through separate accounts of life insurance companies and qualified pension plans.

 

53


ADVISER

The investment adviser for the Portfolio is ING Investments, which is registered with the SEC as an investment adviser and serves as an investment adviser to registered investment companies (or series thereof), as well as structured finance vehicles. ING Investments, subject to the authority of the Directors of the Portfolio, has the overall responsibility for the management of the Portfolio’s subject to delegation of certain responsibilities to another ING Investments adviser - ING Investment Management Co. (“ING IM” or “Sub-Adviser”). ING IM is the Sub-Adviser to the Portfolio. ING Investments and ING IM are indirect, wholly-owned subsidiaries of ING Groep (NYSE: ING). ING Groep is a global financial institution of Dutch origin offering banking, investments, life insurance, and retirement services to over 75 million private, corporate, and institutional clients in more than 50 countries. With a diverse workforce of about 125,000 people, ING Groep comprises a broad spectrum of prominent companies that increasingly serve their clients under the ING brand. The principal executive offices of ING Groep are located at Amstelveensesweg 500, 1081 KL Amsterdam, P.O. Box 810, 1000 AV Amsterdam, the Netherlands.

On February 26, 2001, the name of the Adviser changed from “Pilgrim Investments, Inc.” to “ING Pilgrim Investments, LLC.” On March 1, 2002, the name of the Adviser was changed from “ING Pilgrim Investments, LLC” to “ING Investments, LLC.”

ING Investments serves pursuant to an investment management agreement (“Investment Advisory Agreement”) between ING Investments and the Company on behalf of the Portfolio. The Investment Advisory Agreement requires ING Investments to oversee the provision of all investment advisory and portfolio management services for the Portfolio. Pursuant to a sub-advisory agreement between ING Investments and ING IM (“Sub-Advisory Agreement”) ING Investments has delegated certain management responsibilities to ING IM. ING Investments oversees the investment management of the Sub-Adviser for the Portfolio.

The Investment Advisory Agreement requires ING Investments to provide, subject to the supervision of the Board, investment advice and investment services to the Portfolio and to furnish advice and recommendations with respect to investment of the Portfolio’s assets and the purchase or sale of its portfolio securities. The Investment Advisory Agreement provides that ING Investments is not subject to liability to the Portfolio for any act or omission in the course of, or connected with, rendering services under the Investment Advisory Agreement, except by reason of willful misfeasance, bad faith, negligence or reckless disregard of its obligations and duties under the Investment Advisory Agreement.

After an initial term of two years, the Investment Advisory Agreement and Sub-Advisory Agreement continues in effect from year to year so long as such continuance is specifically approved at least annually by: (a) the Board; or (b) the vote of a “majority” (as defined in the 1940 Act) of the Fund’s outstanding shares voting as a single class; provided, that in either event the continuance is also approved by at least a majority of the Board who are not “interested persons” (as defined in the 1940 Act) of ING Investments or ING IM by vote cast in person at a meeting called for the purpose of voting on such approval.

Please see the Portfolio’s annual shareholder report to be dated December 31, 2008 for information regarding the basis of the Board’s approval of the investment advisory and investment sub-advisory relationships.

The Investment Advisory Agreement may be terminated without penalty with not less than 60 days’ notice by the Board or by a vote of the holders of a majority of the Portfolio’s outstanding shares voting as a single class, or upon not less than 60 days’ notice by ING Investments. The Investment Advisory Agreement will terminate automatically in the event of its “assignment” (as defined in the 1940 Act).

 

54


Advisory Fees

ING Investments bears the expense of providing its services and pays the fees of the Sub-Adviser. For its services, the Portfolio pays ING Investments a monthly fee in arrears equal to the following as a percentage of the Portfolio’s average daily net assets during the month:

 

Portfolio(1)

   Annual Advisory Fee  

ING Global Equity Option

   0.10 %

 

(1) The Portfolio may seek to achieve a return on uninvested cash or for other reasons, the Portfolio may invest its assets in ING Institutional Prime Money Market Fund and/or one or more other money market funds advised by ING affiliates (“ING Money Market Funds”). The Portfolio’s purchase of shares of an ING Money Market Fund will result in the Portfolio paying a proportionate share of the expenses of the ING Money Market Fund. The Portfolio’s Adviser will waive its fee in an amount equal to the advisory fee received by the adviser of the ING Money Market Fund in which the Portfolio invests resulting from the Portfolio’s investment into the ING Money Market Fund.

Total Advisory Fees Paid

Because the Portfolio had not commenced operations as of the date of this SAI, no Advisory Fees were paid by the Portfolio as of the fiscal year ended December 31, 2007.

SUB-ADVISER

The Investment Advisory Agreement for the Portfolio provides that ING Investments, with the approval of the Portfolio’s Board, may select and employ investment advisers to serve as sub-advisers for the Portfolio, and shall monitor the Sub-Adviser’s investment programs and results, and coordinate the investment activities of the Sub-Adviser to ensure compliance with regulatory restrictions. ING Investments pays all of its expenses arising from the performance of its obligations under the Investment Management Agreement, including all fees payable to the Sub-Adviser, executive salaries and expenses of the Directors and officers of the Portfolio who are employees of ING Investments or its affiliates and office rent of the Portfolio. The Sub-Adviser pays all of its expenses arising from the performance of its obligations under the Sub-Advisory Agreement.

Subject to the expense reimbursement provisions described in this SAI, other expenses incurred in the operation of the Portfolio are borne by the Portfolio, including, without limitation, investment advisory fees; brokerage commissions; interest; legal fees and expenses of attorneys; fees of independent registered public accounting firms, transfer agents and dividend disbursing agents, accounting agents, and custodians; the expense of obtaining quotations for calculating the Portfolio’s NAV; taxes, if any, and the preparation of the Portfolio’s tax return; cost of stock certificates and any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares; fees and expenses of registering and maintaining the registration of shares of the Portfolio under federal and state laws and regulations, expenses of printing and distributing reports, notices and proxy materials to existing shareholders; expenses of printing and filing reports and other documents filed with governmental agencies; expenses of annual and special shareholder meetings; expenses of printing and distributing prospectuses and statements of additional information to existing shareholders; fees and expenses of Directors of the Portfolio who are not employees of the Adviser or any Sub-Adviser, or their affiliates; membership dues in trade associations; insurance premiums; and extraordinary expenses such as litigation expenses.

The Sub-Advisory Agreement may be terminated without payment of any penalties by the Adviser, the Directors, on behalf of the Portfolio, or the shareholders of the Portfolio upon 60 days’ prior written notice. Otherwise, the Sub-Advisory Agreement will remain in effect from year to year, subject to the annual approval of the appropriate Board, on behalf of the Portfolio, or the vote of a majority of the outstanding voting securities, and the vote, cast in person at a meeting duly called and held, of a majority of the Directors, on behalf of the Portfolio who are not parties to the Sub-Advisory Agreement or “interested persons” (as defined in the 1940 Act) of any such party.

Pursuant to the Sub-Advisory Agreement between the Adviser and ING IM, ING IM acts as Sub-Adviser to the Portfolio. In this capacity, ING IM, subject to the supervision and control of the Adviser and the Board, on behalf of the Portfolio, manages the Portfolio’s portfolio investments consistently with the Portfolio’s investment objective, and executes any of the Portfolio’s investment policies that it deems appropriate to utilize from time to time. Fees payable under the Sub-Advisory Agreement accrue daily and are paid monthly by the Adviser. ING IM’s address is 230 Park Avenue, New York, NY 10169. ING IM is a wholly-owned subsidiary of ING Groep.

 

55


The Portfolio and the Adviser have received an exemptive order from the SEC that allows the Adviser to enter into new investment sub-advisory agreements with a non-affiliated sub-adviser and to materially amend the Sub-Advisory agreements with the approval of the Portfolio’s Board, but without shareholder approval. In accordance with the exemptive order received from the SEC, an information statement describing any sub-adviser changes will be provided to shareholders within 90 days of the change. The Adviser remains responsible for providing general management services to the Portfolio, including overall supervisory responsibility for the general management services to the Portfolio, including overall supervisory responsibility for the general management and investment of the Portfolio’s assets, and, subject to the review and approval of the Board, will among other things: (i) set the Portfolio’s overall investment strategies; (ii) evaluate, select and recommend a sub-adviser to manage all or part of the Portfolio’s assets; (iii) when appropriate, allocate and reallocate the Portfolio’s assets among multiple sub-advisers; (iv) monitor and evaluate the investment performance of the sub-advisers and (v) implement procedures reasonably designed to ensure that the sub-adviser complies with the Portfolio’s investment objectives, policies and restrictions.

Sub-Advisory Fees

As compensation to the Sub-Adviser for its services, ING Investments pays the Sub-Adviser a monthly fee in arrears equal to the following as a percentage of the Portfolio’s average daily net assets managed during the month:

 

Portfolio(1)

   Sub-Advisory Fee  

ING Global Equity Option

   0.045 %

 

(1) The Portfolio may seek to achieve a return on uninvested cash or for other reasons, the Portfolio may invest its assets in ING Institutional Prime Money Market Fund and/or one or more other money market funds advised by ING affiliates (“ING Money Market Funds”). The Portfolio’s purchase of shares of an ING Money Market Fund will result in the Portfolio paying a proportionate share of the expenses of the ING Money Market Fund. The Portfolio’s Sub-Adviser will waive its fee in an amount equal to the sub-advisory fee received by the sub-adviser of the ING Money Market Fund in which the Portfolio invests resulting from the Portfolio’s investment into the ING Money Market Fund.

Sub-Advisory Fees Paid

The Portfolio had not commenced operations as of the date of this SAI. Therefore, no sub-advisory fees were paid for the fiscal year ended December 31, 2007.

Portfolio Manager

Other Accounts Managed

The following table shows the number of accounts and total assets in the accounts managed by the portfolio manager as of June 30, 2008.

 

Portfolio
Manager

   Registered Investment
Companies
   Other Pooled Investment
Vehicles
   Other Accts
   Number of
Accounts
   Total
Assets
   Number of
Accounts
   Total
Assets
   Number of
Accounts (1)
   Total
Assets

Paul Zemsky

                 

 

(1)          of these Accounts with Total Assets of                      have advisory fee that is also based on the performance of the Account.

 

56


Potential Material Conflicts of Interest

The portfolio manager may be subject to potential conflicts of interest because the portfolio manager is responsible for other accounts in addition to the Portfolio. These other accounts may include, among others, other mutual funds, separately managed advisory accounts, commingled trust accounts, insurance separate accounts, wrap fee programs and hedge funds. Potential conflicts may arise out of the implementation of differing investment strategies for the portfolio manager’s various accounts, the allocation of investment opportunities among those accounts or differences in the advisory fees paid by the portfolio manager’s accounts.

A potential conflict of interest may arise as a result of the portfolio manager’s responsibility for multiple accounts with similar investment guidelines. Under these circumstances, a potential investment may be suitable for more than one of the portfolio managers’ accounts, but the quantity of the investment available for purchase is less than the aggregate amount the accounts would ideally devote to the opportunity. Similar conflicts may arise when multiple accounts seek to dispose of the same investment.

The portfolio manager may also manage accounts whose objectives and policies differ from that of the portfolio. These differences may be such that under certain circumstances, trading activity appropriate for one account managed by the portfolio manager may not be appropriate for the Portfolio. For example, if an account were to sell a significant position in a security, which could cause the market price of that security to decrease, while the Portfolio maintained its position in that security.

A potential conflict may arise when the portfolio manager is responsible for accounts that have different advisory fees – the difference in the fees may create an incentive for the portfolio manager to favor one account over another, for example, in terms of access to particularly appealing investment opportunities. This conflict may be heightened where an account is subject to a performance-based fee.

As part of its compliance program, ING IM has adopted policies and procedures reasonably designed to address the potential conflicts of interest described above.

Finally, a potential conflict of interest may arise because the investment mandates for certain other accounts, such as hedge funds, may allow extensive use of short sales, which, in theory, could allow them to enter into short positions in securities where other accounts hold long positions. ING IM has policies and procedures reasonably designed to limit and monitor short sales by the other accounts to avoid harm to the Portfolio.

Compensation

Compensation consists of (a) fixed base salary; (b) bonus which is based on ING IM performance, one and three year pre-tax performance of the accounts the portfolio managers are primarily and jointly responsible for relative to account benchmarks and peer universe performance, and revenue growth of the accounts they are responsible for; and, in certain instances, (c) long-term equity awards tied to the performance of the parent company, ING Groep.

The Portfolio Manager is also eligible to participate in an annual cash incentive plan. The overall design of the annual incentive plan was developed to tie pay to both performance and cash flows, structured in such a way as to drive performance and promote retention of top talent. As with base salary compensation, individual target awards are determined and set based on external market data and internal comparators. Investment performance is measured on both relative and absolute performance in all areas. ING IM has defined indices (                                 Index for Mr. Zemsky as Portfolio Manager to the Portfolio) and where applicable, peer groups including but not limited to Russell, Morningstar, Lipper and Lehman and set performance goals to appropriately reflect requirements for each investment team. The measures for each team are outlined on a “scorecard” that is reviewed on an annual basis. These scorecards measure investment performance versus peer groups over one- and three-year periods and year-to-date net cash flow (changes in the accounts’ net assets not attributable to changes in the value of the accounts’ investments) for all accounts managed by each team. The results for overall ING IM scorecards are calculated on an asset weighted performance basis of the individual team scorecards.

 

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Investment professionals’ performance measures for bonus determinations are weighted by 25% being attributable to the overall ING IM performance and 75% attributable to their specific team results (60% investment performance and 15% net cash flow).

Based on job function, internal comparators and external market data, portfolio managers participate in the ING Long-Term Incentive Plan. Plan awards are based on the current year’s performance as defined by the ING IM component of the annual incentive plan. The awards vest in three years and are paid in a combination of ING restricted stock, stock options and restricted performance units.

Portfolio managers whose base salary compensation exceeds a particular threshold may participate in ING IM’s deferred compensation plan. The plan provides an opportunity to invest deferred amounts of compensation in mutual funds, ING IM stock or at an annual fixed interest rate. Deferral elections are done on an annual basis and the amount of compensation deferred is irrevocable.

Portfolio Manager Ownership of Securities

The following table shows the dollar range of shares of the Portfolio owned by the portfolio manager as of June 30, 2008, including investments by their immediate family members and amounts invested through retirement and deferred compensation plans.

 

Portfolio Manager

  

Dollar Range of Securities of the Portfolio Owned

Paul Zemsky

   None

ADMINISTRATOR

ING Funds Services, LLC (“ING Funds Services” or “Administrator”) serves as administrator for the Portfolio pursuant to an Administration Agreement. The Administrator is an affiliate of ING Investments. The address of the Administrator is 7337 East Doubletree Ranch Road, Scottsdale, AZ 85258. Subject to the supervision of the Board, the Administrator provides the overall business management and administrative services necessary to properly conduct the Portfolio’s business, except for those services performed by ING Investments under the Investment Advisory Agreements, the Sub-Adviser under the Sub-Advisory Agreement, the custodian under the Custodian Agreement, the transfer agent under the Transfer Agency Agreement, and such other service providers as may be retained by the Portfolio from time to time. The Administrator acts as a liaison among these service providers to the Portfolio. The Administrator is also responsible for monitoring the Portfolio in compliance with applicable legal requirements and for investment policies and restrictions of the Portfolio.

The Administration Agreement may be cancelled by the Board, without payment of any penalty, by a vote of a majority of the Directors upon sixty (60) days’ written notice to the Administrator, or by the Administrator at any time, without the payment of any penalty, upon sixty (60) days’ written notice to the Company.

Administration Fees Paid

For its services, the Administrator is entitled to receive from the Portfolio a fee at an annual rate of 0.10% of the Portfolio’s average daily net assets.

The Portfolio had not commenced operations as of the date of this SAI. Therefore, no advisory fees were paid for the fiscal year ended December 31, 2007.

 

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EXPENSE LIMITATION AGREEMENT

ING Investments has entered into an expense limitation agreement with the Portfolio, pursuant to which ING Investments has agreed to waive or limit its fees. In connection with this agreement and certain U.S. tax requirements, ING Investments will assume other expenses so that the total annual ordinary operating expenses of the Portfolio which exclude interest, taxes, brokerage commissions, acquired fund fees and expenses, other investment-related costs, extraordinary expenses such as litigation, other expenses not incurred in the ordinary course of the Portfolio’s business, and expenses of any counsel or other persons or services retained by the Portfolio’s Directors who are not “interested persons” (as defined in the 1940 Act) of ING Investments do not exceed the expense limitation shown on the following table:

 

Portfolio

   Class S  

ING Global Equity Option

   0.55 %

The Portfolio may at a later date reimburse ING Investments for investment management fees waived or reduced and other expenses assumed by ING Investments during the previous thirty-six (36) months, but only if, after such reimbursement, the Portfolio’s expense ratio does not exceed the percentage described above. ING Investments will only be reimbursed for fees waived or expenses assumed after the effective date of the expense limitation agreements.

The expense limitation agreement provides that the expense limitations shall continue until May 1, 2010. The expense limitation agreements are contractual and, after the initial term, shall renew automatically for one-year terms unless the Adviser provides written notice of termination of the agreement to lead Independent Director upon thirty (30) days’ prior to the end of the then-current term or upon termination of the Investment Management Agreement. The Expense Limitation Agreement may also be terminated by the Portfolio, without payment of any penalty, upon ninety (90) days’ prior written notice to the Adviser at its principal place of business.

CUSTODIAN

The cash and securities owned by the Portfolio are held by The Bank of New York Mellon Corporation (formerly, The Bank of New York, Inc.), One Wall Street, New York, New York 10286, as custodian, which takes no part in the decisions relating to the purchase or sale of the Portfolio’s securities.

The custodian does not participate in determining the investment policies of the Portfolio nor in deciding which securities are purchased or sold by the Portfolio. The Portfolio may, however, invest in obligations of the custodian and may purchase or sell securities from or to the custodian.

TRANSFER AGENT

DST Systems, Inc., 330 West 9th Street, Kansas City, Missouri 64105-1514 serves as the transfer agent and dividend-paying agent to the Portfolio.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

KPMG LLP serves as the independent registered public accounting firm to the Portfolio. KPMG LLP provides audit services, tax return preparation and assistance and consultation in connection with review of SEC filings. KPMG LLP is located at 99 High Street, Boston, MA 02110.

LEGAL COUNSEL

Legal matters for the Portfolio are passed upon by Goodwin Procter LLP, Exchange Place, 53 State Street, Boston, MA 02109.

 

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PRINCIPAL UNDERWRITER

Shares of the Portfolio are offered on a continuous basis. The Portfolio’s principal underwriter is ING Funds Distributor, LLC, 7337 Doubletree Ranch Road, Scottsdale, Arizona 85258. ING Funds Distributor, LLC is a Delaware Corporation and is an indirect wholly-owned subsidiary of ING Groep and an affiliate of ING Investments, LLC. As principal underwriter for the Portfolio, ING Funds Distributor, LLC has agreed to use its best efforts to distribute the shares of the Portfolio.

DISTRIBUTION SERVICING ARRANGEMENTS

Shares are distributed by the Distributor. The Class S shares of the Portfolio are subject to a distribution plan (“Distribution Plan”) adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Class S Distribution Plan, the Distributor is paid an annual distribution fee at the rate of 0.25% of the average daily net assets regardless of expenses of the Class S shares of the Portfolio. The distribution fee may be used to cover expenses incurred in promoting the sale of Class S shares, including (a) the costs of printing and distributing to prospective investors Prospectuses, statements of additional information and sale literature; (b) payments to investment professionals and other persons who provide support services in connection with the distribution of shares; (c) overhead and other distribution related expenses; and (d) accruals for interest on the amount of the forgoing expenses that exceed the distribution fee. The Distributor may re-allow all or a portion of these fees to broker-dealers entering into selling agreements with it, including its affiliates.

The Distributor is required to report in writing to the Board at least quarterly on the amounts and purpose of any payment made under the Distribution Plan and any related agreements, as well as to furnish the Board with such other information as may reasonably be requested in order to enable the Board to make an informed determination whether the Plan should be continued. The terms and provisions of the Plan relating to required reports, term and approval are consistent with the requirements of Rule 12b-1.

The Distribution Plan continues from year to year, provided such continuance is approved annually by a vote of the Board, including a majority of Independent Directors. The Distribution Plan may not be amended to increase the amount to be spent for the services provided by the Distributor without shareholder approval. All amendments to the Distribution Plan must be approved by the Board in the manner described above. The Distribution Plan may be terminated at any time, without penalty, by a vote of a majority of the Independent Directors upon not more than thirty (30) days notice to any other party to the Distribution Plan. All persons who are under common control of the Portfolio could be deemed to have a financial interest in the Plan. No other interested person of the Portfolio has a financial interest in the Plan.

In approving the Distribution Plan, the Board considered all the features of the distribution system, including 1) the advantages to the shareholders of economies of scale resulting from growth in the Portfolio’s assets and potential continued growth, 2) the services provided to the Portfolio and its shareholders by the Distributor, and 3) the Distributor’s shareholder distribution-related expenses and costs.

ING Investments and the Sub-Adviser or their affiliates may make payments to securities dealers that enter into agreements providing the Distributor with access to registered representatives of the securities dealer.

SHAREHOLDER SERVICE AND DISTRIBUTION ARRANGEMENTS

The Class S shares of the Portfolio are subject to a shareholder service and/or distribution plan (“Class S Plan”) adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Class S Plan, the Distributor is paid an annual shareholder service and/or distribution fee at the rate of 0.25% of the average daily net assets regardless of expenses of the Class S shares of the Portfolio. The shareholder service and/or distribution fees may be used to pay securities dealers (including the Distributor) and other financial institutions, plan administrators and organizations for services (“Services”) including, but not limited to: acting as the shareholder of record; processing purchase and redemption orders; maintaining participant account records; answering participant questions regarding the Portfolio; facilitation of the tabulation of shareholder votes in the event of a meeting of Portfolio shareholders; the conveyance of information relating to shares purchased and redeemed and share

 

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balances to the Portfolio and to service providers, provision of support services including providing information about the Portfolio and answering questions concerning the Portfolio, and provision of other services as may be agreed upon from time to time. The shareholder service and/or distribution fee may be used to cover expenses incurred in promoting the sale of Class S shares, including (a) the costs of printing and distributing to prospective investors Prospectuses, statements of additional information and sale literature; (b) payments to investment professionals and other persons who provide support services in connection with the distribution of shares; (c) overhead and other distribution related expenses; and (d) accruals for interest on the amount of the forgoing expenses that exceed the distribution fee. The Distributor may re-allow all or a portion of these fees to broker-dealers entering into selling agreements with it, including its affiliates.

The Distributor is required to report in writing to the Board at least quarterly on the amounts and purpose of any payment made under the Class S Plan and any related agreements, as well as to furnish the Board with such other information as may reasonably be requested in order to enable the Board to make an informed determination whether the Class S Plan should be continued. The terms and provisions of the Class S Plan relating to required reports, term and approval are consistent with the requirements of Rule 12b-1.

The Class S Plan continues from year to year, provided such continuance is approved annually by a vote of the Board, including a majority of Independent Directors. The Class S Plan may not be amended to increase the amount to be spent for the services provided by the Distributor without shareholder approval. All amendments to the Class S Plan must be approved by the Board in the manner described above. The Class S Plan may be terminated at any time, without penalty, by a vote of a majority of the Independent Directors upon not more than thirty (30) days notice to any other party to the Class S Plan. All persons who are under common control of the Portfolio could be deemed to have a financial interest in the Plan. No other interested person of the Portfolio has a financial interest in the Plan.

In approving the Class S Plan, the Board considered all the features of the distribution system, including 1) the advantages to the shareholders of economies of scale resulting from growth in the Portfolio’s assets and potential continued growth, 2) the services provided to the Portfolio and its shareholders by the Distributor, and 3) the Distributor’s shareholder distribution-related expenses and costs.

ING Investments and the Sub-Adviser or their affiliates may make payments to securities dealers that enter into agreements providing the Distributor with access to registered representatives of the securities dealer.

Distribution and/or Shareholder Service (12b-1) Fees Paid

The Portfolio had not commenced operations as of the date of this SAI. Therefore, no fees were paid under the Distribution Plan and/or Class S Plan.

DISCLOSURE OF THE PORTFOLIO’S PORTFOLIO SECURITIES

The Portfolio is required by the SEC to file their complete portfolio holdings schedule with the SEC on a quarterly basis. This schedule is filed with the Portfolio’s annual and semi-annual shareholder reports on Form N-CSR for the second and fourth fiscal quarters and on Form N-Q for the first and third fiscal quarters.

In addition, the Portfolio post its portfolio holdings schedule on ING’s website on a month-end basis and are available 30 days after the end of the previous calendar month. The portfolio holdings schedule is as of the preceding month-end (e.g., the Portfolio will post its month-end June 30 holdings on July 30).

The Portfolio also compiles a list composed of their ten largest holdings (“Top Ten”). This information is produced monthly, and is made available on ING’s website, on the tenth day of each month. The Top Ten holdings information is as of the last day of the previous month.

 

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Investors (both individual and institutional), financial intermediaries that distribute the Portfolio’s shares and most third parties may receive the Portfolio annual or semi-annual shareholder reports, or view them on ING’s website, along with the Portfolio’s portfolio holdings schedule. The Top Ten lists are also provided in quarterly Portfolio descriptions that are included in the offering materials of variable life insurance products and variable annuity contracts.

Other than in regulatory filings or on ING’s website, the Portfolio may provide its complete portfolio holdings to certain unaffiliated third-parties and affiliates when the Portfolio has a legitimate business purpose for doing so. Unless otherwise noted below, the Portfolio’s disclosure of its portfolio holdings will be on an as-needed basis, with no lag time between the date of which the information is requested and the date the information is provided. Specifically, the Portfolio’s disclosure of their portfolio holdings may include disclosure:

 

   

To the Portfolio’s independent registered public accounting firm, named herein, for use in providing audit opinions;

 

   

To financial printers for the purpose of preparing the Portfolio’s regulatory filings;

 

   

For the purpose of due diligence regarding a merger or acquisition;

 

   

To a new adviser or sub-adviser prior to the commencement of its management of the Portfolio;

 

   

To rating and ranking agencies such as Bloomberg, Morningstar, Lipper and S&P’s, such agencies may receive more raw data for the Portfolio than is posted on the Portfolio’s website;

 

   

To consultants for use in providing asset allocation advice in connection with investments by affiliated funds-of-funds in the Portfolio;

 

   

To service providers, such as proxy voting and class action services providers, on a daily basis, in connection with their providing services benefiting the Portfolio; and

 

   

To a third party for purposes of effecting in-kind redemptions of securities to facilitate orderly redemption of portfolio assets and minimal impact on remaining Portfolio’s shareholders.

In all instances of such disclosure the receiving party, by agreement, is subject to a duty of confidentiality, including a duty not to trade on such information.

The Portfolio’s Board has adopted policies and procedures (“Policies”) designed to ensure that disclosure of information regarding the Portfolio’s portfolio securities is in the best interests of Portfolio shareholders, including procedures to address conflicts between the interests of the Portfolio’s shareholders, on the one hand, and those of the Portfolio’s adviser, sub-advisers, principal underwriter or any affiliated person of the Portfolio, its adviser, or its principal underwriter, on the other. Such Policies authorize the Portfolio’s administrator to implement the Board’s Policies and direct the administrator to document the expected benefit to shareholders. Among other considerations, the administrator is directed to consider whether such disclosure may create an advantage for the recipient or its affiliates or their clients over that of the Portfolio’s shareholders. Similarly, the administrator is directed to consider, among other things, whether the disclosure of portfolio holdings creates a conflict between the interests of shareholders and the interests of the adviser, sub-adviser, principal underwriter and their affiliates. The Board has authorized the senior officers of the Portfolio’s administrator to authorize the release of the Portfolio’s portfolio holdings, as necessary, in conformity with the foregoing principles and to monitor for compliance with the Policies. The Portfolio’s administrator reports quarterly to the Board regarding the implementation of the Policies.

The Portfolio has the following ongoing arrangements with certain third parties to provide the Portfolio’s portfolio holdings:

 

Party

  

Purpose

  

Frequency

  

Time Lag Between Date of
Information and Date Information
Released

Institutional Shareholder

Services, Inc.

  

Proxy Voting & Class Action

Services

   Daily    None

Charles River Development

   Compliance    Daily    None

 

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All of the arrangements in the table above are subject to the Policies adopted by the Board to ensure such disclosure is for a legitimate business purpose and is in the best interests of the Portfolio and its shareholders. The Portfolio’s Board must approve any material change to the Policies. The Policies may not be waived, or exceptions made, without the consent of ING’s Legal Department. All waivers and exceptions involving the Portfolio will be disclosed to the Portfolio’s Board no later than its next regularly scheduled quarterly meeting. No compensation or other consideration may be received by the Portfolio, the adviser, or any other party in connection with the disclosure of portfolio holdings in accordance with the Policies.

PURCHASE AND REDEMPTION OF SHARES

Shares of the Portfolio are purchased and redeemed at the NAV next determined after receipt of a purchase or redemption order in acceptable form as described in the Portfolio’s Prospectuses. The value of shares redeemed may be more or less than the shareholder’s costs, depending upon the market value of the portfolio securities at the time of redemption.

Redemption of shares, or payment, may be suspended at times (a) when the New York Stock Exchange (“NYSE”) is closed for other than customary weekend or holiday closings, (b) when trading on NYSE is restricted, (c) when an emergency exists, as a result of which disposal by the Portfolio of securities owned by it is not reasonably practicable, or it is not reasonably practicable for the Portfolio fairly to determine the value of its net assets, or during any other period when the SEC, by order, so permits; provided that applicable rules and regulations of the SEC shall govern as to whether the conditions prescribed in (b) or (c) exist. The NYSE is not open for business on the following holidays (nor on the nearest Monday or Friday if the holiday falls on a weekend), on which the Portfolio will not redeem shares: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

If you invest in the Portfolio through a financial intermediary, you may be charged a commission or transaction fee by the financial intermediary for the purchase and sale of Portfolio shares.

Shares of the Portfolio are offered, on a continuous basis, to both registered and unregistered separate accounts of affiliated Participating Insurance Companies to Portfolio VA Contracts and VLI Policies. Each separate account contains divisions, each of which corresponds to a Portfolio. Net purchase payments under the VA Contracts are placed in one or more of the divisions of the relevant separate account and the assets of each division are invested in the shares of the Portfolio which corresponds to that division. Each separate account purchases and redeems shares of the Portfolio for its divisions as NAV without sales or redemption charges.

The Portfolio may offer the shares of the Portfolio to certain pension and retirement plans qualified under the Code. The relationships of pension and retirement plans and pension and retirement plan participants to the Portfolio would be subject, in part, to the provisions of the individual pension and retirement plans and applicable law. Accordingly, such relationships could be different from those described in the Prospectus for separate accounts and owners of VA Contracts and VLI Policies, in such areas, for example, as tax matters and voting privileges.

The Board monitors for possible conflict among separate accounts (and will do so for pension and retirement plans) buying shares of the Portfolio. Conflicts could develop for a variety of reasons. For example, differences in treatment under tax and other laws or the failure by a separate account to comply with such laws could cause a conflict. To eliminate a conflict, the Board may require a separate account or Plan to withdraw its participation in the Portfolio. The Portfolio’s NAV could decrease if it had to sell investment securities to pay redemption proceeds to a separate account (or pension and retirement plan) withdrawing because of a conflict.

 

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The Portfolio ordinarily affects orders to purchase or redeem its shares that are based on transactions under VLI Policies or VA Contracts (e.g. purchase or premium payments, surrender or withdrawal requests, etc.) at the Portfolio’s NAV per share next computed on the day on which the separate account processes such transactions. The Portfolio effects order to purchase or redeem its shares that are not based on such transactions at the Portfolio’s NAV per share next computed on the day on which the Portfolio receives the orders.

Please refer to the appropriate separate account prospectus related to your VA Contract for more information regarding the contract.

PORTFOLIO TRANSACTIONS

The Adviser or the Sub-Adviser for the Portfolio places orders for the purchase and sale of investment securities for the Portfolio, pursuant to authority granted in the Advisory Agreement or Sub-Advisory Agreements. Subject to policies and procedures approved by the Portfolio’s Board, the Adviser or the Sub-Adviser has discretion to make decisions relating to placing these orders, including, where applicable, selecting the brokers or dealers that will execute the purchase and sale of investment securities, negotiating the commission or other compensation paid to the broker or dealer executing the trade, or using an electronic trading network (“ECN”) or alternative trading system (“ATS”).

In situations where the Sub-Adviser resigns or the Adviser otherwise assumes day to day management of the Portfolio pursuant to its Advisory Agreement with the Portfolio, the Adviser will perform the services described herein as being performed by the Sub-Adviser.

How Securities Transactions are Effected

Purchases and sales of securities on a securities exchange (which include most equity securities) are effected through brokers who charge a commission for their services. In transactions on securities exchanges in the United States, these commissions are negotiated, while on many foreign securities exchanges commissions are fixed. Securities traded in the over-the-counter markets (such as fixed-income securities and some equity securities) are generally traded on a “net” basis with market makers acting as dealers; in these transactions, the dealers act as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. Transactions in certain over-the counter securities also may be effected on an agency basis, when, in the Adviser’s or the Sub-Adviser’s opinion, the total price paid (including commission) is equal to or better than the best total price available from a market maker. In underwritten offerings, securities are usually purchased at a fixed price, which includes an amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid. The Adviser or the Sub-Adviser may also place trades using an ECN or ATS.

How the Sub-Adviser Selects Broker-Dealers

The Adviser or the Sub-Adviser has a duty to seek to obtain best execution of the Portfolio’s orders, taking into consideration a full range of factors designed to produce the most favorable overall terms reasonably available under the circumstances. In selecting brokers and dealers to execute trades, the Adviser or a Sub-Adviser may consider both the characteristics of the trade and the full range and quality of the brokerage services available from eligible broker-dealers. This consideration often involves qualitative as well as quantitative judgments. Factors relevant to the nature of the trade may include, among others, price (including the applicable brokerage commission or dollar spread), the size of the order, the nature and characteristics (including liquidity) of the market for the security, the difficulty of execution, the timing of the order, potential market impact, and the need for confidentiality, speed, and certainty of execution. Factors relevant to the range and quality of brokerage services available from eligible brokers and dealers may include, among others, the firms’ execution, clearance, settlement, and other operational facilities; willingness and ability to commit capital or take risk in positioning a block of securities, where necessary; special expertise in particular securities or markets; ability to provide liquidity, speed and anonymity; the nature and quality of other

 

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brokerage and research services provided to the Adviser or the Sub-Adviser (consistent with the “safe harbor” described below); and the firms’ general reputation, financial condition and responsiveness to the Adviser or the Sub-Adviser, as demonstrated in the particular transaction or other transactions. Subject to its duty to seek best execution of the Portfolio’s orders, the Adviser or the Sub-Adviser may select broker-dealers that participate in commission recapture programs that have been established for the benefit of the Portfolio. Under these programs, the participating broker-dealers will return to the Portfolio (in the form of a credit to the Portfolio) a portion of the brokerage commissions paid to the broker-dealers by the Portfolio. Theses credits are used to pay certain expenses of the Portfolio. These commission recapture payments benefit the Portfolios, and not the Adviser or the Sub-Adviser.

The Safe Harbor for Soft Dollar Practices

In selecting broker-dealers to execute a trade for the Portfolio, the Adviser or the Sub-Adviser may consider the nature and quality of brokerage and research services provided to the Adviser or the Sub-Adviser as a factor in evaluating the most favorable overall terms reasonably available under the circumstances. As permitted by Section 28(e) of the 1934 Act, the Adviser or the Sub-Adviser may cause the Portfolio to pay a broker-dealer a commission for effecting a securities transaction for the Portfolio that is in excess of the commission which another broker-dealer would have charged for effecting the transaction, if the Adviser or the Sub-Adviser makes a good faith determination that the broker’s commission paid by the Portfolio is reasonable in relation to the value of the brokerage and research services provided by the broker-dealer, viewed in terms of either the particular transaction or the Adviser’s or the Sub-Adviser’s overall responsibilities to the Portfolio and its other investment advisory clients. The practice of using a portion of the Portfolio’s commission dollars to pay for brokerage and research services provided to the Adviser or the Sub-Adviser is sometimes referred to as “soft dollars.” Section 28(e) is sometimes referred to as a “safe harbor,” because it permits this practice, subject to a number of restrictions, including the Adviser’s or the Sub-Adviser’s compliance with certain procedural requirements and limitations on the type of brokerage and research services that qualify for the safe harbor.

Brokerage and Research Products and Services Under the Safe Harbor – Research products and services may include, but are not limited to, general economic, political, business and market information and reviews, industry and company information and reviews, evaluations of securities and recommendations as to the purchase and sale of securities, financial data on a company or companies, performance and risk measuring services and analysis, stock price quotation services, computerized historical financial databases and related software, credit rating services, analysis of corporate responsibility issues, brokerage analysts’ earning estimates, computerized links to current market data, software dedicated to research, and portfolio modeling. Research services may be provided in the form of reports, computer-generated data feeds and other services, telephone contacts, and personal meetings with securities analysts, as well as in the form of meetings arranged with corporate officers and industry spokespersons, economists, academics and governmental representatives. Brokerage products and services assist in the execution, clearance and settlement of securities transactions, as well as functions incidental thereto, including but not limited to related communication and connectivity services and equipment, and software related to order routing, market access, algorithmic trading, and other trading activities. On occasion, a broker-dealer may furnish the Adviser or the Sub-Adviser with a service that has a mixed use (that is, the service is used both for brokerage and research activities that are within the safe harbor and for other activities). In this case, the Adviser or the Sub-Adviser is required to reasonably allocate the cost of the service, so that any portion of the service that does not qualify for the safe harbor is paid for by the Adviser or the Sub-Adviser from its own funds, and not by portfolio commissions paid by the Portfolio.

Benefits to the Adviser or the Sub-Adviser - Research products and services provided to the Adviser or the Sub-Adviser by broker-dealers that effect securities transactions for the Portfolio may be used by the Adviser or the Sub-Adviser in servicing all of its accounts. Accordingly, not all of these services may be used by the Adviser or the Sub-Adviser in connection with the Portfolio. Some of these products and services are also available to the Adviser or the Sub-Adviser for cash, and some do not have an explicit cost or determinable value. The

 

65


research received does not reduce the advisory fees paid to the Adviser or the sub-advisory fees payable to the Sub-Adviser for services provided to the Portfolio. The Adviser’s or the Sub-Adviser’s expenses would likely increase if the Adviser or Sub-Adviser had to generate these research products and services through its own efforts, or if it paid for these products or services itself.

Broker-Dealers that are Affiliated with the Adviser or a Sub-Adviser

Portfolio transactions may be executed by brokers affiliated with the ING Groep or the Adviser or the Sub-Adviser, so long as the commission paid to the affiliated broker is reasonable and fair compared to the commission that would be charged by an unaffiliated broker in a comparable transaction.

The placement of portfolio brokerage with broker-dealers who have sold shares of the Portfolio is subject to rules adopted by the SEC and the Financial Industry Regulatory Authority (“FINRA”). Under these rules, the Sub-Adviser may not consider a broker’s promotional or sales efforts on behalf of the Portfolio when selecting a broker-dealer for portfolio transactions, and neither the Portfolio nor the Sub-Adviser may enter into an agreement under which the Portfolio directs brokerage transactions (or revenue generated from such transactions) to a broker-dealer to pay for distribution of Portfolio shares. The Portfolio has adopted policies and procedures, approved by the Board, that are designed to attain compliance with these prohibitions.

Principal Trades and Research

Purchases of securities for the Portfolio also may be made directly from issuers or from underwriters. Purchase and sale transactions may be effected through dealers which specialize in the types of securities which the Portfolios will be holding. Dealers and underwriters usually act as principals for their own account. Purchases from underwriters will include a concession paid by the issuer to the underwriter and purchases from dealers will include the spread between the bid and the asked price. If the execution and price offered by more than one dealer or underwriter are comparable, the order may be allocated to a dealer or underwriter which has provided such research or other services as mentioned above.

More Information About Trading in Fixed-Income Securities

Purchases and sales of fixed-income securities will usually be principal transactions. Such securities often will be purchased or sold from or to dealers serving as market makers for the securities at a net price. The Portfolio may also purchase such securities in underwritten offerings and will, on occasion, purchase securities directly from the issuer. Generally, fixed-income securities are traded on a net basis and do not involve brokerage commissions. The cost of executing fixed-income securities transactions consists primarily of dealer spreads and underwriting commissions.

In purchasing and selling fixed-income securities, it is the policy of the Portfolio to obtain the best results, while taking into account the dealer’s general execution and operational facilities, the type of transaction involved and other factors, such as the dealer’s risk in positioning the securities involved. While the Adviser or the Sub-Adviser generally seeks reasonably competitive spreads or commissions, the Portfolio will not necessarily pay the lowest spread or commission available.

Transition Management

Changes in Sub-Advisers and investment personnel and reorganizations of the Portfolio may result in the sale of a significant portion or even all of the Portfolio’s portfolio securities. This type of change will increase trading costs and the portfolio turnover for the Portfolio. The Portfolio, the Adviser, or the Sub-Adviser may engage a broker-dealer to provide transition management services in connection with a change in Sub-Adviser, a reorganization, or other changes.

 

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Allocation of Trades

Some securities considered for investment by the Portfolio may also be appropriate for other clients served by the Portfolio’s Sub-Adviser. If the purchase or sale of securities consistent with the investment policies of the Portfolio and one or more of these other clients is considered at or about the same time, transactions in such securities will be placed on an aggregate basis and allocated among the Portfolio and such other clients in a manner deemed fair and equitable, over time, by the Sub-Adviser and consistent with the Sub-Adviser’s written policies and procedures. Sub-Advisers may use different methods of allocating the results aggregated trades. The Sub-Adviser’s relevant policies and procedures and the results of aggregated trades in which the Portfolio participated are subject to periodic review by the Board. To the extent the Portfolio seeks to acquire (or dispose of) the same security at the same time as other portfolios, one or more of the Portfolios may not be able to acquire (or dispose of) as large a position in such security as it desires, or it may have to pay a higher (or receive a lower) price for such security. It is recognized that in some cases, this system could have a detrimental effect on the price or value of the security insofar as the Portfolios are concerned. However, over time, the Portfolio’s ability to participate in aggregate trades is expected to provide better execution for the Portfolio.

Cross-Transactions

The Board has adopted a policy allowing trades to be made between affiliated registered investment companies or series thereof provided they meet the terms of Rule 17a-7 under the 1940 Act.

The Portfolio had not commenced operations as of the date of this SAI. Therefore, no brokerage commissions were paid for the fiscal year ended December 31, 2007.

CODE OF ETHICS

The Portfolio, ING Investments, the Sub-Adviser and the Distributor have adopted a code of ethics (“Code of Ethics” or written supervisory procedures) governing personal trading activities of all “access persons,” as defined by the 1940 Act, who, in connection with their regular functions, play a role in the recommendation of any purchase or sale of a security by the Portfolio or obtain information pertaining to such purchase or sale. The Code of Ethics is intended to prohibit fraud against the Portfolio that may rise from personal trading of securities that may be purchased or held by the Portfolio or of Portfolio shares. The Code of Ethics also prohibits short-term trading of the Portfolio by persons subject to the Code of Ethics. Personal trading is permitted by such persons subject to certain restrictions; however such persons are generally required to pre-clear all holdings and security transactions with the ING Funds’ Compliance Officer or her designee and to report all transactions on a regular basis.

PROXY VOTING PROCEDURES

The Board has adopted proxy voting procedures and guidelines to govern the voting of proxies relating to the Portfolio’s portfolio securities. The procedures provide that funds-of-funds, including the Portfolio, will “echo” vote their interests in Underlying Funds. This means that, if the Portfolio must vote on a proposal with respect to an Underlying Fund, the Portfolio will vote its interest in that Underlying Fund in the same proportion all other shareholders in the Underlying Fund voted their interests. The effect of echo voting may be that a small number of shareholders may determine the outcome of a vote. The procedures delegate to ING Investments the authority to vote proxies relating to portfolio securities, and provide a method for responding to potential conflicts of interest. In delegating voting authority to ING Investments, the Board has also approved ING Investments’ proxy voting procedures, which require ING Investments to vote proxies in accordance with the Portfolio’s proxy voting procedures and guidelines. An independent proxy voting service has been retained to assist in the voting of Portfolio proxies through the provision of vote analysis, implementation and recordkeeping and disclosure services. A copy of the proxy voting procedures and guidelines of the Portfolio, including the procedures of ING Investments, is attached hereto as Appendix A. No later than August 31st of each year, information regarding how the Portfolio voted proxies relating to portfolio securities for the one-year period ending June 30th is available through the ING Funds’ website (www.ingfunds.com) or by accessing the SEC’s EDGAR database (www.sec.gov).

 

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NET ASSET VALUE

As noted in the Prospectus, the NAV and offering price of the Portfolio’s shares will be determined once daily as of the close of regular trading (“Market Close”) on the New York Stock Exchange (“NYSE”) (normally 4:00 p.m. Eastern time unless otherwise designated by the NYSE) during each day on which the NYSE is open for trading. As of the date of this Statement of Additional Information, the NYSE is closed on the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

Portfolio securities listed or traded on a national securities exchange will be valued at the last reported sale price on the valuation day. Securities traded on an exchange for which there has been no sale that day and other securities traded in the over-the-counter market will be valued at the mean between the last reported bid and asked prices on the valuation day. Portfolio securities reported by NASDAQ will be valued at the NASDAQ Official Closing Price on the valuation day. In cases in which securities are traded on more than one exchange, the securities are valued on the exchange that is normally the primary market. Investments in securities maturing in 60 days or less are valued at amortized cost, which, when combined with accrued interest, approximates market value. This involves valuing a security at cost on the date of acquisition and thereafter assuming a constant accretion of a discount or amortization of a premium to maturity, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price the Portfolio would receive if it sold the instrument. (See “Net Asset Value” in the “Information for Investors” section of the Prospectuses.) The long-term debt obligations held in the Portfolio’s portfolio will be valued at the mean between the most recent bid and asked prices as obtained from one or more dealers that make markets in the securities when over-the counter market quotations are readily available.

Securities and assets for which market quotations are not readily available (which may include certain restricted securities which are subject to limitations as to their sale) or are deemed unreliable are valued at their fair values as determined in good faith by or under the supervision of the Portfolio’s Board, in accordance with methods that are specifically authorized by the Board. Securities traded on exchanges, including foreign exchanges, which close earlier than the time that the Portfolio calculates its NAV, may also be valued at their fair values as determined in good faith by or under the supervision of the Portfolio’s Board, in accordance with methods that are specifically authorized by the Board. The valuation techniques applied in any specific instance may vary from case to case. With respect to a restricted security, for example, consideration is generally given to the cost of investment, the market value of any unrestricted securities of the same class at the time of valuation, the potential expiration of restrictions on the security, the existence of any registration rights, the costs to the Portfolio related to registration of the security, as well as factors relevant to the issuer itself. Consideration may also be given to the price and extent of any public trading in similar securities of the issuer or comparable companies’ securities.

The value of a foreign security traded on an exchange outside the United States is generally based on its price on the principal foreign exchange where it trades as of the time the Portfolio determines its NAV or if the foreign exchange closes prior to the time the Portfolio determines its NAV, the most recent closing price of the foreign security on its principal exchange. Trading in certain non-U.S. securities may not take place on all days on which the NYSE is open. Further, trading takes place in various foreign markets on days on which the NYSE is not open. Consequently, the calculation of the Portfolio’s NAV may not take place contemporaneously with the determination of the prices of securities held by the Portfolio in foreign securities markets. Further, the value of the Portfolio’s assets may be significantly affected by foreign trading on days when a shareholder cannot purchase or redeem shares of the Portfolio. In calculating the Portfolio’s NAV, foreign securities denominated in foreign currency are converted to U.S. dollar equivalents.

 

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If a significant event which is likely to impact the value of one or more foreign securities held by the Portfolio occurs after the time at which the foreign market for such securities closes but before the time that the Portfolio’s NAV is calculated on any business day, such event may cause the closing price on the foreign exchange to not represent a readily available reliable market value quotation for such securities at the time the Portfolio determines its NAV. In such a case, the Portfolio will use the fair value of such securities as determined under the Portfolio’s valuation procedures. Events after the close of trading on a foreign market that could require the Portfolio to fair value some or all of its foreign securities include, among others, securities trading in the United States and other markets, corporate announcements, natural and other disasters, and political and other events. Among other elements of analysis in determination of a security’s fair value, the Board has authorized the use of one or more research services to assist with such determinations. An independent research service may use statistical analyses and quantitative models to help determine fair value as of the time the Portfolio calculates its NAV. There can be no assurance that such models accurately reflect the behavior of the applicable markets or the effect of the behavior of such markets on the fair value of securities, nor that such markets will continue to behave in a fashion that is consistent with such models. Unlike the closing price of a security on an exchange, fair value determinations employ elements of judgment. Consequently, the fair value assigned to a security may not represent the actual value that the Portfolio could obtain if it were to sell the security at the time of the close of the NYSE. Pursuant to procedures adopted by the Board, the Portfolios are not obligated to use the fair valuations suggested by any research service, and valuation recommendations provided by such research services may be overridden if other events have occurred, or if other fair valuations are determined in good faith to be more accurate. Unless an event is such that it causes the Portfolios to determine that the closing prices for one or more securities do not represent readily available reliable market value quotations at the time the Portfolios determines their NAV, events that occur between the time of the close of the foreign market on which they are traded and the close of regular trading on the NYSE will not be reflected in the Portfolio’s NAV.

Options on securities, currencies, futures and other financial instruments purchased by the Portfolio are valued at their last bid price in the case of listed options or at the average of the last bid prices obtained from dealers in the case of OTC Options.

The fair value of other assets is added to the value of all securities positions to arrive at the value of the Portfolio’s total assets. The Portfolio’s liabilities, including accruals for expenses, are deducted from its total assets. Once the total value of the Portfolio’s net assets is so determined, that value is then divided by the total number of shares outstanding (excluding treasury shares), and the result, rounded to the nearest cent, is the NAV per share.

In computing the NAV for a class of shares of the Portfolio, all class-specific liabilities incurred or accrued are deducted from the class’ net assets. The resulting net assets are divided by the number of shares of the class outstanding at the time of the valuation and the result (adjusted to the nearest cent) is the NAV per share.

Orders received by dealers prior to Market Close will be confirmed at the offering price computed as of Market Close provided the order is received by the Transfer Agent prior to Market Close that same day. It is the responsibility of the dealer to insure that all orders are transmitted timely to the Portfolio. Orders received by dealers after Market Close will be confirmed at the next computed offering price as described in the Prospectus.

TAX CONSIDERATIONS

The following is only a limited discussion of certain additional tax considerations generally affecting the Portfolio. No attempt is made to present a detailed explanation of the tax treatment of the Portfolio and no explanation is provided with respect to the tax treatment of any Portfolio shareholder. The discussions here and in the Prospectuses are not intended as substitutes for careful tax planning. Holders of VA Contracts or VLI Policies must consult the contract prospectus, prospectus summary or disclosure statement for information concerning the federal income tax consequences of owning such VA Contracts or VLI Policies.

 

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Qualification as a Regulated Investment Company

The Portfolio intends to elect to qualify as a “regulated investment company” (“RIC”) under the provisions of Subchapter M of the Code. If the Portfolio qualifies as a RIC and complies with the appropriate provisions of the Code, it will be relieved of federal income tax on the amounts of income it attributes.

To qualify for treatment as a RIC, the Portfolio generally must, among other things: (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of securities or foreign currencies, and other income (including gains from certain options, futures, and forward contracts) derived with respect to its business of investing in securities or foreign currencies; (b) diversify its holdings so that at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Portfolio’s assets is represented by cash, cash items, U.S. government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5.00% of the value of the Portfolio’s total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. government securities or the securities of other regulated investment companies), or of two or more issuers which the Portfolio controls and which are engaged in the same or similar trades or businesses or related trades or businesses; and (c) distribute in each taxable year at least 90% of the sum of its investment company taxable income and its net tax-exempt interest income. If the Portfolio does not meet all of these Code requirements, it will be taxed as an ordinary corporation and its distributions (to the extent of available earnings and profits) will be taxed to shareholders as ordinary income (except to the extent a shareholder is exempt form tax).

Excise Tax

Generally, in order to avoid a 4% nondeductible excise tax, the Portfolio must distribute to its shareholders during the calendar year the following amounts:

 

   

98% of the Portfolio’s ordinary income for the calendar year;

 

   

98% of the Portfolio’s capital gain net income (all capital gains, both long-term and short-term, minus all such capital losses), all computed as if the Portfolio were on a taxable year ending October 31 of the year in question and beginning the previous November 1; and

 

   

any undistributed ordinary income or capital gain net income for the prior year.

The excise tax generally is inapplicable to any RIC whose sole shareholders are either tax-exempt pension trusts or separate accounts of life insurance companies funding variable contracts. Although the Portfolios believe that they are not subject to the excise tax, they intend to make the distributions required to avoid the imposition of such a tax.

Diversification

The Portfolio also intends to comply with the separate diversification requirements imposed by Section 817(h) of the Code and the regulations thereunder on certain insurance company separate accounts. These requirements, which are in addition to the diversification requirements imposed on the Portfolios by the 1940 Act and Subchapter M of the Code, place certain limitations on assets of each insurance company separate account used to fund variable contracts. Because Section 817(h) and those regulations treat the assets of the Portfolio as assets of the related separate account, these regulations are imposed on the assets of the Portfolio. Specifically, the regulations provide that, after a one year start-up period or except as permitted by the “safe harbor” described below, as of the end of each calendar quarter or within 30 days thereafter no more than 55% of the total assets of the Portfolio may be represented by any one investment, no more than 70% by any two investments, no more than 80% by any three investments and no more than 90% by any four investments. For this purpose, all securities of the same issuer are considered a single investment, and each U.S. government

 

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agency and instrumentality is considered a separate issuer. Section 817(h) provides, as a safe harbor, that a separate account will be treated as being adequately diversified if the diversification requirements under Subchapter M of the Code are satisfied and no more than 55% of the value of the account’s total assets is attributable to cash and cash items (including receivables), U.S. government securities and securities of other RICs. Failure by the Portfolio to both qualify as a RIC and to satisfy the Section 817(h) requirements would generally cause the Variable Contracts to lose their favorable tax status and require a contract holder to include in ordinary income any income accrued under the contracts for the current and all prior taxable years. Under certain circumstances described in the applicable U.S. Treasury regulations, inadvertent failure to satisfy the applicable diversification requirements may be corrected, but such a correction would require a payment to the Internal Revenue Service (“IRS”) based on the tax contract holders would have incurred if they were treated as receiving the income on the contract for the period during which the diversification requirements were not satisfied. Any such failure may also result in adverse tax consequences for the insurance company issuing the contracts. Failure by the Portfolio to qualify as a RIC would also subject it to federal and state income taxation on all of its taxable income and gain, whether or not distributed to shareholders.

The U.S Treasury Department announced that it would issue future regulations or rulings addressing the circumstances in which a Variable Contract owner’s control of the investments of the separate account may cause the contract owner, rather than the insurance company, to be treated as the owner of the assets held by the separate account. To date, the Treasury Department has issued only a few such pronouncements. If the contract owner is considered the owner of the securities underlying the separate account, income and gains produced by those securities would be included currently in the contract owner’s gross income. It is not known what standards will be set forth in the regulations or rulings.

In the event that rules or regulations are adopted, there can be no insurance that the Portfolio will be able to operate as currently described, or that the Portfolio will not have to change its investment objective or investment policies. The Portfolio’s investment objective and the investment policies of the Portfolio may be modified as necessary to prevent any such prospective rules and regulations from causing Variable Contract owners to be considered the owners of the shares of the Portfolio.

Foreign Investments

Investment income from foreign securities maybe subject to foreign taxes withheld at the source. It is impossible to determine the effective rate of foreign tax in advance since the amount of the Portfolio’s assets to be invested in various countries is not known.

General Summary

The discussion of “Taxes” in the Prospectus, in conjunction with the foregoing, is a general summary of applicable provisions of the Code and U.S. Treasury regulations now in effect as currently interpreted by the courts and the IRS. The Code and these U.S. Treasury regulations, as well as the current interpretations thereof, may be changed at any time.

PERFORMANCE INFORMATION

Performance information for the Portfolio may appear in reports or promotional literature to current or prospective shareholders.

 

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30-Day Yield for Certain Non-Money Market Portfolios

Quotations of yield for Portfolio will be based on all investment income per share earned during a particular 30-day period, less expenses accrued during the period (net investment income), and will be computed by dividing net investment income by the value of a share on the last day of the period, according to the following formula:

YIELD = 2[( a – b + 1)6 - 1]

cd

 

Where:

   a =    dividends and interest earned during the period
   b =    the expenses accrued for the period (net of reimbursements)
   c =    the average daily number of shares outstanding during the period
   d =    the maximum offering price per share on the last day of the period

For purposes of determining net investment income during the period (variable “a” in the formula), interest earned on debt obligations held by the Portfolio is calculated each day during the period according to the formulas below, and then added together for each day in the period:

 

   

Certain mortgage-backed, asset-backed and CMO securities: Generally, interest is computed by taking daily interest income (coupon rate times face value divided by 360 or 365, as the case may be) adjusted by that day’s pro-rata share of the most recent paydown gain or loss from the security;

 

   

Other debt obligations: Generally, interest is calculated by computing the yield to maturity of each debt obligation held based on the market value of the obligations (including current interest accrued) at the close of each day, dividing the result by 360 and multiplying the quotient by the market value of the obligation (including current accrued interest).

For purposes of this calculation, it is assumed that each month contains 30 days.

Undeclared earned income will be subtracted from the NAV per share (variable “d” in the formula). Undeclared earned income is the net investment income, which, at the end of the base period, has not been declared as a dividend, but is reasonably expected to be and is declared as a dividend shortly thereafter.

Average Annual Total Return

Quotations of average annual total return for the Portfolio will be expressed in terms of the average annual compounded rate of return of a hypothetical investment in the Portfolio over a period of one, five and ten years (or, if less, up to the life of the Portfolio), calculated pursuant to the formula:

P (1 + T)n = ERV

 

Where:

   P =    a hypothetical initial payment of $1,000
   T =    an average annual total return
   n =    the number of years

ERV = the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5, or 10 year period at the end of the 1, 5, or 10 year period (or fractional portion thereof).

All total return figures reflect the deduction of Portfolio expenses (an on annual basis), and assume that all dividends and distributions on shares are reinvested when paid.

Performance information for the Portfolio may be compared, in reports and promotional literature, to: (a) the S&P 500® Index, the Russell 2000 Index, the Russell 3000 Index, Lehman Brothers U.S. Aggregate Bond Index®, Lehman Brothers Intermediate Government Bond Index®, Merrill Lynch High-Yield Index, Salomon Brothers Broad Investment Grade Bond Index, Dow Jones Industrial Average, or other indices (including, where appropriate, a blending of indices) that measure performance of a pertinent group of securities widely regarded by investors as representative of the securities markets in general; (b) other groups of investment companies tracked by Morningstar or Lipper Analytical Services, widely used independent research firms that rank mutual funds and other investment companies by overall performance, investment objectives, and assets,

 

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or tracked by other services, companies, publications, or persons who rank such investment companies on overall performance or other criteria; and (c) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Portfolio.

FINANCIAL STATEMENTS

The Portfolio’s annual and semi-annual shareholder reports are available upon request and without charge by calling 1-800-992-0180.

 

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APPENDIX A

 

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ING FUNDS

PROXY VOTING PROCEDURES AND GUIDELINES

Effective Date: July 29, 2003

Revision Date: March 13, 2008

 

I. INTRODUCTION

The following are the Proxy Voting Procedures and Guidelines (the “Procedures and Guidelines”) of the ING Funds set forth on Exhibit 1 attached hereto and each portfolio or series thereof (each a “Fund” and collectively, the “Funds”). The purpose of these Procedures and Guidelines is to set forth the process by which each Fund will vote proxies related to the equity assets in its investment portfolio (the “portfolio securities”). The Procedures and Guidelines have been approved by the Funds’ Boards of Trustees/Directors1 (each a “Board” and collectively, the “Boards”), including a majority of the independent Trustees/Directors2 of the Board. Only the Board may amend these Procedures and Guidelines. The Board shall review these Procedures and Guidelines at its discretion, and make any revisions thereto as deemed appropriate by the Board.

 

II. DELEGATION OF VOTING AUTHORITY

The Board hereby delegates to ING Investments, LLC (the “Adviser”) the authority and responsibility to vote all proxies with respect to all portfolio securities of the Fund, in accordance with the then-current Procedures and Guidelines approved by the Board. The Board may revoke such delegation with respect to any proxy or proposal, and assume the responsibility of voting any Fund proxy or proxies, as it deems appropriate. The President or Chief Financial Officer of a Fund may approve non-material amendments to the Procedures and Guidelines for immediate implementation, subject to ratification at the next regularly scheduled meeting of the Board.

When a Fund participates in the lending of its securities and the securities are on loan at record date, proxies related to such securities will not be forwarded to the Adviser by the Fund’s custodian and therefore will not be voted. However, the Adviser shall use best efforts to recall or restrict specific securities from loan for the purpose of facilitating a “material” vote as described in the Adviser’s proxy voting procedures (the “Adviser Procedures”).

 

1

Reference in these Procedures to one or more Funds shall, as applicable, mean those Funds that are under the jurisdiction of the particular Board at issue. No provision in these Procedures is intended to impose any duty upon the particular Board with respect to any other Fund.

 

2

The independent Trustees/Directors are those Board members who are not “interested persons” of the Funds within the meaning of Section 2(a)(19) of the Investment Company Act of 1940.

 

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Funds that are “funds-of-funds” will “echo” vote their interests in underlying mutual funds, which may include ING Funds (or portfolios or series thereof) other than those set forth on Exhibit 1 attached hereto. This means that, if the fund-of-funds must vote on a proposal with respect to an underlying investment company, the fund-of-funds will vote its interest in that underlying fund in the same proportion all other shareholders in the investment company voted their interests.

 

III. APPROVAL AND REVIEW OF PROCEDURES

The Adviser has adopted proxy voting procedures in connection with the voting of portfolio securities for the Funds as attached hereto in Exhibit 3. The Board hereby approves such procedures.

Any material changes to the Adviser Procedures must be approved by the Board prior to voting any Fund proxies in accordance with such amended procedures. The President or Chief Financial Officer of the Adviser may approve non-material amendments to the Procedures and Guidelines for immediate implementation, subject to ratification at the next regularly scheduled meeting of the Board of the Fund.

 

IV. VOTING PROCEDURES AND GUIDELINES

The Guidelines that are set forth in Exhibit 4 hereto specify the manner in which the Funds generally will vote with respect to the proposals discussed therein.

Unless otherwise noted, the defined terms used hereafter shall have the same meaning as defined in the Adviser Procedures.

 

  A. Routine Matters

The Agent shall be instructed to submit a vote in accordance with the Guidelines where such Guidelines provide a clear “For,” “Against,” “Withhold” or “Abstain” on a proposal. However, the Agent shall be directed to refer any proxy proposal to the Proxy Coordinator for instructions as if it were a matter requiring case-by-case consideration under circumstances where the application of the Guidelines is unclear, it appears to involve unusual or controversial issues, or an Investment Professional (as such term is defined for purposes of the Adviser Procedures) recommends a vote contrary to the Guidelines.

 

  B. Matters Requiring Case-by-Case Consideration

The Agent shall be directed to refer proxy proposals accompanied by its written analysis and voting recommendation to the Proxy Coordinator where the Guidelines have noted “case-by-case” consideration.

 

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Upon receipt of a referral from the Agent, the Proxy Coordinator may solicit additional research from the Agent, Investment Professional(s), as well as from any other source or service.

Except in cases in which the Proxy Group has previously provided the Proxy Coordinator with standing instructions to vote in accordance with the Agent’s recommendation, the Proxy Coordinator will forward the Agent’s analysis and recommendation and/or any research obtained from the Investment Professional(s), the Agent or any other source to the Proxy Group. The Proxy Group may consult with the Agent and/or Investment Professional(s), as it deems necessary.

The Proxy Coordinator shall use best efforts to convene the Proxy Group with respect to all matters requiring its consideration. In the event quorum requirements cannot be timely met in connection with a voting deadline, it shall be the policy of the Funds to vote in accordance with the Agent’s recommendation, unless the Agent’s recommendation is deemed to be conflicted as provided for under the Adviser Procedures, in which case no action shall be taken on such matter (i.e., a “Non-Vote”).

 

  1. Within-Guidelines Votes: Votes in Accordance with a Fund’s Guidelines and/or, where applicable, Agent Recommendation

In the event the Proxy Group, and where applicable, any Investment Professional participating in the voting process, recommend a vote Within Guidelines, the Proxy Group will instruct the Agent, through the Proxy Coordinator, to vote in this manner. Except as provided for herein, no Conflicts Report (as such term is defined for purposes of the Adviser Procedures) is required in connection with Within-Guidelines Votes.

 

  2. Non-Votes: Votes in Which No Action is Taken

The Proxy Group may recommend that a Fund refrain from voting under circumstances including, but not limited to, the following: (1) if the economic effect on shareholders’ interests or the value of the portfolio holding is indeterminable or insignificant, e.g., proxies in connection with fractional shares securities no longer held in the portfolio of an ING Fund or proxies being considered on behalf of a Fund that is no longer in existence; or (2) if the cost of voting a proxy outweighs the benefits, e.g., certain international proxies, particularly in cases in which share blocking practices may impose trading restrictions on the relevant portfolio security. In such instances, the Proxy Group may instruct the Agent, through the Proxy Coordinator, not to vote such proxy. The Proxy Group may provide the Proxy Coordinator with standing instructions on parameters that would dictate a Non-Vote without the Proxy Group’s review of a specific proxy. It is noted a Non-Vote determination would generally not be made in connection with voting rights received pursuant to class action participation; while a Fund may no longer hold the security, a continuing economic effect on shareholders’ interests is likely.

 

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Reasonable efforts shall be made to secure and vote all other proxies for the Funds, but, particularly in markets in which shareholders’ rights are limited, Non-Votes may also occur in connection with a Fund’s related inability to timely access ballots or other proxy information in connection with its portfolio securities.

Non-Votes may also result in certain cases in which the Agent’s recommendation has been deemed to be conflicted, as described in Section IV.B. above and Section V. below.

 

  3. Out-of-Guidelines Votes: Votes Contrary to Procedures and Guidelines, or Agent Recommendation, where applicable, Where No Recommendation is Provided by Agent, or Where Agent’s Recommendation is Conflicted

If the Proxy Group recommends that a Fund vote contrary to the Procedures and Guidelines, or the recommendation of the Agent, where applicable, if the Agent has made no recommendation on a matter requiring case-by-case consideration and the Procedures and Guidelines are silent, or the Agent’s recommendation on a matter requiring case-by-case consideration is deemed to be conflicted as provided for under the Adviser Procedures, the Proxy Coordinator will then request that all members of the Proxy Group, including any members not in attendance at the meeting at which the relevant proxy is being considered, and each Investment Professional participating in the voting process complete a Conflicts Report (as such term is defined for purposes of the Adviser Procedures), in substantially the form attached hereto as Exhibit 2. As provided for in the Adviser Procedures, the Proxy Coordinator shall be responsible for identifying to Counsel potential conflicts of interest with respect to the Agent.

If Counsel determines that a conflict of interest appears to exist with respect to the Agent, any member of the Proxy Group or the participating Investment Professional(s), the Proxy Coordinator will instruct the Agent to vote the proxy as directed by the Guidelines, or in accordance with the recommendation of the Agent, where applicable. Cases in which any member of the Proxy Group or a participating Investment Professional has failed to complete and return a Conflicts Report shall be treated as if a conflict of interest appears to exist, except that, upon Counsel’s finding that a conflict of interest exists with respect to one or more members of the Proxy Group or the Advisers generally, the remaining members of the Proxy Group shall not be required to complete a Conflicts Report in connection with the proxy.

If Counsel determines that each member of the Proxy Group has completed and returned a Conflicts Report and there does not appear to be a conflict of interest with respect to the Agent, any member of the Proxy Group or the participating Investment Professional(s), the Proxy Coordinator will instruct the Agent to vote the proxy as recommended by the Proxy Group.

 

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V. CONFLICTS OF INTEREST

In any case in which there appears to be a conflict of interest with respect to the Agent’s recommendation on a matter requiring case-by-case consideration, no action shall be taken on such matter (i.e., a “Non-Vote”). In any case in which a member of the Proxy Group has failed to complete and return a Conflicts Report when so required, or in which there appears to be a conflict of interest with respect to any member of the Proxy Group or any Investment Professional participating in the voting process, the Agent will be directed to vote Within Guidelines so that the Adviser shall have no opportunity to vote a Fund’s proxy in a situation in which the Adviser or certain other related parties may be deemed to have a conflict of interest.

 

VI. REPORTING AND RECORD RETENTION

 

  A. Reporting by the Funds

Annually in August, each Fund will post its proxy voting record or a link thereto for the prior one-year period ending on June 30th on the ING Funds website. The proxy voting record for each Fund will also be available in the EDGAR database on the SEC’s website.

 

  B. Reporting to the Boards

At each regularly scheduled meeting, the Board will receive a report from the Adviser’s Proxy Coordinator indicating each proxy proposal, or a summary of such proposals, (1) that was voted Out-of-Guidelines; and (2) for which the Proxy Group initially recommended a vote Out-of-Guidelines, but which was ultimately voted Within Guidelines in accordance with Section V hereof. Such report shall indicate the name of the issuer, the substance of the proposal, and the reasons for voting, or recommending, an Out-of-Guidelines Vote.

 

A-5


EXHIBIT 1

to the

ING Funds

Proxy Voting Procedures

ING VP BALANCED PORTFOLIO, INC.

ING STRATEGIC ALLOCATION PORTFOLIOS, INC.

ING GET FUNDS

ING VP BOND PORTFOLIO

ING VP MONEY MARKET PORTFOLIO

ING VARIABLE FUNDS

ING VARIABLE PORTFOLIOS, INC.

ING SERIES FUND, INC.

 

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EXHIBIT 2

to the

ING Funds

Proxy Voting Procedures

FORM OF CONFLICTS REPORT

 

A-7


FORM OF CONFLICT OF INTEREST REPORT – PROXY GROUP MEMBERS

PROXY VOTING OF THE ING FUNDS

 

Issuer:

  

Meeting Date:

  

1.

  

To your knowledge, do you, or anyone in your immediate household, have a personal relationship of any sort with the Issuer, its officers, directors, or employees, or might you, or anyone in your immediate household, be affected by the outcome of the proxy proposal? This does not include former business relationships with which you have had no communication for at least one year and have no expectation of future or ongoing communication.

Explanation:

           YES   NO

¨      ¨ 

2.

  

To your knowledge, (1) does any ING Entity have a Material Business Relationship with the Issuer or (2) is any ING Entity actively seeking to have a Material Business Relationship with the Issuer?

Explanation:

           YES  NO

¨      ¨ 

3.

  

Have you, or, to your knowledge, anyone else employed by an ING Entity, been contacted by any person or organization, including another ING employee or affiliate, with a recommendation or request that a proxy be voted for (or against) a particular proposal with respect to the Issuer? This includes communications from the Issuer or its Affiliates, from a shareholder, or from a commercial, union or any other special interest group, but would not include routine communications from proxy solicitors.

Explanation:

           YES  NO

¨      ¨ 

4.

  

Are you aware of any other information that might lead a reasonable person to conclude that an ING Entity appears to have a conflict of interest with respect to the proxy proposal?

Explanation:

           YES  NO

¨      ¨ 

Name:

   Date:   

Certification: As a member of the Proxy Group, I understand that I have a fiduciary duty to vote Fund proxies solely in the best interests of the Fund(s) and its (their) shareholders. I certify that my recommendation with respect to the vote on the proxy proposal relating to the Issuer noted above is based solely on this criterion.

Definitions:

Affiliate means (A) any company directly or indirectly owning, controlling, or holding with power to vote, 5% or more of the outstanding voting securities of the Issuer; (B) any company 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the issuer; (C) any company directly or indirectly controlling, controlled by, or under common control with, the Issuer; (D) any officer, director, partner, copartner, or employee of the Issuer; (E) if the Issuer is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (F) if the Issuer is an unincorporated investment company not having a board of directors, the depositor thereof.

ING Entity means all direct and indirect subsidiaries, joint ventures and business units of ING Groep N.V., including, but not limited to, ING Investments, LLC, ING Funds Distributor, LLC, ING Investment Management Co., ING Investment Management Americas, Directed Services, LLC and ING Financial Advisers, LLC.

Issuer includes the company with respect to which the proxy is solicited, and any other entity which you know to be affiliated therewith, such as a pension plan, joint venture, merger partner, subsidiary or parent, or company under common control, but does not include entities associated with the Issuer solely through the provision of consulting, advisory or other professional services.

Material Business Relationship means, but, subject to review by Counsel, may not be limited to, a relationship which you know to constitute (1) participation in a joint venture, (2) revenues to ING of $1 million or more per year, or (3) ownership by ING of more than 5% of the outstanding securities of the Issuer (“5% Issuer”) (except that an Issuer’s affiliation with a 5% Issuer shall not constitute a de facto conflict of interest for ING with the first Issuer).

** Please return to ING Funds Proxy Coordinator at 480-477-2786 or proxycoordinator@ingfunds.com **

 

A-8


EXHIBIT 3

to the

ING Funds

Proxy Voting Procedures

ING INVESTMENTS, LLC,

ING INVESTMENT MANAGEMENT CO.

AND

DIRECTED SERVICES, LLC

PROXY VOTING PROCEDURES

 

I. INTRODUCTION

ING Investments, LLC, ING Investment Management Co. and Directed Services, LLC (each an “Adviser” and collectively, the “Advisers”) are the investment advisers for the registered investment companies and each series or portfolio thereof (each a “Fund” and collectively, the “Funds”) comprising the ING family of funds. As such, the Advisers have been delegated the authority to vote proxies with respect to securities for certain Funds over which they have day-to-day portfolio management responsibility.

The Advisers will abide by the proxy voting guidelines adopted by a Fund’s respective Board of Directors or Trustees (each a “Board” and collectively, the “Boards”) with regard to the voting of proxies unless otherwise provided in the proxy voting procedures adopted by a Fund’s Board.

In voting proxies, the Advisers are guided by general fiduciary principles. Each must act prudently, solely in the interest of the beneficial owners of the Funds it manages. The Advisers will not subordinate the interest of beneficial owners to unrelated objectives. Each Adviser will vote proxies in the manner that it believes will do the most to maximize shareholder value.

The following are the Proxy Voting Procedures of ING Investments, LLC, ING Investment Management Co. and Directed Services, LLC (the “Adviser Procedures”) with respect to the voting of proxies on behalf of their client Funds as approved by the respective Board of each Fund.

Unless otherwise noted, best efforts shall be used to vote proxies in all instances.

 

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II. ROLES AND RESPONSIBILITIES

 

  A. Proxy Coordinator

The Proxy Coordinator identified in Appendix 1 will assist in the coordination of the voting of each Fund’s proxies in accordance with the ING Funds Proxy Voting Procedures and Guidelines (the “Procedures” or “Guidelines” and collectively the “Procedures and Guidelines”). The Proxy Coordinator is authorized to direct the Agent to vote a Fund’s proxy in accordance with the Procedures and Guidelines unless the Proxy Coordinator receives a recommendation from an Investment Professional (as described below) to vote contrary to the Procedures and Guidelines. In such event, and in connection with proxy proposals requiring case-by-case consideration (except in cases in which the Proxy Group has previously provided the Proxy Coordinator with standing instructions to vote in accordance with the Agent’s recommendation), the Proxy Coordinator will call a meeting of the Proxy Group (as described below).

Responsibilities assigned herein to the Proxy Coordinator, or activities in support thereof, may be performed by such members of the Proxy Group or employees of the Advisers’ affiliates as are deemed appropriate by the Proxy Group.

Unless specified otherwise, information provided to the Proxy Coordinator in connection with duties of the parties described herein shall be deemed delivered to the Advisers.

 

  B. Agent

An independent proxy voting service (the “Agent”), as approved by the Board of each Fund, shall be engaged to assist in the voting of Fund proxies for publicly traded securities through the provision of vote analysis, implementation, recordkeeping and disclosure services. The Agent is ISS Governance Services, a unit of RiskMetrics Group, Inc. The Agent is responsible for coordinating with the Funds’ custodians to ensure that all proxy materials received by the custodians relating to the portfolio securities are processed in a timely fashion. To the extent applicable, the Agent is required to vote and/or refer all proxies in accordance with these Adviser Procedures. The Agent will retain a record of all proxy votes handled by the Agent. Such record must reflect all the information required to be disclosed in a Fund’s Form N-PX pursuant to Rule 30b1-4 under the Investment Company Act. In addition, the Agent is responsible for maintaining copies of all proxy statements received by issuers and to promptly provide such materials to the Adviser upon request.

The Agent shall be instructed to vote all proxies in accordance with a Fund’s Guidelines, except as otherwise instructed through the Proxy Coordinator by the Adviser’s Proxy Group, or a Fund’s Compliance Committee (“Committee”).

The Agent shall be instructed to obtain all proxies from the Funds’ custodians and to review each proxy proposal against the Guidelines. The Agent also shall be requested to call the Proxy Coordinator’s attention to specific proxy proposals that although governed by the Guidelines appear to involve unusual or controversial issues.

 

A-10


Subject to the oversight of the Advisers, the Agent shall establish and maintain adequate internal controls and policies in connection with the provision of proxy voting services voting to the Advisers, including methods to reasonably ensure that its analysis and recommendations are not influenced by conflict of interest, and shall disclose such controls and policies to the Advisers when and as provided for herein. Unless otherwise specified, references herein to recommendations of the Agent shall refer to those in which no conflict of interest has been identified.

 

  C. Proxy Group

The Adviser shall establish a Proxy Group (the “Group” or “Proxy Group”) which shall assist in the review of the Agent’s recommendations when a proxy voting issue is referred to the Group through the Proxy Coordinator. The members of the Proxy Group, which may include employees of the Advisers’ affiliates, are identified in Appendix 1, as may be amended from time at the Advisers’ discretion.

A minimum of four (4) members of the Proxy Group (or three (3) if one member of the quorum is either the Fund’s Chief Investment Risk Officer or Chief Financial Officer) shall constitute a quorum for purposes of taking action at any meeting of the Group. The vote of a simple majority of the members present and voting shall determine any matter submitted to a vote. Tie votes shall be broken by securing the vote of members not present at the meeting; provided, however, that the Proxy Coordinator shall ensure compliance with all applicable voting and conflict of interest procedures and shall use best efforts to secure votes from all or as many absent members as may reasonably be accomplished. The Proxy Group may meet in person or by telephone. The Proxy Group also may take action via electronic mail in lieu of a meeting, provided that each Group member has received a copy of any relevant electronic mail transmissions circulated by each other participating Group member prior to voting and provided that the Proxy Coordinator follows the directions of a majority of a quorum (as defined above) responding via electronic mail. For all votes taken in person or by telephone or teleconference, the vote shall be taken outside the presence of any person other than the members of the Proxy Group and such other persons whose attendance may be deemed appropriate by the Proxy Group from time to time in furtherance of its duties or the day-to-day administration of the Funds. In its discretion, the Proxy Group may provide the Proxy Coordinator with standing instructions to perform responsibilities assigned herein to the Proxy Group, or activities in support thereof, on its behalf, provided that such instructions do not contravene any requirements of these Adviser Procedures or a Fund’s Procedures and Guidelines.

A meeting of the Proxy Group will be held whenever (1) the Proxy Coordinator receives a recommendation from an Investment Professional to vote a Fund’s proxy contrary to the Procedures and Guidelines, or the recommendation of the Agent, where applicable, (2) the Agent has made no recommendation with respect to a vote on a proposal, or (3) a matter requires case-by-case consideration, including those in which the Agent’s recommendation is deemed to be conflicted as provided for under these Adviser Procedures, provided that, if the Proxy Group has previously provided the Proxy

 

A-11


Coordinator with standing instructions to vote in accordance with the Agent’s recommendation and no issue of conflict must be considered, the Proxy Coordinator may implement the instructions without calling a meeting of the Proxy Group.

For each proposal referred to the Proxy Group, it will review (1) the relevant Procedures and Guidelines, (2) the recommendation of the Agent, if any, (3) the recommendation of the Investment Professional(s), if any, and (4) any other resources that any member of the Proxy Group deems appropriate to aid in a determination of a recommendation.

If the Proxy Group recommends that a Fund vote in accordance with the Procedures and Guidelines, or the recommendation of the Agent, where applicable, it shall instruct the Proxy Coordinator to so advise the Agent.

If the Proxy Group recommends that a Fund vote contrary to the Procedures and Guidelines, or the recommendation of the Agent, where applicable, or if the Agent’s recommendation on a matter requiring case-by-case consideration is deemed to be conflicted, it shall follow the procedures for such voting as established by a Fund’s Board.

The Proxy Coordinator shall use best efforts to convene the Proxy Group with respect to all matters requiring its consideration. In the event quorum requirements cannot be timely met in connection with to a voting deadline, the Proxy Coordinator shall follow the procedures for such voting as established by a Fund’s Board.

 

  D. Investment Professionals

The Funds’ Advisers, sub-advisers and/or portfolio managers (each referred to herein as an “Investment Professional” and collectively, “Investment Professionals”) may submit, or be asked to submit, a recommendation to the Proxy Group regarding the voting of proxies related to the portfolio securities over which they have day-to-day portfolio management responsibility. The Investment Professionals may accompany their recommendation with any other research materials that they deem appropriate or with a request the vote be deemed “material” in the context of the portfolio(s) they manage, such that that lending activity on behalf of such portfolio(s) with respect to the relevant security should be reviewed by the Proxy Group and considered for recall and/or restriction. Input from the relevant sub-advisers and/or portfolio managers shall be given primary consideration in the Proxy Group’s determination of whether a given proxy vote is to be deemed material and the associated security accordingly restricted from lending. The determination that a vote is material in the context of a Fund’s portfolio shall not mean that such vote is considered material across all Funds voting that meeting. In order to recall or restrict shares timely for material voting purposes, the Proxy Group shall use best efforts to consider, and when deemed appropriate, to act upon, such requests timely, and requests to review lending activity in connection with a potentially material vote may be initiated by any relevant Investment Professional and submitted for the Proxy Group’s consideration at any time.

 

A-12


III. VOTING PROCEDURES

 

  A. In all cases, the Adviser shall follow the voting procedures as set forth in the Procedures and Guidelines of the Fund on whose behalf the Adviser is exercising delegated authority to vote.

 

  B. Routine Matters

The Agent shall be instructed to submit a vote in accordance with the Guidelines where such Guidelines provide a clear “For”, “Against,” “Withhold” or “Abstain” on a proposal. However, the Agent shall be directed to refer any proxy proposal to the Proxy Coordinator for instructions as if it were a matter requiring case-by-case consideration under circumstances where the application of the Guidelines is unclear, it appears to involve unusual or controversial issues, or an Investment Professional recommends a vote contrary to the Guidelines.

 

  C. Matters Requiring Case-by-Case Consideration

The Agent shall be directed to refer proxy proposals accompanied by its written analysis and voting recommendation to the Proxy Coordinator where the Guidelines have noted “case-by-case” consideration.

Upon receipt of a referral from the Agent, the Proxy Coordinator may solicit additional research from the Agent, Investment Professional(s), as well as from any other source or service.

Except in cases in which the Proxy Group has previously provided the Proxy Coordinator with standing instructions to vote in accordance with the Agent’s recommendation, the Proxy Coordinator will forward the Agent’s analysis and recommendation and/or any research obtained from the Investment Professional(s), the Agent or any other source to the Proxy Group. The Proxy Group may consult with the Agent and/or Investment Professional(s), as it deems necessary.

 

  1. Within-Guidelines Votes: Votes in Accordance with a Fund’s Guidelines and/or, where applicable, Agent Recommendation

In the event the Proxy Group, and where applicable, any Investment Professional participating in the voting process, recommend a vote Within Guidelines, the Proxy Group will instruct the Agent, through the Proxy Coordinator, to vote in this manner. Except as provided for herein, no Conflicts Report (as such term is defined herein) is required in connection with Within-Guidelines Votes.

 

  2. Non-Votes: Votes in Which No Action is Taken

The Proxy Group may recommend that a Fund refrain from voting under circumstances including, but not limited to, the following: (1) if the economic effect on shareholders’ interests or the value of the portfolio holding is

 

A-13


indeterminable or insignificant, e.g., proxies in connection with fractional shares, securities no longer held in the portfolio of an ING Fund or proxies being considered on behalf of a Fund that is no longer in existence; or (2) if the cost of voting a proxy outweighs the benefits, e.g., certain international proxies, particularly in cases in which share blocking practices may impose trading restrictions on the relevant portfolio security. In such instances, the Proxy Group may instruct the Agent, through the Proxy Coordinator, not to vote such proxy. The Proxy Group may provide the Proxy Coordinator with standing instructions on parameters that would dictate a Non-Vote without the Proxy Group’s review of a specific proxy. It is noted a Non-Vote determination would generally not be made in connection with voting rights received pursuant to class action participation; while a Fund may no longer hold the security, a continuing economic effect on shareholders’ interests is likely.

Reasonable efforts shall be made to secure and vote all other proxies for the Funds, but, particularly in markets in which shareholders’ rights are limited, Non-Votes may also occur in connection with a Fund’s related inability to timely access ballots or other proxy information in connection with its portfolio securities.

Non-Votes may also result in certain cases in which the Agent’s recommendation has been deemed to be conflicted, as provided for in the Funds’ Procedures.

 

  3. Out-of-Guidelines Votes: Votes Contrary to Procedures and Guidelines, or Agent Recommendation, where applicable, Where No Recommendation is Provided by Agent, or Where Agent’s Recommendation is Conflicted

If the Proxy Group recommends that a Fund vote contrary to the Procedures and Guidelines, or the recommendation of the Agent, where applicable, if the Agent has made no recommendation on a matter requiring case-by-case consideration and the Procedures and Guidelines are silent, or the Agent’s recommendation on a matter requiring case-by-case consideration is deemed to be conflicted as provided for under these Adviser Procedures, the Proxy Coordinator will then implement the procedures for handling such votes as adopted by the Fund’s Board.

 

  4. The Proxy Coordinator will maintain a record of all proxy questions that have been referred to a Fund’s Compliance Committee, all applicable recommendations, analysis, research and Conflicts Reports.

 

IV. ASSESSMENT OF THE AGENT AND CONFLICTS OF INTEREST

In furtherance of the Advisers’ fiduciary duty to the Funds and their beneficial owners, the Advisers shall establish the following:

 

  A. Assessment of the Agent

 

A-14


The Advisers shall establish that the Agent (1) is independent from the Advisers, (2) has resources that indicate it can competently provide analysis of proxy issues and (3) can make recommendations in an impartial manner and in the best interests of the Funds and their beneficial owners. The Advisers shall utilize, and the Agent shall comply with, such methods for establishing the foregoing as the Advisers may deem reasonably appropriate and shall do not less than annually as well as prior to engaging the services of any new proxy service. The Agent shall also notify the Advisers in writing within fifteen (15) calendar days of any material change to information previously provided to an Adviser in connection with establishing the Agent’s independence, competence or impartiality.

Information provided in connection with assessment of the Agent shall be forwarded to a member of the mutual funds practice group of ING US Legal Services (“Counsel”) for review. Counsel shall review such information and advise the Proxy Coordinator as to whether a material concern exists and if so, determine the most appropriate course of action to eliminate such concern.

 

  B. Conflicts of Interest

The Advisers shall establish and maintain procedures to identify and address conflicts that may arise from time to time concerning the Agent. Upon the Advisers’ request, which shall be not less than annually, and within fifteen (15) calendar days of any material change to such information previously provided to an Adviser, the Agent shall provide the Advisers with such information as the Advisers deem reasonable and appropriate for use in determining material relationships of the Agent that may pose a conflict of interest with respect to the Agent’s proxy analysis or recommendations. The Proxy Coordinator shall forward all such information to Counsel for review. Counsel shall review such information and provide the Proxy Coordinator with a brief statement regarding whether or not a material conflict of interest is present. Matters as to which a material conflict of interest is deemed to be present shall be handled as provided in the Fund’s Procedures and Guidelines.

In connection with their participation in the voting process for portfolio securities, each member of the Proxy Group, and each Investment Professional participating in the voting process, must act solely in the best interests of the beneficial owners of the applicable Fund. The members of the Proxy Group may not subordinate the interests of the Fund’s beneficial owners to unrelated objectives, including taking steps to reasonably insulate the voting process from any conflict of interest that may exist in connection with the Agent’s services or utilization thereof.

For all matters for which the Proxy Group recommends an Out-of-Guidelines Vote, or for which a recommendation contrary to that of the Agent has been received from an Investment Professional and is to be utilized, the Proxy Coordinator will implement the procedures for handling such votes as adopted by the Fund’s Board, including completion of such Conflicts Reports as may be required under the Fund’s Procedures. Completed Conflicts Reports shall be provided to the Proxy Coordinator within two (2) business days. Such Conflicts Report should describe any known conflicts of either a business or personal nature, and set forth any contacts

 

A-15


with respect to the referral item with non-investment personnel in its organization or with outside parties (except for routine communications from proxy solicitors). The Conflicts Report should also include written confirmation that any recommendation from an Investment Professional provided in connection with an Out-of-Guidelines Vote or under circumstances where a conflict of interest exists was made solely on the investment merits and without regard to any other consideration.

The Proxy Coordinator shall forward all Conflicts Reports to Counsel for review. Counsel shall review each report and provide the Proxy Coordinator with a brief statement regarding whether or not a material conflict of interest is present. Matters as to which a material conflict of interest is deemed to be present shall be handled as provided in the Fund’s Procedures and Guidelines.

 

V. REPORTING AND RECORD RETENTION

The Adviser shall maintain the records required by Rule 204-2(c)(2), as may be amended from time to time, including the following: (1) A copy of each proxy statement received regarding a Fund’s portfolio securities. Such proxy statements received from issuers are available either in the SEC’s EDGAR database or are kept by the Agent and are available upon request. (2) A record of each vote cast on behalf of a Fund. (3) A copy of any document created by the Adviser that was material to making a decision how to vote a proxy, or that memorializes the basis for that decision. (4) A copy of written requests for Fund proxy voting information and any written response thereto or to any oral request for information on how the Adviser voted proxies on behalf of a Fund. All proxy voting materials and supporting documentation will be retained for a minimum of six (6) years.

 

A-16


APPENDIX 1

to the

Advisers’ Proxy Voting Procedures

Proxy Group for registered investment company clients of ING Investments, LLC, ING Investment Management Co. and Directed Services, LLC:

 

Name

 

Title or Affiliation

Stanley D. Vyner

  Chief Investment Risk Officer and Executive Vice President, ING Investments, LLC

Todd Modic

  Senior Vice President, ING Funds Services, LLC and ING Investments, LLC; and Chief Financial Officer of the ING Funds

Maria Anderson

  Vice President of Fund Compliance, ING Funds Services, LLC

Karla J. Bos

  Proxy Coordinator for the ING Funds and Assistant Vice President – Special Projects, ING Funds Services, LLC

Julius A. Drelick III, CFA

  Vice President, Platform Product Management and Project Management, ING Funds Services, LLC

Harley Eisner

  Vice President of Financial Analysis, ING Funds Services, LLC

Theresa K. Kelety, Esq.

  Counsel, ING Americas US Legal Services

Effective as of January 1, 2008

 

A-17


EXHIBIT 4

to the

ING Funds

Proxy Voting Procedures

 

 

PROXY VOTING GUIDELINES OF THE ING FUNDS

 

 

 

 

I. INTRODUCTION

The following is a statement of the Proxy Voting Guidelines (“Guidelines”) that have been adopted by the respective Boards of Directors or Trustees of each Fund. Unless otherwise provided for herein, any defined term used herein shall have the meaning assigned to it in the Funds’ and Advisers’ Proxy Voting Procedures (the “Procedures”).

Proxies must be voted in the best interest of the Fund(s). The Guidelines summarize the Funds’ positions on various issues of concern to investors, and give a general indication of how Fund portfolio securities will be voted on proposals dealing with particular issues. The Guidelines are not exhaustive and do not include all potential voting issues.

The Adviser, in exercising its delegated authority, will abide by the Guidelines as outlined below with regard to the voting of proxies except as otherwise provided in the Procedures. In voting proxies, the Adviser is guided by general fiduciary principles. It must act prudently, solely in the interest of the beneficial owners of the Funds it manages. The Adviser will not subordinate the interest of beneficial owners to unrelated objectives. The Adviser will vote proxies in the manner that it believes will do the most to maximize shareholder value.

 

II. GUIDELINES

The following Guidelines are grouped according to the types of proposals generally presented to shareholders of U.S. issuers: Board of Directors, Proxy Contests, Auditors, Proxy Contest Defenses, Tender Offer Defenses, Miscellaneous, Capital Structure, Executive and Director Compensation, State of Incorporation, Mergers and Corporate Restructurings, Mutual Fund Proxies, and Social and Environmental Issues. An additional section addresses proposals most frequently found in global proxies.

General Policies

These Guidelines apply to securities of publicly traded companies and to those of privately held companies if publicly available disclosure permits such application. All matters for which such disclosure is not available shall be considered CASE-BY-CASE.

 

A-18


It shall generally be the policy of the Funds to take no action on a proxy for which no Fund holds a position or otherwise maintains an economic interest in the relevant security at the time the vote is to be cast.

In all cases receiving CASE-BY-CASE consideration, including cases not specifically provided for under these Guidelines, unless otherwise provided for under these Guidelines, it shall generally be the policy of the Funds to vote in accordance with the recommendation provided by the Funds’ Agent, Institutional Shareholder Services, Inc.

Unless otherwise provided for herein, it shall generally be the policy of the Funds to vote in accordance with the Agent’s recommendation in cases in which such recommendation aligns with the recommendation of the relevant issuer’s management or management has made no recommendation. However, this policy shall not apply to CASE-BY-CASE proposals for which a contrary recommendation from the Investment Professional for the relevant Fund has been received and is to be utilized, provided that incorporation of any such recommendation shall be subject to the conflict of interest review process required under the Procedures.

Recommendations from the Investment Professionals, while not required under the Procedures, are likely to be considered with respect to proxies for private equity securities and/or proposals related to merger transactions/corporate restructurings, proxy contests, or unusual or controversial issues. Such input shall be given primary consideration with respect to CASE-BY-CASE proposals being considered on behalf of the relevant Fund.

Except as otherwise provided for herein, it shall generally be the policy of the Funds not to support proposals that would impose a negative impact on existing rights of the Funds to the extent that any positive impact would not be deemed sufficient to outweigh removal or diminution of such rights.

The foregoing policies may be overridden in any case as provided for in the Procedures. Similarly, the Procedures provide that proposals whose Guidelines prescribe a firm voting position may instead be considered on a CASE-BY-CASE basis in cases in which unusual or controversial circumstances so dictate.

Interpretation and application of these Guidelines is not intended to supersede any law, regulation, binding agreement or other legal requirement to which an issuer may be or become subject. No proposal shall be supported whose implementation would contravene such requirements.

 

PROPOSAL

  

Guidelines

THE BOARD OF DIRECTORS

  
Unless otherwise provided for herein, the Agent’s standards with respect to determining director independence shall apply. These standards generally provide that, to be considered completely independent, a director shall have no material connection to the company other than the board seat. Agreement with the Agent’s independence standards shall not dictate that a   

 

A-19


PROPOSAL

  

Guidelines

Fund’s vote shall be cast according to the Agent’s corresponding recommendation. Where applicable and except as otherwise provided for herein, it shall be the policy of the Funds to lodge disagreement with an issuer’s policies or practices by withholding support from a proposal for the relevant policy or practice rather than the director nominee(s) to which the Agent assigns a correlation. Support shall be withheld from culpable nominees as appropriate, but if they are not standing for election (e.g., the board is classified), support shall generally not be withheld from others in their stead. Withholding support from a nominee shall be effected by withholding support from, or voting against, the candidate, pursuant to the applicable election standard.   
Voting on director nominees in uncontested elections not subject to specific policies described herein    Case-by-Case
Voting on independent outside director nominees if application of the policies described herein is likely to result in withholding support from the majority of independent outside directors sitting on a board, or removal of such directors would negatively impact majority board independence, unless the concerns identified are of such grave nature as to merit removal of the independent directors.    Do Not Withhold
Where applicable and except as otherwise provided for herein, support in connection with issues raised by the Agent if the nominee did not serve on the board or relevant committee during the majority of the time period relevant to the concerns cited by the Agent.    Do Not Withhold
Support from a nominee who, during both of the most recent two years, attended less than 75 percent of the board and committee meetings without a valid reason for the absences. Do not withhold support in connection with attendance issues for nominees who have served on the board for less than the two most recent years.    Withhold
Support from a nominee in connection with poison pill or anti-takeover considerations (e.g., furtherance of measures serving to disenfranchise shareholders or failure to remove restrictive pill features or ensure pill expiration or submission to shareholders for vote) in cases for which culpability for implementation or renewal of the pill in such form can be specifically attributed to the nominee    Withhold
Provided that a nominee served on the board during the relevant time period, support from a nominee who has failed to implement a shareholder proposal that was approved by (1) a majority of the issuer’s shares outstanding (most recent annual meeting) or (2) a majority of the votes cast for two consecutive years. However, in the case of shareholder proposals seeking shareholder ratification of a poison pill, generally do not withhold support from a nominee in such cases if the company has already implemented a policy that should reasonably prevent abusive use of the pill.    Withhold

 

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PROPOSAL

  

Guidelines

Voting on a nominee who has not acted upon negative votes (withhold or against, as applicable based on the issuer’s election standard) representing a majority of the votes cast at the previous annual meeting    Case-by-Case

•        Such nominees when (1) the issue relevant to the majority negative vote has been adequately addressed or cured or (2) the Funds’ Guidelines or voting record do not support the relevant issue.

   For
Support from inside directors or affiliated outside directors who sit on the audit committee    Withhold
Support from inside directors or affiliated outside directors who sit on the nominating or compensation committee, provided that such committee meets the applicable independence requirements of the relevant listing exchange.    Do Not Withhold
Support from inside directors or affiliated outside directors if the full board serves as the compensation or nominating committee OR has not created one or both committees, provided that the issuer is in compliance with all provisions of the listing exchange in connection with performance of relevant functions (e.g., performance of relevant functions by a majority of independent directors in lieu of the formation of a separate committee).    Do Not Withhold
Compensation Practices   
It shall generally be the policy of the Funds that matters of compensation are best determined by an independent board and compensation committee. Generally:   

(1)    Where applicable and except as otherwise provided for herein, support for nominees who did not serve on the compensation committee, or board, as applicable based on the Agent’s analysis, during the majority of the time period relevant to the concerns cited by the Agent.

   Do Not Withhold

(2)    In cases in which the Agent has identified a “pay for performance” disconnect or internal pay disparity, as such issues are defined by the Agent, support for director nominees.

   Do Not Withhold

(3)    If the Agent recommends withholding support from nominees in connection with executive compensation or perquisites related to retention or recruitment, including severance or termination arrangements, votes on such nominees if the issuer has provided adequate rationale and/or disclosure.

   For

(4)    If the Agent has raised issues of options backdating, consideration of members of the compensation committee, or board, as applicable, as well as company executives nominated as directors.

   Case-by-Case

(5)    Nominees if the Agent has raised other considerations regarding “poor compensation practices.

   Case-by-Case

 

A-21


PROPOSAL

  

Guidelines

Accounting Practices   

(1)    Independent outside director nominees serving on the audit committee.

   For

(2)    Where applicable and except as otherwise provided for herein, support for nominees serving on the audit committee who did not serve on that committee during the majority of the time period relevant to the concerns cited by the Agent.

   Do Not Withhold

(3)    If the Agent has raised concerns regarding poor accounting practices, consideration of the company’s CEO and CFO, if nominated as directors, and nominees serving on the audit committee.

   Case-by-Case

(4)    If total non-audit fees exceed the total of audit fees, audit-related fees and tax compliance and preparation fees, the provisions under AUDITORS below shall apply.

  
Board Independence   
It shall generally be the policy of the Funds that a board should be majority independent. Inside director or affiliated outside director nominees in cases in which the full board is not majority independent.    Case-by-Case

(1)    Support from the fewest directors whose removal would achieve majority independence across the remaining board, except that support may be withheld from additional nominees whose relative level of independence cannot be differentiated.

   Withhold

(2)    Support from all non-independent nominees, including the founder, chairman or CEO, if the number required to achieve majority independence is equal to or greater than the number of non-independent nominees.

   Withhold

(3)    Except as provided above, support for non-independent nominees in the role of CEO, and when appropriate, founder or chairman. Determine support for other non-independent nominees based on the qualifications and contributions of the nominee as well as the Funds’ voting precedent for assessing relative independence to management, e.g., insiders holding senior executive positions are deemed less independent than affiliated outsiders with a transactional or advisory relationship to the company, and affiliated outsiders with a material transactional or advisory relationship are deemed less independent than those with lesser relationships.

   For

(4)    Non-voting directors (e.g., director emeritus or advisory director) shall be excluded from calculations with respect to majority board independence.

  

 

A-22


PROPOSAL

  

Guidelines

(5)    When conditions contributing to a lack of majority independence remain substantially similar to those in the previous year, it shall generally be the policy of the Funds to vote on nominees in a manner consistent with votes cast by the Fund(s) in the previous year.

  
Nominees without regard to “over-boarding” issues raised by the Agent, unless other concerns requiring case-by-case consideration have been raised    For
Consideration of nominees when the Agent recommends withholding support due to assessment that a nominee acted in bad faith or against shareholder interests in connection with a major transaction, such as a merger or acquisition, factoring in the merits of the nominee’s performance and rationale and disclosure provided    Case-by-Case
Performance Test for Directors   

•        Support on nominees failing the Agent’s performance test, which includes market-based and operating performance measures, provided that input from the Investment Professional(s) for a given Fund shall be given primary consideration with respect to such proposals.

   Case-by-Case
Proposals Regarding Board Composition or Board Service   

•        Except as otherwise provided for herein, shareholder proposals to impose new board structures or policies, including those requiring that the positions of Chairman and CEO be held separately, except support proposals in connection with a binding agreement or other legal requirement to which an issuer has or reasonably may expect to become subject, and consider such proposals on a case-by-case basis if the board is not majority independent or pervasive corporate governance concerns have been identified.

   Against

•        Management proposals to adopt or amend board structures or policies, except consider such proposals on a case-by-case basis if the board is not majority independent, pervasive corporate governance concerns have been identified, or the proposal may result in a material reduction in shareholders’ rights.

   For

•        Shareholder proposals seeking more than a simple majority of independent directors.

   Against

•        Shareholder proposals asking that board compensation and/or nominating committees be composed exclusively of independent directors.

   Against

•        Shareholder proposals to limit the number of public company boards on which a director may serve.

   Against

 

A-23


PROPOSAL

   Guidelines

•        Shareholder proposals that seek to redefine director independence or directors’ specific roles (e.g., responsibilities of the lead director)

   Against

•        Shareholder proposals requesting creation of additional board committees or offices, except as otherwise provided for herein

   Against

•        Shareholder proposals that seek creation of an audit, compensation or nominating committee of the board, unless the committee in question is already in existence or the issuer has availed itself of an applicable exemption of the listing exchange (e.g., performance of relevant functions by a majority of independent directors in lieu of the formation of a separate committee)

   For

•        Shareholder proposals to limit the tenure of outside directors

   Against

•        Shareholder proposals to impose a mandatory retirement age for outside directors unless the proposal seeks to relax existing standards, but generally do not vote against management proposals seeking to establish a retirement age for directors

   Against
Shareholder proposals requiring directors to own a minimum amount of company stock in order to qualify as a
director or to remain on the board
   Against
Director and Officer Indemnification and Liability Protection    Case-by-Case

•        Limit or eliminate entirely directors’ and officers’ liability for monetary damages for violating the duty of care

   Against

•        Proposals that would expand coverage beyond just legal expenses to acts, such as negligence, that are more serious violations of fiduciary obligation than mere carelessness

   Against

•        Proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if:

  

(1)    The director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company, and

 

(2)    Only if the director’s legal expenses would be covered

   For
PROXY CONTESTS     
Input from the Investment Professional(s) for a given Fund shall be given primary consideration with respect to proposals in connection with proxy contests being considered on behalf of that Fund.   
Voting for director nominees in contested elections    Case-by-Case
Reimburse proxy solicitation expenses    Case-by-Case

 

A-24


PROPOSAL

  

Guidelines

AUDITORS     
Management proposals to ratify auditors, except in cases of poor accounting practices or high non-audit fees. Consider
management proposals to ratify auditors on a case-by-case basis if the Agent cites poor accounting practices.
   For
Non-Audit Services   

•        Approval of auditors when fees for non-audit services exceed 50 percent of total auditor fees as described below. Vote against management proposals to ratify auditors only in cases in which concerns exist that remuneration for the non-audit work is so lucrative as to taint the auditor’s independence. For purposes of this review, fees deemed to be reasonable, generally non-recurring, exceptions to the non-audit fee category (e.g., those related to an IPO) shall be excluded. If concerns exist or an issuer has a history of questionable accounting practices, also vote for shareholder proposals asking the issuer to present its auditor annually for ratification, but in other cases generally vote against.

   Case-by-Case
Auditor Independence   

•        Shareholder proposals asking companies to prohibit their auditors from engaging in non-audit services or capping the level of non-audit services

   Case-by-Case
Audit Firm Rotation   

•        Shareholder proposals asking for mandatory audit firm rotation

   Against
PROXY CONTEST DEFENSES   
Board Structure: Staggered vs. Annual Elections   

•        Proposals to classify or otherwise restrict shareholders’ ability to vote upon directors

   Against

•        Proposals to repeal classified boards and to elect all directors annually

   For
Shareholder Ability to Remove Directors   

•        Proposals that provide that directors may be removed only for cause

   Against

•        Proposals to restore shareholder ability to remove directors with or without cause

   For

•        Proposals that provide that only continuing directors may elect replacement to fill board vacancies

   Against

 

A-25


PROPOSAL

  

Guidelines

•        Proposals that permit shareholders to elect directors to fill board vacancies

   For
Cumulative Voting   

•        Management proposals to eliminate cumulative voting, when the company maintains a classified board of directors, except that such proposals may be supported irrespective of classification in furtherance of an issuer’s plan to adopt a majority voting standard

   Against

•        Shareholder proposals to restore or permit cumulative voting, in cases in which the company maintains a classified board of directors

   For
Time-Phased Voting   

•        Proposals to implement time-phased or other forms of voting that do not promote a one share, one vote standard

   Against

•        Proposals to eliminate such forms of voting

   For
Shareholder Ability to Call Special Meetings   

•        Proposals to restrict or prohibit shareholder ability to call special meetings

   Against

•        Proposals that remove restrictions on the right of shareholders to act independently of management

   For
Shareholder Ability to Act by Written Consent   

•        Proposals to restrict or prohibit shareholder ability to take action by written consent

   Against

•        Proposals to allow or make easier shareholder action by written consent

   For
Shareholder Ability to Alter the Size of the Board   

•        Proposals that seek to fix the size of the board or designate a range for its size

   For

•        Proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval

   Against
TENDER OFFER DEFENSES   
Poison Pills   

•        Proposals that ask a company to submit its poison pill for shareholder ratification, or to redeem its pill in lieu thereof, unless:

   For

(1)    shareholders have approved adoption of the plan,

 

(2)    a policy has already been implemented by the company that should reasonably prevent abusive use of the pill, or

   Against

 

A-26


PROPOSAL

  

Guidelines

(3)    the board had determined that it was in the best interest of shareholders to adopt a pill without delay, provided that such plan would be put to shareholder vote within twelve months of adoption or expire, and if not approved by a majority of the votes cast, would immediately terminate

  

•        Shareholder proposals to redeem a company’s poison pill

   Case-by-Case

•        Management proposals to approve or ratify a poison pill or any plan that can reasonably be construed as an anti-takeover measure, with voting decisions generally based on the Agent’s approach to evaluating such proposals, considering factors such as rationale, trigger level and sunset provisions. Votes will generally be cast in a manner that seeks to preserve shareholder value and the right to consider a valid offer.

   Case-by-Case

•        Management proposals in connection with poison pills or anti-takeover activities that do not meet the Agent’s standards

   Against
Fair Price Provisions   

•        Proposals to adopt fair price provisions

   Case-by-Case

•        Fair price provisions with shareholder vote requirements greater than a majority of disinterested shares

   Against
Greenmail   

•        Proposals to adopt antigreenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments

   For

•        Antigreenmail proposals when they are bundled with other charter or bylaw amendments

   Case-by-Case
Pale Greenmail    Case-by-Case
Unequal Voting Rights   

•        Dual-class exchange offers

   Against

•        Dual-class recapitalizations

   Against
Supermajority Shareholder Vote Requirement to Amend the Charter or Bylaws   

•        Management proposals to require a supermajority shareholder to approve charter and bylaw amendments or other key proposals

   Against

•        Shareholder proposals to lower supermajority shareholder vote requirements for charter and bylaw amendments, unless the proposal also asks the issuer to mount a solicitation campaign or similar form of comprehensive commitment to obtain passage of the proposal

   For

 

A-27


PROPOSAL

  

Guidelines

Supermajority Shareholder Vote Requirement to Approve Mergers     

•        Management proposals to require a supermajority shareholder vote to approve mergers and other significant business combinations

   Against

•        Shareholder proposals to lower supermajority shareholder vote requirements for mergers and other significant business combinations

   For
White Squire Replacements    For
MISCELLANEOUS     
Amendments to Corporate Documents   

•        Except to align with legislative or regulatory changes or when support is recommended by the Agent or Investment Professional (including, for example, as a condition to a major transaction such as a merger), proposals seeking to remove shareholder approval requirements or otherwise remove or diminish shareholder rights, e.g., by:

 

(1)    adding restrictive provisions,

 

(2)    removing article provisions or moving them to portions of the charter not requiring shareholder approval or

 

(3)    in corporate structures such as holding companies, removing provisions in an active subsidiary’s charter that provide voting rights to parent company shareholders. This policy would also generally apply to proposals seeking approval of corporate agreements or amendments to such agreements that the Agent recommends against because a similar reduction in shareholder rights is requested.

   Against

•        Proposals for charter amendments that may support board entrenchment or may be used as an anti-takeover device, particularly if the proposal is bundled or the board is classified

   Against

•        Proposals seeking charter or bylaw amendments to remove anti-takeover provisions

   For

•        Proposals seeking charter or bylaw amendments not addressed under these Guidelines

   Case-by-Case
Shareholder proposals to adopt confidential voting, use independent tabulators, and use independent inspectors of election    For
Management proposals to adopt confidential voting    For
Proxy Access   

•        Shareholder proposals seeking open access to management’s proxy material in order to nominate their own candidates to the board

   Case-by-Case

 

A-28


PROPOSAL

  

Guidelines

Majority Voting Standard   
Except as otherwise provided for herein, it shall generally be the policy of the Funds to extend discretion to issuers to determine when it may be appropriate to adopt a majority voting standard.   

•        Management proposals, irrespective of whether the proposal contains a plurality carve-out for contested elections, and shareholder proposals also supported by management, seeking election of directors by the affirmative vote of the majority of votes cast in connection with a meeting of shareholders, including amendments to corporate documents or other actions in furtherance of such standard, and provided such standard when supported does not conflict with state law in which the company is incorporated

   For

•        Shareholder proposals not otherwise supported by management seeking adoption of the majority voting standard or related amendments or actions

   Against

•        Proposals seeking adoption of the majority voting standard for issuers with a history of board malfeasance or pervasive corporate governance concerns

   Case-by-Case
Bundled or “Conditioned” Proxy Proposals    Case-by-Case

•        Proposals containing one or more items not supported under these Guidelines if the Agent or an Investment Professional deems the negative impact, on balance, to outweigh any positive impact

   Against
Shareholder Advisory Committees    Case-by-Case
Reimburse Shareholder for Expenses Incurred   

•        Proposals to reimburse expenses incurred in connection with shareholder proposals, with voting decisions determined based on the Agent’s criteria, considering whether the related proposal received the requisite support for approval and was adopted for the benefit of the company and its shareholders

   Case-by-Case
Management proposals for Other Business, in connection with proxies of U.S. issuers, except in connection with a proxy contest in which a Fund is not voting in support of management    For
Proposals to lower quorum requirements for shareholder meetings below a majority of the shares outstanding    Case-by-Case
Advance Notice for Shareholder Proposals   

•        Management proposals related to advance notice period requirements, provided that the period requested is in accordance with applicable law and no material governance concerns have been identified in connection with the issuer

   For

 

A-29


PROPOSAL

  

Guidelines

CAPITAL STRUCTURE     
Common Stock Authorization   

•        Proposals to increase the number of shares of common stock, taking into consideration whether intention exists to significantly dilute shareholders proportionate interest or to be unduly dilutive to shareholders’ proportionate interest. Except where otherwise indicated, the Agent’s proprietary approach, utilizing quantitative criteria (e.g., dilution, peer group comparison, company performance and history) to determine appropriate thresholds and, for requests marginally above such allowable threshold, a qualitative review (e.g., rationale and prudent historical usage), will generally be utilized in evaluating such proposals.

   Case-by-Case

•        Proposals to authorize capital increases within the Agent’s allowable thresholds or those in excess but meeting Agent’s qualitative standards. Consider on a case-by-case basis those requests failing the Agent’s review for proposals in connection with which a contrary recommendation from the Investment Professional(s) has been received and is to be utilized (e.g., in support of a merger or acquisition proposal).

   For

•        Proposals to authorize capital increases within the Agent’s allowable thresholds or those in excess but meeting Agent’s qualitative standards, unless the company states that the stock may be used as a takeover defense. In those cases, consider on a case-by-case basis if a contrary recommendation from the Investment Professional(s) has been received and is to be utilized.

   For

•        Proposals to authorize capital increases exceeding the Agent’s thresholds when a company’s shares are in danger of being delisted or if a company’s ability to continue to operate as a going concern is uncertain.

   For

•        Proposals to increase the number of authorized shares of a class of stock if the issuance which the increase is intended to service is not supported under these Guidelines.

   Against
Dual Class Capital Structures   

•        Proposals to increase the number of authorized shares of the class of stock that has superior voting rights in companies that have dual class capital structures, but consider case-by-case if (1) bundled with favorable proposal(s),(2) approval of such proposal(s) is a condition of such favorable proposal(s), or (3) part of a recapitalization for which support is recommended by the Agent or an Investment Professional

   Against

 

A-30


PROPOSAL

  

Guidelines

•        Management proposals to create or perpetuate dual class capital structures with unequal voting rights in cases in which the relevant Fund owns the class with inferior voting rights (except consider case-by-case if bundled with favorable proposal(s) or if approval of such proposal(s) is a condition of such favorable proposal(s)), but generally vote for such proposals if the relevant Fund owns the class with superior voting rights

   Against

•        Shareholder proposals to eliminate dual class capital structures with unequal voting rights in cases in which the relevant Fund owns the class with inferior voting rights, but generally vote against such proposals if the relevant Fund owns the class with superior voting rights, and consider case-by-case if (1) bundled with favorable proposal(s),(2) approval of such proposal(s) is a condition of such favorable proposal(s), or (3) part of a recapitalization for which support is recommended by the Agent or an Investment Professional

   For

•        Management proposals to eliminate dual class capital structures, generally voting with the Agent’s recommendation unless a contrary recommendation has been received from the Investment Professional for the relevant Fund and is to be utilized

   Case-by-Case
Stock Distributions: Splits and Dividends   

•        Management proposals to increase common share authorization for a stock split, provided that the increase in authorized shares falls within the Agent’s allowable thresholds, but consider on a case-by-case basis those proposals exceeding the Agent’s threshold for proposals in connection with which a contrary recommendation from the Investment Professional(s) has been received and is to be utilized

   For
Reverse Stock Splits   

•        Management proposals to implement a reverse stock split when the number of shares authorized for issue is proportionately reduced

   For

•        Proposals to implement a reverse stock split that do not proportionately reduce the number of shares of authorized for issue

   Case-by-Case

•        Requests that do not proportionately reduce the number of shares authorized and effectively exceed the Agent’s allowable threshold for capital increase if the Agent otherwise supports management’s rationale

   For

 

A-31


PROPOSAL

  

Guidelines

Preferred Stock   

•        Proposals authorizing the issuance of preferred stock or creation of new classes of preferred stock with unspecified voting, conversion, dividend distribution, and other rights (“blank check” preferred stock), but vote for if the Agent or an Investment Professional so recommends because the issuance is required to effect a merger or acquisition proposal

   Against

•        Proposals to issue or create blank check preferred stock in cases where the company expressly states that the stock will not be used as a takeover defense. Generally vote against in cases where the company expressly states that, or fails to disclose whether, the stock may be used as a takeover defense, but vote for if the Agent or an Investment Professional so recommends because the issuance is required to effect a merger or acquisition proposal

   For

•        Proposals to issue or authorize preferred stock in cases where the company specified the voting, dividend, conversion, and other rights of such stock and the terms of the preferred stock appear reasonable

   For

•        Proposals to increase the number of blank check preferred shares after analyzing the number of preferred shares available for issue given a company’s industry performance in terms of shareholder returns

   Case-by-Case
Shareholder proposals to have blank check preferred stock placements, other than those shares issued for the purpose of raising capital or making acquisitions in the normal course of business, submitted for shareholder ratification    For
Management Proposals to Reduce the Par Value of Common Stock    For
Shareholder Proposals that Seek Preemptive Rights or Management Proposals that Seek to Eliminate Them    Case-by-Case
Debt Restructuring    Case-by-Case
Share Repurchase Programs   

•        Proposals for open-market share repurchase plans in which all shareholders may participate on equal terms

   For

•        Proposals for programs with terms favoring selected, non-Fund parties

   Against

•        Proposals for share repurchase methods lacking adequate risk mitigation as assessed by the Agent

   Against
Management Proposals to Cancel Repurchased Shares    For

 

A-32


PROPOSAL

  

Guidelines

Tracking Stock    Case-by-Case
EXECUTIVE AND DIRECTOR COMPENSATION     
Votes with respect to compensation and employee benefit plans, except as otherwise provided for herein, with voting
decisions generally based on the Agent’s approach to evaluating such plans, which includes determination of costs and
comparison to an allowable cap.
   Case-by-Case

•        Generally vote in accordance with the Agent’s recommendations for equity-based plans with costs within such cap and against those with costs in excess of it, except that plans above the cap may be supported if so recommended by the Agent or Investment Professional as a condition to a major transaction such as a merger

  

•        Proposals seeking approval of plans for which the Agent suggests cost or dilution assessment may not be possible due to the method of disclosing shares allocated to the plan(s), except that such concerns arising in connection with evergreen provisions shall be considered case-by-case

   Against

•        Proposals for plans with costs within the cap if the primary considerations raised by the Agent pertain to matters that would not result in a negative vote under these Guidelines for the relevant board or committee member(s), or equity compensation burn rate or pay for performance as defined by the Agent

   For

•        Proposals for plans administered by potential grant recipients

   Against

•        Proposals to eliminate existing shareholder approval requirements for plan changes assessed as material by the Agent, unless the company has provided a reasonable rationale and/or adequate disclosure regarding the requested changes

   Against

•        Proposals for plans for which the Agent raises other considerations not otherwise provided for herein

   Case-by-Case
Restricted Stock or Stock Option Plans   

•        Proposals for restricted stock or stock option plans, or the issuance of shares in connection with such plans, considering factors such as level of disclosure and adequacy of vesting or performance requirements. Proposals for plans that do not meet the Agent’s criteria in this regard may be supported, but vote against if no disclosure is provided regarding either vesting or performance requirements.

   Case-by-Case
Management Proposals Seeking Approval to Reprice, Replace or Exchange Options, considering factors such as rationale, historic trading patterns, value-for-value exchange, vesting periods and replacement option terms    Case-by-Case

 

A-33


PROPOSAL

  

Guidelines

•        Proposals that meet the Agent’s criteria for acceptable repricing, replacement or exchange transactions, except that considerations raised by the Agent regarding burn rate or executive participation shall not be grounds for withholding support

   For

•        Management proposals seeking approval of compensation plans that:

 

(1)    permit or may permit (e.g., history of repricing and no express prohibition against future repricing) repricing of stock options, or any form or alternative to repricing, without shareholder approval,

 

(2)    include provisions that permit repricing, replacement or exchange transactions that do not meet the Agent’s criteria (except regarding burn rate or executive participation as noted above), or

 

(3)    give the board sole discretion to approve option repricing, replacement or exchange programs

   Against
Director Compensation, with voting decisions generally based on the Agent’s quantitative approach described above
as well as a review of qualitative features of the plan in cases in which costs exceed the Agent’s threshold. Do not
vote against
plans for which burn rate is the sole consideration raised by the Agent.
   Case-by-Case
Employee Stock Purchase Plans, and capital issuances in support of such plans, with voting decisions generally based
on the Agent’s approach to evaluating such plans, except that negative recommendations by the Agent due to
evergreen provisions will be reviewed case-by-case.
   Case-by-Case
OBRA-Related Compensation Proposals   
Votes on plans intended to qualify for favorable tax treatment under the provisions of Section 162(m) of OBRA should be evaluated irrespective of the Agent’s assessment of board independence, provided that the board meets the independence requirements of the relevant listing exchange.   

•        Amendments that Place a Cap on Annual Grants or Amend Administrative Features

   For

•        Amendments to Add Performance-Based Goals

   For

•        Amendments to Increase Shares and Retain Tax Deductions Under OBRA

   Case-by-Case

•        Approval of Cash or Cash-and-Stock Bonus Plan, with primary consideration given to management’s assessment that such plan meets the requirements for exemption of performance-based compensation

   For

 

A-34


PROPOSAL

  

Guidelines

Shareholder Proposals Regarding Executive and Director Pay

 

•        Regarding the remuneration of individuals other than senior executives and directors, proposals that seek to expand or restrict disclosure or require shareholder approval beyond regulatory requirements and market practice, or proposals seeking disclosure of executive and director compensation if providing it would be out of step with market practice and potentially disruptive to the business

   Against

•        Proposals that seek to impose new compensation structures or policies, such as “claw back” recoupments or advisory votes, unless evidence exists of abuse in historical compensation practices, and except as otherwise provided for herein

   Against
Severance and Termination Payments   

•        Shareholder proposals to have parachute arrangements submitted for shareholder ratification, (with “parachutes” defined as compensation arrangements related to termination that specify change-in-control events), and provided that the proposal does not include unduly restrictive or arbitrary provisions such as advance approval requirements

   For

•        Shareholder proposals to submit executive severance agreements for shareholder ratification, unless such proposals do not specify change-in-control events; Supplemental Executive Retirement Plans; or deferred executive compensation plans; or ratification is required by the listing exchange

   Against

•        All proposals to approve, ratify or cancel executive severance or termination arrangements, including those related to executive recruitment or retention, generally voting FOR such compensation arrangements if the issuer has provided adequate rationale and/or disclosure or support is recommended by the Agent or Investment Professional (e.g., as a condition to a major transaction such as a merger).

   Case-by-Case
Employee Stock Ownership Plans (ESOPs)    For
401(k) Employee Benefit Plans    For
Shareholder proposals requiring mandatory periods for officers and directors to hold company stock    Against
Advisory Votes on Executive Compensation   

•        Management proposals seeking ratification of the company’s compensation program, unless the program includes practices or features not supported under these Guidelines and the proposal receives a negative recommendation from the Agent

   For

 

A-35


PROPOSAL

  

Guidelines

•        Unless otherwise provided for herein, reports not receiving the Agent’s support due to concerns regarding severance/termination payments, incentive structures or vesting or performance criteria not otherwise supported by these Guidelines, generally voting for if the company has provided a reasonable rationale and/or adequate disclosure regarding the matter(s) under consideration

   Case-by-Case
STATE OF INCORPORATION     
Voting on State Takeover Statutes    Case-by-Case
Voting on Reincorporation Proposals, generally supporting management proposals not assessed by the Agent as a
potential takeover defense, but if so assessed, weighing management’s rationale for the change
   Case-by-Case

•        Management reincorporation proposals upon which another key proposal, such as a merger transaction, is contingent if the other key proposal is also supported

   For

•        Shareholder reincorporation proposals not also supported by the company

   Against

MERGERS AND CORPORATE RESTRUCTURINGS

  
Input from the Investment Professional(s) for a given Fund shall be given primary consideration with respect to proposals regarding business combinations, particularly those between otherwise unaffiliated parties, or other corporate restructurings being considered on behalf of that Fund.   
Proposals not typically supported under these Guidelines, if a key proposal, such as a merger transaction, is contingent upon its support and a vote for is accordingly recommended by the Agent or an Investment Professional    For
Mergers and Acquisitions    Case-by-Case
Corporate Restructuring, including demergers, minority squeezeouts, leveraged buyouts, spinoffs, liquidations, dispositions, divestitures and asset sales, with voting decisions generally based on the Agent’s approach to evaluating such proposals    Case-by-Case
Appraisal Rights    For
Changing Corporate Name    For
Adjournment of Meeting   

•        Proposals to adjourn a meeting when the primary proposal is also voted FOR

   For

 

A-36


PROPOSAL

   Guidelines
MUTUAL FUND PROXIES     
Election of Directors    Case-by-Case
Converting Closed-end Fund to Open-end Fund    Case-by-Case
Proxy Contests    Case-by-Case
Investment Advisory Agreements    Case-by-Case
Approving New Classes or Series of Shares    For
Preferred Stock Proposals    Case-by-Case
1940 Act Policies    Case-by-Case
Changing a Fundamental Restriction to Nonfundamental Restriction    Case-by-Case
Change Fundamental Investment Objective to Nonfundamental    Case-by-Case
Name Rule Proposals    Case-by-Case
Disposition of Assets/Termination/Liquidation    Case-by-Case
Changes to the Charter Document    Case-by-Case
Changing the Domicile of a Fund    Case-by-Case
Change in Fund’s Subclassification    Case-by-Case
Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder Approval    For
Distribution Agreements    Case-by-Case
Master-Feeder Structure    For
Mergers    Case-by-Case
Shareholder Proposals to Establish Director Ownership Requirement    Against
Reimburse Shareholder for Expenses Incurred    Case-by-Case
Terminate the Investment Advisor    Case-by-Case
SOCIAL AND ENVIRONMENTAL ISSUES     
Unless otherwise specified herein. While a wide variety of factors may go into each analysis, the overall principle guiding all vote recommendations focuses on how or whether the proposal will enhance the economic value of the company. Because a company’s board is likely to have access to relevant, non-public information regarding a company’s business, such proposals will generally be voted in a manner intended to give the board (rather than shareholders) latitude to set corporate policy and oversee management.    Case-by-Case

 

A-37


PROPOSAL

  

Guidelines

 

Shareholder proposals seeking to dictate corporate conduct, apply existing law, duplicate policies already substantially in place and/or addressed by the issuer or release information that would not help a shareholder evaluate an investment in the corporation as an economic matter, absent concurring support from the issuer, compelling evidence of abuse, significant public controversy or litigation, the issuer’s significant history of relevant violations; or activities not in step with market practice or regulatory requirements, or unless provided for otherwise herein.

 

•        Such proposals would generally include those seeking preparation of reports and/or implementation or additional disclosure of corporate policies related to issues such as:

 

•        consumer and public safety

 

•        environment and energy

 

•        labor standards and human rights

 

•        military business and political concerns

 

•        workplace diversity and non-discrimination

 

•        sustainability

 

•        social issues

 

•        vendor activities

 

•        economic risk, or

 

•        matters of science and engineering

   Against

 

A-38


PROPOSAL

   Guidelines

 

GLOBAL PROXIES

    

 

The foregoing Guidelines provided in connection with proxies of U.S. issuers shall also be applied to global proxies where applicable and not provided for otherwise herein. The following provide for differing regulatory and legal requirements, market practices and political and economic systems existing in various global markets.

 

  

Proposals in cases in which the Agent recommends voting against such proposal because relevant disclosure by the issuer, or the time provided for consideration of such disclosure, is inadequate, unless otherwise provided for herein. For purposes of these global Guidelines, “against” shall mean withholding of support for a proposal, resulting in submission of a vote of against or abstain, as appropriate for the given market and level of concern raised by the Agent regarding the issue or lack of disclosure or time provided.

 

   Against

Proposals for which the Agent recommends support of practices described herein as associated with a firm against vote:

 

(1)    as the issuer or market transitions to better practices (e.g., having committed to new regulations or governance codes) or

 

(2)    as the more favorable choice in cases in which shareholders must choose between alternate proposals

 

   Case-by-Case

Routine Management Proposals

 

   For

•        The opening of the shareholder meeting

 

   For

•        That the meeting has been convened under local regulatory requirements

 

   For

•        The presence of quorum

 

   For

•        The agenda for the shareholder meeting

 

   For

•        The election of the chair of the meeting

 

   For

•        The appointment of shareholders to co-sign the minutes of the meeting

 

   For

•        Regulatory filings (e.g., to effect approved share issuances)

 

   For

•        The designation of inspector or shareholder representative(s) of minutes of meeting

 

   For

•        The designation of two shareholders to approve and sign minutes of meeting

 

   For

•        The allowance of questions

 

   For

•        The publication of minutes

   For

 

A-39


PROPOSAL

   Guidelines

•        The closing of the shareholder meeting

   For

•        Other similar routine management proposals

   For

Discharge of Management/Supervisory Board Members

 

  

•        Management proposals seeking the discharge of management and supervisory board members, unless the Agent recommends against due to concern about the past actions of the company’s auditors or directors or legal action is being taken against the board by other shareholders, including when the proposal is bundled

   For

Director Elections

 

  

•        Votes on director nominees in uncontested elections not otherwise subject to policies described herein. Unless otherwise provided for herein, the Agent’s standards with respect to determining director independence shall apply. These standards generally provide that, to be considered completely independent, a director shall have no material connection to the company other than the board seat. Agreement with the Agent’s independence standards shall not dictate that a Fund’s vote shall be cast according to the Agent’s corresponding recommendation. Further, unless otherwise provided for herein, the application of Guidelines in connection with such standards shall apply only in cases in which the nominee’s level of independence can be ascertained based on available disclosure.

 

   Case-by-Case

•        Votes in contested elections, with primary consideration given to input from the Investment Professional(s) for a given Fund

 

   Case-by-Case

•        For issuers domiciled in Canada, Finland, France, Ireland, the Netherlands, Sweden or tax haven markets, non-independent directors in cases in which the full board serves as the audit committee, or the company does not have an audit committee

 

   Against

•        For issuers in all markets, including those in tax haven markets and those in Japan that have adopted the U.S.-style board-with-committees structure, non-independent nominees to the audit committee, or, if the slate of nominees is bundled, the slate. However, if the slate is bundled and audit committee membership is unclear or proposed as a separate agenda item, vote for if the Agent otherwise recommends support. For Canadian issuers, the Funds’ U.S. Guidelines with respect to audit committees shall apply.

 

   Against

•        In tax haven markets, non-independent directors in cases in which the full board serves as the compensation committee, or the company does not have a compensation committee

 

   Do Not Vote
Against

•        Non-independent directors who sit on the compensation or nominating committees, provided that such committees meet the applicable independence requirements of the relevant listing exchange

   Do Not Vote
Against

 

A-40


PROPOSAL

   Guidelines

•        In cases in which committee membership is unclear, non-independent director nominees if no other issues have been raised in connection with his/her nomination

   Case-by-Case

•        Individuals nominated as outside/non-executive directors who do not meet the Agent’s standard for independence, unless the slate of nominees is bundled, in which case the proposal(s) to elect board members shall be considered on a case-by-case basis

   Against

•        For issuers in tax haven markets, votes on bundled slates of nominees if the board is non-majority independent. For issuers in Canada and other global markets, generally follow the Agent’s standards for withholding support from bundled slates or non-independent directors (typically excluding the CEO), as applicable, if the board does not meet the Agent’s independence standards or the board’s independence cannot be ascertained due to inadequate disclosure.

   Against

•        Nominees or slates of nominees presented in a manner not aligned with market practice and/or legislation, including:

 

•        Bundled slates of nominees (e.g., France, Hong Kong or Spain);

 

•        Simultaneous reappointment of retiring directors (e.g., South Africa);

 

•        In markets with term lengths capped by legislation or market practice, nominees whose terms exceed the caps or are not disclosed (except that bundled slates with such lack of disclosure shall be considered on a case-by-case basis); or

 

•        Nominees whose names are not disclosed in advance of the meeting (e.g., Austria, Philippines, Hong Kong or South Africa) or far enough in advance relative to voting deadlines (e.g., Italy) to make an informed voting decision

 

•        Such criteria will not generally provide grounds for withholding support in countries in which they may be identified as best practice but such legislation or market practice is not yet applicable, unless specific governance shortfalls identified by the Agent dictate that less latitude should be extended to the issuer.

   Against

•        Nominees in connection with which a recommendation has been made that the position of chairman should be separate from that of CEO or otherwise required to be independent, unless other concerns requiring CASE-BY-CASE consideration have been raised

   For

•        In cases in which cumulative or net voting applies, generally vote with Agent’s recommendation to support nominees asserted by the issuer to be independent, even if independence disclosure or criteria fall short of Agent’s standards.

  

 

A-41


PROPOSAL

   Guidelines

•        Nominees for whom the Agent has raised concerns regarding scandals or internal controls

 

   Case-by-Case

•        Nominees or slates of nominees when (1) the scandal or shortfall in controls took place at the company, or an affiliate, for which the nominee is being considered; (2) culpability can be attributed to the nominee (e.g., nominee manages or audits relevant function), and (3) the nominee has been directly implicated, with resulting arrest and criminal charge or regulatory sanction.

 

   Against

•        For markets such as the tax havens, Australia, Canada, Hong Kong, Japan, Malaysia and South Africa (and for outside directors in South Korea) in which nominees’ attendance records are adequately disclosed, the Funds’ U.S. Guidelines with respect to director attendance shall apply. The same policy shall be applied regarding attendance by statutory auditors of Japanese companies.

 

  

•        Self-nominated director candidates, with voting decisions generally based on the Agent’s approach to evaluating such candidates

 

   Case-by-Case

•        Nominees for whom “over-boarding” issues have been raised by the Agent, unless other concerns require case-by-case consideration

 

   For

•        For companies incorporated in tax haven markets but which trade exclusively in the U.S., the Funds’ U.S. Guidelines with respect to director elections shall apply.

 

  
Board Structure   

•        Proposals to fix board size, but also support proposals seeking a board range if the range is reasonable in the context of market practice and anti-takeover considerations

 

   For

•        Proposed article amendments in this regard, with voting decisions generally based on the Agent’s approach to evaluating such proposals

 

   Case-by-Case

Director and Officer Indemnification and Liability Protection, voting in accordance with the Agent’s standards

 

   Case-by-Case

•        Proposals seeking approval of overly broad provisions

 

   Against

Independent Statutory Auditors

 

  

•        With respect to Japanese companies that have not adopted the U.S.-style board-with-committees structure, any nominee to the position of “independent statutory auditor” whom the Agent considers affiliated, e.g., if the nominee has worked a significant portion of his

   Against

 

A-42


PROPOSAL

   Guidelines

career for the company, its main bank or one of its top shareholders. Where shareholders are forced to vote on multiple nominees in a single resolution, vote against all nominees. In cases in which multiple slates of statutory auditors are presented, generally vote with the Agent’s recommendation, typically to support nominees deemed to be more independent and/or aligned with interests of minority shareholders.

 

  

•        Incumbent nominees at companies implicated in scandals or exhibiting poor internal controls

 

   Against
Key Committees   

•        Proposals that permit non-board members to serve on the audit, compensation or nominating committee, provided that bundled slates may be supported if no slate nominee serves on the relevant committee(s)

 

   Against

Director and Statutory Auditor Remuneration, with voting decisions generally based on the Agent’s approach to evaluating such proposals, while also factoring in the merits of the rationale and disclosure provided

 

   Case-by-Case

•        Proposals to approve the remuneration of directors and auditors as long as the amount is not excessive (e.g., significant increases should be supported by adequate rationale and disclosure) and there is no evidence of abuse. For Toronto Stock Exchange (TSX) issuers, the Agent’s limits with respect to equity awards to non-employee directors shall apply.

 

   For

Bonus Payments

 

  
With respect to Japanese companies:   

•        Retirement bonus proposals if all payments are for directors and auditors who have served as executives of the company

 

   For

•        Proposals if one or more payments are for non-executive, affiliated directors or statutory auditors; when one or more of the individuals to whom the grants are being proposed (1) has not served in an executive capacity for the company for at least three years or (2) has been designated by the company as an independent statutory auditor, regardless of the length of time he/she has served

 

   Against

•        In all markets, if issues have been raised regarding a scandal or internal controls, bonus proposals for retiring directors or continuing directors or auditors when culpability can be attributed to the nominee (e.g., if a Fund is also voting against the nominee under criteria herein regarding issues of scandal or internal controls), unless bundled with bonuses for a majority of retirees a Fund is voting for

   Against

 

A-43


PROPOSAL

   Guidelines

Stock Option Plans for Independent Internal Statutory Auditors

 

  

•        With respect to Japanese companies, proposals regarding option grants to independent internal statutory auditors, following the Agent’s guidelines

 

   Against

Compensation Plans

 

  

•        Votes with respect to compensation plans, and awards thereunder or capital issuances in support thereof, unless otherwise provided for herein, with voting decisions generally based on the Agent’s approach to evaluating such plans, considering quantitative or qualitative factors as appropriate for the market

 

   Case-by-Case

Amendment Procedures for Equity Compensation Plans and ESPPs

 

  

•        For TSX issuers, votes with respect to amendment procedures for security-based compensation arrangements and employee share purchase plans shall generally be cast in a manner designed to preserve shareholder approval rights, with voting decisions generally based on the Agent’s recommendation.

 

  

Shares Reserved for Equity Compensation Plans

 

  

•        Unless otherwise provided for herein, voting decisions shall generally be based on the Agent’s methodology, including classification of a company’s stage of development as growth or mature and the corresponding determination as to reasonability of the share requests.

 

  

•        Equity compensation plans (e.g., option, warrant, restricted stock or employee share purchase plans or participation in company offerings such as IPOs or private placements), the issuance of shares in connection with such plans, or related management proposals (e.g., article amendments) that:

 

   Against

•        Exceed the Agent’s recommended dilution limits, including cases in which the Agent suggests dilution cannot be fully assessed (e.g., due to inadequate disclosure);

 

•        Provide deep or near-term discounts to executives or directors, unless discounts to executives are deemed by the Agent to be adequately mitigated by other vesting requirements (e.g., Japan) or broad-based employee participation otherwise meeting Agent’s standards (e.g., France);

 

•        Are administered with discretion by potential grant recipients;

 

•        Provide for retirement benefits or equity incentive awards to outside directors if not in line with market practice (e.g., Australia, Belgium, The Netherlands);

  

 

A-44


PROPOSAL

   Guidelines

•        Permit financial assistance in the form of non-recourse (or essentially non-recourse) loans in connection with executive’s participation;

 

•        For matching share plans, do not meet the Agent’s standards, considering holding period, discounts, dilution, participation, purchase price and performance criteria;

 

•        Provide for vesting upon change in control if deemed by the Agent to evidence a conflict of interest or anti-takeover device;

 

•        Provide no disclosure regarding vesting or performance criteria (provided that proposals providing disclosure in one or both areas, without regard to Agent’s criteria for such disclosure, shall be supported provided they otherwise satisfy these Guidelines);

 

•        Permit post-employment vesting if deemed inappropriate by the Agent;

 

•        Allow plan administrators to make material amendments without shareholder approval unless adequate prior disclosure has been provided, with such voting decisions generally based on the Agent’s approach to evaluating such plans; or

 

•        Provide for retesting in connection with achievement of performance hurdles unless the Agent’s analysis indicates that:

 

(1)    Performance targets are adequately increased in proportion to the additional time available,

 

(2)    Retesting is de minimis as a percentage of overall compensation or is acceptable relative to market practice, or

 

(3)    The issuer has committed to cease retesting within a reasonable period of time.

 

  

•        Such plans/awards or the related issuance of shares that:

 

(1)    Do not suffer from the defects noted above; or

 

(2)    Otherwise meet the Agent’s tests if the considerations raised by the Agent pertain primarily to performance hurdles, contract or notice periods, discretionary bonuses, recruitment awards, retention incentives, non-compete payments or vesting upon change in control (other than addressed above), if the company has provided adequate disclosure and/or a reasonable rationale in support of the relevant plan/award, practice or participation. Unless otherwise provided for herein, market practice of the primary country in which a company does business, or in which an employee is serving, as applicable, shall supersede that of the issuer’s domicile.

   For

 

A-45


PROPOSAL

   Guidelines

•        Proposals in connection with such plans or the related issuance of shares in other instances

 

   Case-by-Case

Remuneration Reports

 

  

•        Reports that include compensation plans permitting:

 

(1)    Practices or features not supported under these Guidelines, including financial assistance under the conditions described above;

 

(2)    Retesting deemed by the Agent to be excessive relative to market practice (irrespective of the Agent’s support for the report as a whole);

 

(3)    Equity award valuation triggering a negative recommendation from the Agent; or

 

(4)    Provisions for retirement benefits or equity incentive awards to outside directors if not in line with market practice, except that reports will generally be voted for if contractual components are reasonably aligned with market practices on a going-forward basis (e.g., existing obligations related to retirement benefits or terms contrary to evolving standards would not preclude support for the report)

 

   Against

•        Reports receiving the Agent’s support and not triggering the concerns cited above

 

   For

•        Unless otherwise provided for herein, reports not receiving the Agent’s support due to concerns regarding severance/ termination payments, “leaver” status, incentive structures and vesting or performance criteria not otherwise supported by these Guidelines, generally voted for if the company has provided a reasonable rationale and/or adequate disclosure regarding the matter(s) under consideration. Reports with typically unsupported features may be voted for in cases in which the Agent recommends their initial support as the issuer or market transitions to better practices (e.g., having committed to new regulations or governance codes).

 

   Case-by-Case

Shareholder Proposals Regarding Executive and Director Pay

 

  

•        The Funds’ U.S. Guidelines with respect to such shareholder proposals shall apply.

 

  

General Share Issuances

 

  

•        Unless otherwise provided for herein, voting decisions shall generally be based on the Agent’s practice to determine support for general issuance requests (with or without preemptive rights), or related requests to repurchase and reissue shares, based on their

   For

 

A-46


PROPOSAL

   Guidelines

amount relative to currently issued capital as well as market-specific considerations (e.g., priority right protections in France, reasonable levels of dilution and discount in Hong Kong). Requests to reissue repurchased shares will not be supported unless a related general issuance request is also supported.

  

•        Specific issuance requests, based on the proposed use and the company’s rationale

 

   Case-by-Case

•        Proposals to issue shares (with or without preemptive rights), convertible bonds or warrants, to grant rights to acquire shares, or to amend the corporate charter relative to such issuances or grants in cases in which concerns have been identified by the Agent with respect to inadequate disclosure, inadequate restrictions on discounts, failure to meet the Agent’s standards for general issuance requests, or authority to refresh share issuance amounts without prior shareholder approval

 

   Against

Increases in Authorized Capital

 

  

•        Unless otherwise provided for herein, voting decisions should generally be based on the Agent’s approach.

  

•        Nonspecific proposals, including bundled proposals, to increase authorized capital up to 100 percent over the current authorization unless the increase would leave the company with less than 30 percent of its new authorization outstanding

 

   For

•        Specific proposals to increase authorized capital, unless:

 

   For

•        The specific purpose of the increase (such as a share-based acquisition or merger) does not meet these Guidelines for the purpose being proposed; or

 

•        The increase would leave the company with less than 30 percent of its new authorization outstanding after adjusting for all proposed issuances

 

   Against

•        Proposals to adopt unlimited capital authorizations

 

   Against

•        The Agent’s market-specific exceptions to the above parameters (e.g., The Netherlands, due to hybrid market controls) shall be applied.

 

  

Preferred Stock

 

  

•        Unless otherwise provided for herein, voting decisions should generally be based on the Agent’s approach.

 

  

•        Creation of a new class of preferred stock or issuances of preferred stock up to 50 percent of issued capital unless the terms of the preferred stock would adversely affect the rights of existing shareholders

   For

 

A-47


PROPOSAL

   Guidelines

•        Creation/issuance of convertible preferred stock as long as the maximum number of common shares that could be issued upon conversion meets the Agent’s guidelines on equity issuance requests

 

   For

•        Creation of (1) a new class of preference shares that would carry superior voting rights to the common shares or (2) blank check preferred stock unless the board states that the authorization will not be used to thwart a takeover bid

 

   Against

Poison Pills/Protective Preference Shares

 

  

•        Management proposals in connection with poison pills or anti-takeover activities (e.g., disclosure requirements or issuances, transfers or repurchases) that do not meet the Agent’s standards. Generally vote in accordance with Agent’s recommendation to withhold support from a nominee in connection with poison pill or anti-takeover considerations when culpability for the actions can be specifically attributed to the nominee.

 

   Against

•        Director remuneration in connection with poison pill considerations raised by the Agent.

 

   Do Not Vote

Against

Approval of Financial Statements and Director and Auditor Reports

 

  

•        Management proposals seeking approval of financial accounts and reports, unless there is concern about the company’s financial accounts and reporting, which, in the case of related party transactions, would include concerns raised by the Agent regarding consulting agreements with non-executive directors

 

   For

•        Unless otherwise provided for herein, reports not receiving the Agent’s support due to concerns regarding severance/termination payments not otherwise supported by these Guidelines, factoring in the merits of the rationale and disclosure provided

 

   Case-by-Case

•        Board-issued reports receiving a negative recommendation from the Agent due to concerns regarding independence of the board or the presence of non-independent directors on the audit committee

 

   Against

•        Such proposals in connection with remuneration practices otherwise supported under these Guidelines or as a means of expressing disapproval of broader practices of the issuer or its board

 

   Do Not Vote
Against

Remuneration of Auditors

 

  

•        Proposals to authorize the board to determine the remuneration of auditors, unless there is evidence of excessive compensation relative to the size and nature of the company

   For

 

A-48


PROPOSAL

   Guidelines

Indemnification of Auditors

 

   Against

Ratification of Auditors and Approval of Auditors’ Fees, generally following the Agent’s standards for proposals seeking auditor ratification or approval of auditors’ fees, except that for Canadian issuers, the Funds’ U.S. Guidelines with respect to auditors and auditor fees shall apply.

 

  

•        Such proposals for companies in the MSCI EAFE index, provided the level of audit fee disclosure meets the Agent’s standards

 

   For

•        In other cases, such proposals unless there are material concerns raised by the Agent about the auditor’s practices or independence

   For
Allocation of Income and Dividends   

•        Management proposals concerning allocation of income and the distribution of dividends, including adjustments to reserves to make capital available for such purposes. In the event management offers multiple dividend proposals on the same agenda, primary consideration shall be given to input from the relevant Investment Professional(s).

 

   For
Stock (Scrip) Dividend Alternatives    For

•        Stock (scrip) dividend proposals that do not allow for a cash option unless management demonstrates that the cash option is harmful to shareholder value

 

   Against
Debt Instruments   

•        Proposals authorizing excessive discretion, as assessed by the Agent, to a board to issue or set terms for debt instruments (e.g., commercial paper)

 

   Against

Debt Issuance Requests

 

When evaluating a debt issuance request, the issuing company’s present financial situation is examined. The main factor for analysis is the company’s current debt-to-equity ratio, or gearing level. A high gearing level may incline markets and financial analysts to downgrade the company’s bond rating, increasing its investment risk factor in the process. A gearing level up to 100 percent is considered acceptable.

   Case-by-Case

•        Debt issuances for companies when the gearing level is between zero and 100 percent

 

   For

•        Proposals where the issuance of debt will result in the gearing level being greater than 100 percent, or for which inadequate disclosure precludes calculation of the gearing level, comparing any such proposed debt issuance to industry and market standards, and with voting decisions generally based on the Agent’s approach to evaluating such requests

   Case-by-Case

 

A-49


PROPOSAL

   Guidelines

Financing Plans

 

  

•        Adoption of financing plans if they are in the best economic interests of shareholders

 

   For

Related Party Transactions

 

   Case-by-Case

•        Approval of such transactions unless the agreement requests a strategic move outside the company’s charter or contains unfavorable or high risk terms (e.g., deposits without security interest or guaranty)

 

   For

Approval of Donations

 

  

•        Proposals for which adequate, prior disclosure of amounts is not provided

 

   Against

•        Proposals seeking single- or multi-year authorities for which adequate, prior disclosure of amounts is provided

 

   For

Capitalization of Reserves

 

  

•        Proposals to capitalize the company’s reserves for bonus issues of shares or to increase the par value of shares

 

   For
Investment of Company Reserves, with primary consideration for such proposals given to input from the Investment Professional(s) for a given Fund    Case-by-Case
Amendments to Articles of Association    Case-by-Case

•        That are editorial in nature

 

   For

•        Where shareholder rights are protected

 

   For

•        Where there is negligible or positive impact on shareholder value

 

   For

•        For which management provides adequate reasons for the amendments or the Agent otherwise supports management’s position

 

   For

•        That seek to discontinue and/or delist a form of the issuer’s securities in cases in which the relevant Fund does not hold the affected security type

 

   For

•        Which the company is required to do so by law (if applicable)

 

   For

•        That remove or lower quorum requirements for board or shareholder meetings below levels recommended by the Agent

 

   Against

•        That reduce relevant disclosure to shareholders

   Against

 

A-50


PROPOSAL

   Guidelines

•        That seek to align the articles with provisions of another proposal not supported by these Guidelines

 

   Against

•        That are not supported under these Guidelines, are presented within a bundled proposal, and for which the Agent deems the negative impact, on balance, to outweigh any positive impact

 

   Against

•        That impose a negative impact on existing shareholder rights, including rights of the Funds, to the extent that any positive impact would not be deemed by the Agent to be sufficient to outweigh removal or diminution of such rights

 

   Against

•        With respect to article amendments for Japanese companies:

 

  

•        Management proposals to amend a company’s articles to expand its business lines

 

   For

•        Management proposals to amend a company’s articles to provide for an expansion or reduction in the size of the board, unless the expansion/ reduction is clearly disproportionate to the growth/decrease in the scale of the business or raises anti-takeover concerns

 

   For

•        If anti-takeover concerns exist, management proposals, including bundled proposals, to amend a company’s articles to authorize the Board to vary the annual meeting record date or to otherwise align them with provisions of a takeover defense

 

   Against

•        Management proposals regarding amendments to authorize share repurchases at the board’s discretion, unless there is little to no likelihood of a “creeping takeover” (major shareholder owns nearly enough shares to reach a critical control threshold) or constraints on liquidity (free float of shares is low), and where the company is trading at below book value or is facing a real likelihood of substantial share sales; or where this amendment is bundled with other amendments which are clearly in shareholders’ interest (generally following the Agent’s guidelines)

 

   Against

Other Business

 

  

•        Management proposals for Other Business in connection with global proxies, voting in accordance with the Agent’s market-specific recommendations

   Against

 

A-51


STATEMENT OF ADDITIONAL INFORMATION

August 20, 2008

ING VARIABLE PORTFOLIOS, INC.

7337 East Doubletree Ranch Road

Scottsdale, AZ 85258-2034

(800) 992-0180

ING RussellTM Global Large Cap Index 85% Portfolio

Adviser Class, Class I, and Service Class Shares

This Statement of Additional Information (“SAI”) relates to ING RussellTM Global Large Cap Index 85% Portfolio (“Portfolio), a series of ING Variable Portfolios, Inc. (“Company”). A prospectus or prospectuses (each a “Prospectus” and collectively, the “Prospectuses”) for the Portfolio dated August 20, 2008, which provide the basic information you should know before investing in the Portfolio, may be obtained without charge from the Portfolio or the Portfolio’s principal underwriter, ING Funds Distributor, LLC (“Distributor”), at the address listed above. This SAI is not a Prospectus, but is incorporated therein by reference, and should be read in conjunction with the Prospectuses, each dated August 20, 2008, which have been filed with the U.S. Securities and Exchange Commission (“SEC”). Capitalized terms not defined in this SAI are used as defined in the Prospectuses.

The information in this SAI expands on the information contained in the Prospectuses and any supplements thereto. Copies of the Prospectuses and annual or semi-annual shareholder reports, when available, may be obtained upon request and without charge by contacting the Portfolio at the address and phone number written above.

Shares of the Portfolio are sold to insurance company separate accounts, so that the Portfolio may serve as an investment option under variable life insurance policies and variable annuity contracts issued by insurance companies (“Variable Contracts”). The Portfolio also may sell its shares to certain other investors, such as qualified pension and retirement plans, insurance companies and any adviser to the Portfolio as well as to the general accounts of any insurance company whose separate account holds shares of the Portfolio. Shares of the Portfolio are currently offered to separate accounts (“Variable Accounts”) of insurance companies that are subsidiaries of ING Groep N.V. (“ING Groep”) as well as non-affiliated insurance companies. Shares of the Portfolio also may be made available to affiliated investment companies under fund-of-funds arrangements, consistent with Section 12(d)(1)(G) of the Investment Company Act of 1940, as amended (“1940 Act”). For information on allocating premiums and cash values under the terms of the Variable Contracts, see the prospectus for your Variable Contract.

ING Variable Portfolios, Inc. is authorized to issue multiple series of shares, each representing a diversified portfolio of investments with different investment objectives, policies and restrictions.

 

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TABLE OF CONTENTS

 

GENERAL INFORMATION

   3

FUNDAMENTAL INVESTMENT RESTRICTIONS

   3

DIRECTORS AND OFFICERS

   47

BOARD OF DIRECTORS

   51

DIRECTOR OWNERSHIP OF SECURITIES

   52

INDEPENDENT DIRECTOR OWNERSHIP OF SECURITIES

   52

DIRECTOR COMPENSATION

   53

CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS

   53

ADVISER

   54

SUB-ADVISER

   55

ADMINISTRATOR

   58

CUSTODIAN

   59

TRANSFER AGENT

   59

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   59

LEGAL COUNSEL

   59

PRINCIPAL UNDERWRITER

   60

DISTRIBUTION SERVICING ARRANGEMENTS

   60

SHAREHOLDER SERVICES AND DISTRIBUTION PLAN

   61

DISCLOSURE OF THE PORTFOLIO’S PORTFOLIO SECURITIES

   62

PURCHASE AND REDEMPTION OF SHARES

   63

BROKERAGE ALLOCATION AND TRADING POLICIES

  

CODE OF ETHICS

   68

PROXY VOTING PROCEDURES

   68

NET ASSET VALUE

   68

TAX CONSIDERATIONS

   70

PERFORMANCE INFORMATION

   72

FINANCIAL STATEMENTS

   72

APPENDIX A

   A-1

 

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GENERAL INFORMATION

Effective May 1, 2002, the name of ING Variable Portfolios, Inc. was changed as follows:

 

Old Name

  

New Name

Aetna Variable Portfolios, Inc.

   ING Variable Portfolios, Inc.

Organization. ING Variable Portfolios, Inc. was incorporated in Maryland in 1996 and is registered as a diversified open-end management investment company consisting of separately managed series.

This SAI pertains only to ING RussellTM Global Large Cap Index 85% Portfolio.

Classes. The Board of Directors of the Portfolio (the “Board”) has the authority to subdivide the Portfolio into classes of shares having different attributes, so long as each share of each class represents a proportionate interest in the Portfolio equal to each other share in the Portfolio. Shares of the Portfolio currently are classified into three classes. ADV Class, Class I and Class S shares are offered through this SAI and the corresponding Prospectuses. Each class of shares has the same rights, privileges and preferences, except with respect to: (a) the distribution fees borne by ADV Class and Class S; (b) the expenses allocable exclusively to each class; and (c) the voting rights on matters exclusively affecting a single class.

Capital Stock. Shares of the Portfolio have no preemptive or conversion rights. Each share of the Portfolio has the same rights to share in dividends declared by the Portfolio. Upon liquidation of the Portfolio, shareholders in the Portfolio are entitled to share pro rata in the net assets of the Portfolio available for distribution to shareholders. Shares of the Portfolio are fully paid and non-assessable.

Voting Rights. Shareholders of the Portfolio are entitled to one vote for each full share held (and fractional votes for fractional shares held) and will vote in the election of Directors (to the extent hereinafter provided), and on other matters submitted to the vote of shareholders. Participants who select the Portfolio for investment through their variable annuity contract (“VA Contract”) or variable life insurance policy (“VLI Policy”) are not the shareholders of the Portfolio. The insurance companies that issue the separate accounts are the true shareholders, but generally pass through voting to Participants as described in the prospectus for the applicable VA Contract or VLI Policy. Once the initial Board is elected, no meetings of the shareholders for the purpose of electing Directors will be held unless and until such time as less than a majority of the Directors holding office have been elected by the shareholders, or shareholders holding 10% or more of the outstanding shares request such a vote. The Directors then in office will call a shareholder meeting for election of Directors. Vacancies occurring between any such meetings shall be filled as allowed by law, provided that immediately after filling any such vacancy, at least two-thirds of the Directors holding office have been elected by the shareholders. Except as set forth above, the Directors shall continue to hold office and may appoint successor Directors. Directors of the Company may be removed at any meeting of shareholders by the vote of a majority of all shares entitled to vote. Any Director may also voluntarily resign from office. Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of Directors can, if they choose to do so, elect all the Directors of the Portfolio, in which event the holders of the remaining shares will be unable to elect any person as a Director.

1940 Act Classification. The Portfolio is an open-end management investment company, as that term is defined under the 1940 Act. The Portfolio is a diversified company, as that term is defined under the 1940 Act. The 1940 Act generally requires that with respect to 75% of its total assets, a diversified company may not invest more than 5% of its total assets in the securities of any one issuer.

 

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FUNDAMENTAL INVESTMENT RESTRICTIONS

The following investment restrictions are fundamental which means they may be changed only with the approval of the holders of a majority of the Portfolio’s outstanding voting securities, as defined in the 1940 Act as the lesser of: (1) 67% or more of the Portfolio’s shares present at a shareholders’ meeting at which the holders of more than 50% of the Portfolio’s outstanding shares of the Portfolio are present in person or by proxy; or (2) more than 50% of the Portfolio’s outstanding voting securities, present in person or by proxy. All other investment policies or practices are considered by the Portfolio to be non-fundamental and accordingly may be changed without shareholder approval. The Portfolio’s investment objective is non-fundamental and may be changed without a shareholder vote. Shareholders will be provided at least 60 days’ prior written notice of any change to the Portfolio’s non-fundamental investment objective. All percentage limitations set forth below apply immediately after a purchase or initial investment. There will be no violation of any investment policy or restriction if that restriction is complied with at the time the relevant action is taken, notwithstanding a later change in the market value of an investment, in net or total assets, in the securities rating of the investment or any other change.

As a matter of fundamental policy, the Portfolio may not:

 

1. purchase securities of any issuer if, as a result, with respect to 75% of the Portfolio’s total assets, more than 5% of the value of its total assets would be invested in the securities of any one issuer or the Portfolio’s ownership would be more than 10% of the outstanding voting securities of any issuer, provided that this restriction does not limit the Portfolio’s investments in securities issued or guaranteed by the U.S. government, its agencies and instrumentalities, or investments in securities of other registered management investment companies;

 

2. purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. government, any state or territory of the United States, or any of their agencies, instrumentalities or political subdivisions; and (b) notwithstanding this limitation or any other fundamental investment limitation, assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Portfolio; and further provided that the Portfolio will concentrate to approximately the same extent that its underlying indices concentrate in the securities of such particular industry or industries;

 

3. borrow money, except to the extent permitted under the 1940 Act, including the rules, regulations, interpretations thereunder and any exemptive relief obtained by the Portfolio;

 

4. make loans, except to the extent permitted under the 1940 Act, including the rules, regulations, interpretations and any exemptive relief obtained by the Portfolio;

 

5. underwrite any issue of securities within the meaning of the Securities Act of 1933 (“1933 Act”) except when it might technically be deemed to be an underwriter either: (a) in connection with the disposition of a portfolio security; or (b) in connection with the purchase of securities directly from the issuer thereof in accordance with its investment objective. This restriction shall not limit the Portfolio’s ability to invest in securities issued by other registered management investment companies;

 

6. purchase or sell real estate, except that the Portfolio may (i) acquire or lease office space for its own use, (ii) invest in securities of issuers that invest in real estate or interests therein, (iii) invest in mortgage-related securities and other securities that are secured by real estate or interests therein, or (iv) hold and sell real estate acquired by the Portfolio as a result of the ownership of securities;

 

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7. issue senior securities except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Portfolio; and

 

8. purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Portfolio from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical commodities). This limitation does not apply to foreign currency transactions, including, without limitation, forward currency contracts.

With respect to fundamental policy number (2), industry classifications are in accordance with Global Industrial Classification (“GIC”) Standards and Standard Industrial Classification Codes. Industry classifications may be changed at any time to reflect changes in the market place.

The Portfolio has adopted a non-fundamental policy as required by Rule 35d-1 under the 1940 Act to invest, under normal circumstances at least 85% of the value of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of companies included in the Russell Global Large Cap Index and 15% of its assets, plus borrowings for investment purposes, in fixed-income securities included in the Lehman Brothers U.S. Aggregate Bond Index and exchange-traded funds that seek investment results that correspond to the price and yield performance of the Lehman Brothers U.S. Aggregate Bond Index. The Portfolio has also adopted a policy to provide its shareholders with at least 60 days’ prior written notice of any change in such investment policy. If, subsequent to an investment, the 80% requirement is no longer met, the Portfolio’s future investments will be made in a manner that will bring the Portfolio into compliance with this policy.

SUPPLEMENTAL DESCRIPTION OF PORTFOLIO INVESTMENTS AND RISKS

Investments, Investment Strategies and Risks

The table on the following pages identifies various securities and investment techniques used by ING Investments, LLC (“Adviser” or “ING Investments”) and the sub-adviser in managing the Portfolio. The table has been marked to indicate those securities and investment techniques that ING Investments and the sub-adviser may use to manage the Portfolio. The Portfolio may use any or all of these techniques at any one time, and the fact that the Portfolio may use a technique does not mean that the technique will be used. The securities and investment techniques are subject to the limitations explained elsewhere in this SAI or the accompanying Prospectuses. The Portfolio’s transactions in a particular type of security or use of a particular technique is subject to limitations imposed by the Portfolio’s investment objective, policies and restrictions described in the Portfolio’s Prospectuses and/or this SAI, as well as federal securities laws. There can be no assurance that the Portfolio will achieve its investment objective. The Portfolio’s policies, strategies and practices are non-fundamental unless otherwise indicated. A more detailed description of the securities and investment techniques, as well as the risks associated with those securities and investment techniques that the Portfolio utilizes, follows the table. The descriptions of the securities and investment techniques in this section supplement the discussion of principal investment strategies contained in the Portfolio’s Prospectuses. Where a particular type of security or investment technique is not discussed in the Portfolio’s Prospectuses, that security or investment technique is not a principal investment strategy.

 

5


Investment Type

  

ING RussellTM Global Large Cap

Index 85% Portfolio

EQUITY INVESTMENTS

  

Common Stock

   X

Convertible Securities

   X

Initial Public Offerings

   X

Preferred Stock

   X

Synthetic Convertible Securities

   X

FOREIGN INVESTMENTS

  

ADRs / EDRs/ GDRs

   X

Eurodollar Convertible Securities

   X

Eurodollar & Yankee Dollar Instruments

   X

Foreign and Emerging Market Securities

   X

Foreign Bank Obligations

   X

Foreign Currency Exchange Transactions/Forward Foreign Currency Contracts

   X

Foreign Mortgage Related Securities

   X

International Debt Securities

   X

Sovereign Debt Securities

   X

Supranational Agencies

   X

FIXED-INCOME INVESTMENTS

  

ARMs

   X

Asset Backed Securities

   X

Banking Industry Obligations/Short-Term Investments

   X

Corporate Debt Securities

   X

Credit Linked Notes

   X

Debt Securities

   X

Floating or Variable Rate Instruments

   X

Guaranteed Investment Contracts

   X

Government Trust Certificates

   X

GNMA Certificates

   X

High Yield Securities

   X

Mortgage Related Securities

   X

Privately Issued CMOs

   X

Interest/Principal Only Stripped Mortgage-Backed Securities

   X

Municipals

   X

Municipal Lease Obligations

   X

Savings Association Obligations

   X

Subordinated Mortgage Securities

   X

Tax Exempt Industrial Development Bonds and Pollution Control Bonds

   X

U.S. Government Securities

   X

Zero Coupon and Pay in Kind Bonds

   X

OTHER INVESTMENTS

  

Derivatives

   X

Foreign Currency Options

   X

Futures Contracts and Options on Futures Contracts

   X

Financial Futures Contracts and Related Options

   X

Foreign Currency Futures Contracts

   X

Forward Currency Contracts

   X

Forward Foreign Currency Contracts

   X

Index-, Currency-, and Equity-Linked Debt Securities

   X

Index Warrants

   X

Loan Participations and Assignments

   X

Options on Futures

   X

Options on Securities and Indices

   X

 

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Investment Type

  

ING RussellTM Global Large Cap

Index 85% Portfolio

Other Investment Companies

   X

Over the Counter Options

   X

Private Funds

   X

Put and Call Options

   X

Real Estate Securities

   X

Securities of Companies with Limited Histories

   X

Senior Loans

   X

Stock Index Options

   X

Straddles

   X

TBA Sale Commitments

   X

Warrants/Index Warrants

   X

Writing Options

   X

INVESTMENT TECHNIQUES

  

Caps and Floors

   X

Cross Currency Swaps

   X

Lending of Portfolio Securities

   X

Portfolio Hedging

   X

Repurchase Agreements

   X

Securities, Interest Rate and Currency Swaps

   X

Swap Agreements and Options on Swap Agreements

   X

Swap Options

   X

When Issued Securities & Delayed-Delivery Transactions

   X

EQUITY INVESTMENTS

Common Stocks

Common stock represents an equity (ownership) interest in a company. This ownership interest generally gives the Portfolio the right to vote on issues affecting the company’s organization and operations. Such investments may be diversified over a cross-section of industries and individual companies. Some of these companies will be organizations with market capitalizations of $500 million or less or companies that have limited product lines, markets and financial resources and are dependent upon a limited management group. Examples of possible investments include emerging growth companies employing new technology, cyclical companies, initial public offerings of companies offering high growth potential, or other corporations offering good potential for high growth in market value. The securities of such companies may be subject to more abrupt or erratic market movements than larger, more established companies both because the securities typically are traded in lower volume and because the issuers typically are subject to a greater degree to changes in earnings and prospects.

Other types of equity securities may also be purchased, such as preferred stock, convertible securities, or other securities that are exchangeable for shares of common stock.

Preferred Stock

Unlike common stock, preferred stock offers a stated dividend rate payable from a corporation’s earnings. Such preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. If interest rates rise, the fixed dividend on preferred stock may be less attractive, causing the price of preferred stock to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to maturity, a negative feature when interest rates decline. Dividends on some preferred stock may be “cumulative,” requiring all or a portion of prior unpaid dividends to be paid before dividends are paid on the issuer’s common stock. Preferred stock also generally has a preference over common stock on the distribution of a corporation’s assets in the event of liquidation of the corporation, and may be “participating,” which means that it may be entitled to a dividend exceeding the stated dividend in certain cases. The rights of preferred stock on the distribution of a corporation’s assets in the event of liquidation are generally subordinate to the rights associated with a corporation’s debt securities.

 

7


Convertible Securities

Convertible securities are securities that may be converted either at a stated price or rate within a specified period of time into a specified number of shares of common stock. By investing in convertible securities, the Portfolio seeks the opportunity, through the conversion feature, to participate in the capital appreciation of the common stock into which the securities are convertible, while investing at a better price than may be available on the common stock or obtaining a higher fixed-rate of return than is available on common stock. The value of a convertible security is a function of its “investment value” (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its “conversion value” (the security’s worth, at market value, if converted into the underlying common stock). The credit standing of the issuer and other factors may also affect the investment value of a convertible security. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value.

The market value of convertible debt securities tends to vary inversely with the level of interest rates. The value of the security declines as interest rates increase and the value increases as interest rates decline. Although under normal market conditions longer term debt securities have greater yields than do shorter-term debt securities of similar quality, they are subject to greater price fluctuations. A convertible security may be subject to redemption at the option of the issuer at a price established in the instrument governing the convertible security. If a convertible security held by the Portfolio is called for redemption, the Portfolio must permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Rating requirements do not apply to convertible debt securities purchased by the Portfolio because the Portfolio purchases such securities for their equity characteristics.

“Synthetic” Convertible Securities

Synthetic convertible securities are derivative positions composed of two or more different securities whose investment characteristics, taken together, resemble those of convertible securities. For example, the Portfolio may purchase a non-convertible debt security and a warrant or option, which enables the Portfolio to have a convertible-like position with respect to a company, group of companies or stock index. Synthetic convertible securities are typically offered by financial institutions and investment banks in private placement transactions. Upon conversion, the Portfolio generally receives an amount in cash equal to the difference between the conversion price and the then current value of the underlying security. Unlike a true convertible security, a synthetic convertible comprises two or more separate securities, each with its own market value. Therefore, the market value of a synthetic convertible is the sum of the values of its fixed-income component and its convertible component. For this reason, the values of a synthetic convertible and a true convertible security may respond differently to market fluctuations.

Initial Public Offerings

Initial Public Offerings (“IPOs”) occur when a company first offers its securities to the public. Although companies can be any age or size at the time of their IPO, they are often smaller and have a limited operating history, which involves a greater potential for the value of their securities to be impaired following the IPO. Investors in IPOs can be adversely affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders. In addition, all of the factors that affect stock market performance may have a greater impact on the shares of IPO companies.

The price of a company’s securities may be highly unstable at the time of its IPO and for a period thereafter due to market psychology prevailing at the time of the IPO, the absence of a prior public market, the small number of shares available and limited availability of investor information. As a result of this or other factors,

 

8


adviser or the Portfolio’s sub-adviser might decide to sell an IPO security more quickly than it would otherwise, which may result in a significant gain or loss and greater transaction costs to the Portfolio. Any gains from shares held for 12 months or less will be treated as short-term gains, taxable as ordinary income to the Portfolio’s shareholders. In addition, IPO securities may be subject to varying patterns of trading volume and may, at times, be difficult to sell without an unfavorable impact on prevailing prices.

The effect of an IPO investment can have a magnified impact on the Portfolio’s performance when the Portfolio’s asset base is small. Consequently, IPOs may constitute a significant portion of the Portfolio’s returns particularly when the Portfolio is small. Since the number of securities issued in an IPO is limited, it is likely that IPO securities will represent a smaller component of the Portfolio’s assets as it increases in size and, therefore, have a more limited effect on the Portfolio’s performance.

There can be no assurance that IPOs will continue to be available for the Portfolio to purchase. The number or quality of IPOs available for purchase by the Portfolio may vary, decrease or entirely disappear. In some cases, the Portfolio may not be able to purchase IPOs at the offering price, but may have to purchase the shares in the aftermarket at a price greatly exceeding the offering price, making it more difficult for the Portfolio to realize a profit.

Unseasoned Companies

The Portfolio considers securities of companies with limited operating histories to be securities of companies with a record of less than three years’ continuous operation, including the operations of any predecessors and parents. (These are sometimes referred to as “unseasoned issuers.”) These companies by their nature have only a limited operating history that can be used for evaluating the company’s growth prospects. As a result, investment decisions for these securities may place a greater emphasis on current or planned product lines and the reputation and experience of the company’s management and less emphasis on fundamental valuation factors than would be the case for more mature companies.

FOREIGN AND EMERGING MARKET INVESTMENTS

American Depositary Receipts, European Depositary Receipts and Global Depositary Receipts

American Depositary Receipts (“ADRs”), Global Depositary (“GDRs”) and European Depositary Receipts (“EDRs”) or other similar securities represent securities of foreign issuers. These securities are typically dollar denominated, although their market price is subject to fluctuations of the foreign currency in which the underlying securities are denominated. Depositary receipts include: ADRs, EDRs and GDRs. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying foreign securities, ADRs are typically designed for U.S. investors and held either in physical form or in book entry form. EDRs are similar to ADRs but may be listed and traded on a European exchange as well as in the United States (typically, these securities are traded on the Luxembourg exchange in Europe). Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in the European securities markets. GDRs are similar to EDRs although they may be held through foreign clearing agents such as Euroclear and other foreign depositories. Depositary receipts denominated in U.S. dollars will not be considered foreign securities for purposes of the investment limitation concerning investment in foreign securities.

Eurodollar Convertible Securities

Eurodollar convertible securities are fixed-income securities of a U.S. issuer or a foreign issuer that are issued outside the United States and are convertible into equity securities of the same or a different issuer. Interest and dividends on Eurodollar securities are payable in U.S. dollars outside of the United States. The Portfolio may invest without limitation in Eurodollar convertible securities. The Eurodollar convertible securities are convertible into foreign equity securities listed, or represented by ADRs listed, on the New York Stock Exchange or the American Stock Exchange or convertible into publicly traded common stock of U.S. companies. The Portfolio may also invest up to 15% of its total assets invested in convertible securities, taken at market value, in Eurodollar convertible securities that are convertible into foreign equity securities, which are not listed, or represented by ADRs listed, on such exchanges.

 

9


Eurodollar and Yankee Dollar Instruments

Eurodollar instruments are bonds that pay interest and principal in U.S. dollars held in banks outside the United States, primarily in Europe. Eurodollar instruments are usually issued on behalf of multinational companies and foreign governments by large underwriting groups composed of banks and issuing houses from many countries. Yankee Dollar instruments are U.S. dollar denominated bonds issued in the United States by foreign banks and corporations. These investments involve risks that are different from investments in securities issued by U.S. issuers.

Foreign and Emerging Market Securities

Foreign financial markets, while growing in volume, have, for the most part, substantially less volume than U.S. markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable domestic companies. The foreign markets also have different clearance and settlement procedures, and in certain markets there have been many times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delivery of securities may not occur at the same time as payment in some foreign markets. Delays in settlement could result in temporary periods when a portion of the assets of the Portfolio is uninvested and no return is earned thereon. The inability of the Portfolio to make intended security purchases due to settlement problems could cause the Portfolio to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Portfolio due to subsequent declines in value of the portfolio security or, if the Portfolio has entered into a contract to sell the security, could result in possible liability to the purchaser.

As foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards and practices comparable to those applicable to domestic companies, there may be less publicly available information about certain foreign companies than about domestic companies. There is generally less government supervision and regulation of exchanges, financial institutions and issuers in foreign countries than there is in the United States. A foreign government may impose exchange control regulations that may have an impact on currency exchange rates, and there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could affect U.S. investments in those countries.

Changes in foreign currency exchange rates will affect the value of securities denominated or quoted in currencies other than the U.S. dollar and the unrealized appreciation or depreciation of investments so far as U.S. investors are concerned. Transactional costs in non-U.S. securities may involve greater time from the trade date until settlement than domestic securities transactions and involve the risk of possible losses through the holding of securities by custodians and securities depositories in foreign countries.

Although the Portfolio will use reasonable efforts to obtain the best available price and the most favorable execution with respect to all transactions and the adviser or sub-adviser will consider the full range and quality of services offered by the executing broker or dealer when making these determinations, fixed commissions on many foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Certain foreign governments levy withholding taxes against dividend and interest income, or may impose other taxes. Although in some countries a portion of these taxes are recoverable, the non-recovered portion of foreign withholding taxes will reduce the income received by the Portfolio on these investments. The risks of investing in foreign securities may be intensified for investments in issuers domiciled or doing substantial business in emerging markets or countries with limited or developing capital markets. Security prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less-established markets and economies. In particular, countries with emerging markets may have relatively unstable governments, present the risk of sudden adverse government action and even nationalization of businesses, have restrictions on foreign ownership, or have prohibitions of repatriation of assets, and may have less protection of property rights than more developed countries. The economies of countries with emerging markets may be predominantly based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt

 

10


burdens or inflation rates. Local securities markets may trade a small number of securities and may be unable to respond effectively to increase in trading volume, potentially making prompt liquidation of substantial holdings difficult or impossible at times. Transaction settlement and dividend collection procedures may be less reliable in emerging markets than in developed markets. Securities of issuers located in other countries with emerging markets may have limited marketability and may be subject to more abrupt or erratic price movements.

Foreign Bank Obligations

Obligations of foreign banks and foreign branches of U.S. banks involve somewhat different investment risks from those affecting obligations of U.S. banks, including the possibilities that liquidity could be impaired because of future political and economic developments; the obligations may be less marketable than comparable obligations of U.S. banks; a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations; foreign deposits may be seized or nationalized; foreign governmental restrictions (such as foreign exchange controls) may be adopted which might adversely affect the payment of principal and interest on those obligations; and the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks. In addition, the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to U.S. banks. In that connection, foreign banks are not subject to examination by any U.S. government agency or instrumentality.

Foreign Currency Exchange Transactions

The Portfolio may buy and sell securities denominated in currencies other than the U.S. dollar, and receive interest, dividends and sale proceeds in currencies other than the U.S. dollar, and therefore may enter into foreign currency exchange transactions to convert to and from different foreign currencies and to convert foreign currencies to and from the U.S. dollar. The Portfolio may either enter into these transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or use forward foreign currency contracts to purchase or sell foreign currencies. A forward foreign currency exchange contract is an agreement to exchange one currency for another — for example, to exchange a certain amount of U.S. dollars for a certain amount of Korean Won — at a future date. Forward foreign currency contracts are included in the group of instruments that can be characterized as derivatives. Neither spot transactions nor forward foreign currency exchange contracts eliminate fluctuations in the prices of the Portfolio’s portfolio securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline.

Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time, they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of these securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain. Use of currency hedging techniques may also be limited by management’s need to protect the status of the Portfolio as a regulated investment company under the Internal Revenue Code of 1986, as amended (“Code”).

Foreign Mortgage-Related Securities

Foreign mortgage-related securities are interests in pools of mortgage loans made to residential homebuyers domiciled in a foreign country. These include mortgage loans made by trust and mortgage loan companies, credit unions, chartered banks, and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations (e.g. Canada Mortgage and Housing Corporation and First Australian National Mortgage Acceptance Corporation Limited). The mechanics of these mortgage-related securities are generally the same as those issued in the United States. However, foreign mortgage markets may differ materially from the U.S. mortgage market with respect to matters such as size of loan pools, pre-payment experience, and maturities of loans.

 

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International Debt Securities

International debt securities represent debt obligations (which may be denominated in U.S. dollar or in non-U.S. currencies) of any rating issued or guaranteed by foreign corporations, certain supranational entities (such as the World Bank) and foreign governments (including political subdivisions having tax authority) or their agencies or instrumentalities, including ADRs. These debt obligations may be bonds (including sinking fund and callable bonds), debentures and notes, together with preferred stock, pay-in-kind securities of zero-coupon securities.

In determining whether to invest in debt obligations of foreign issuers, the Portfolio will consider the relative yields of foreign and domestic high-yield securities, the economies of foreign countries, the condition of such countries’ financial markets, the interest rate climate of such countries and the relationship of such countries’ currency to the U.S. dollar. These factors are judged on the basis of fundamental economic criteria (e.g. relative inflation levels and trends, growth rate forecasts, balance of payments status and economic policies) as well as technical and political data. Subsequent foreign currency losses may result in the Portfolio having previously distributed more income in a particular period than was available from investment income, which could result in a return of capital to shareholders. The Portfolio’s portfolio of foreign securities may include those of a number of foreign countries, or, depending upon market conditions, those of a single country.

Investments in securities of issuers in non-industrialized countries generally involve more risk and may be considered highly speculative. Although a portion of the Portfolio’s investment income may be received or realized in foreign currencies, the Portfolio will be required to compute and distribute its income in U.S. dollar and absorb the cost of current fluctuations and the cost of currency conversions. Investment in foreign securities involves considerations and risks not associated with investment in securities of U.S. issuers. For example, foreign issuers may not be required to use generally accepted accounting principles. If foreign securities are not registered under the 1933 Act, the issuer may not have to comply with the disclosure requirements of the Securities Exchange Act of 1934, as amended (“1934 Act”). The values of foreign securities investments will be affected by incomplete or inaccurate information available to the adviser or sub-adviser as to foreign issuers, changes in currency rates, exchange control regulations or currency blockage, expropriation or nationalization of assets, application of foreign tax laws (including withholding taxes), changes in governmental administration or economic or monetary policy. In addition, it is generally more difficult to obtain court judgments outside the United States.

Restrictions on Foreign Investments

Some developing countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities, such as the Portfolio. As illustrations, certain countries may require governmental approval prior to investment by foreign persons, limit the amount of investment by foreign persons in a particular company or limit the investment by foreign persons to only a specific class of securities of a company that may have less advantageous terms (including price) than securities of the company available for purchase by nationals. Certain countries may restrict investment opportunities in issuers or industries deemed important to national interests.

The manner in which foreign investors may invest in companies in certain developing countries, as well as limitations on such investments, also may have an adverse impact on the operations of a portfolio that invests in such countries. For example, the Portfolio may be required in certain of such countries to invest initially through a local broker or other entity and then have the shares purchased re-registered in the name of the Portfolio. Re-registration, in some instances, may not occur on a timely basis, resulting in a delay during which the Portfolio may be denied certain of its rights as an investor, including rights as to dividends or to be made aware of certain corporate actions. There also may be instances when the Portfolio places a purchase order but is subsequently informed, at the time of re-registration, that the permissible allocation of the investment to foreign investors has been filled, depriving the Portfolio of the ability to make its desired investment at that time.

Substantial limitations may exist in certain countries with respect to the Portfolio’s ability to repatriate investment income, capital or the proceeds of sales of securities by foreign investors. The Portfolio could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of

 

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capital, as well as by the application to the Portfolio of any restrictions on investments. Even when there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the operations of the Portfolio. For example, funds may be withdrawn from the People’s Republic of China only in U.S. or Hong Kong dollars and only at an exchange rate established by the government once each week.

In certain countries, banks or other financial institutions may be among the leading companies or have actively traded securities. The 1940 Act restricts the Portfolio’s investments in any equity securities of an issuer that, in its most recent fiscal year, derived more than 15% of its revenues from “securities related activities,” as defined by the rules thereunder. The provisions may restrict the Portfolio’s investments in certain foreign banks and other financial institutions.

Risks of Investing in Foreign Securities

Investments in foreign securities involve certain inherent risks, including the following:

Market Characteristics. Settlement practices for transactions in foreign markets may differ from those in U. S. markets, and may include delays beyond periods customary in the United States. Foreign security trading practices, including those involving securities settlement where Portfolio assets may be released prior to receipt of payment of securities, may expose the Portfolio to increased risk in the event of a failed trade or the insolvency of a foreign broker-dealer. Transactions in options on securities, future contracts, futures options and currency contracts may not be regulated as effectively on foreign exchanges as similar transactions in the United States, and may not involve clearing mechanisms and related guarantees. The value of such positions also could be adversely affected by the imposition of different exercise terms and procedures and margin requirements than in the United States. The value of the Portfolio’s position may also be adversely impacted by delays in its abilities to act upon economic events occurring in foreign markets during non-business hours in the United States.

Legal and Regulatory Matters. In addition to nationalization, foreign governments may take other actions that could have a significant effect on market prices of securities and payment of interest, including restrictions on foreign investment, expropriation of goods and imposition of taxes, currency restrictions and exchange control regulations.

Taxes. The interest payable on certain of the Portfolio’s foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Portfolio’s shareholders. A shareholder otherwise subject to U.S. federal income taxes may, subject to certain limitations, be entitled to claim a credit or deduction of U.S. federal income tax purposes for his/her proportionate share of such foreign taxes paid by the Portfolio.

Costs. The expense ratio of a portfolio that invests in foreign securities is likely to be higher than those of investment companies investing in domestic securities, since the cost of maintaining the custody of foreign securities is higher. In considering whether to invest in the securities of a foreign company, the adviser or sub-adviser considers such factors as the characteristics of the particular company, differences between economic trends and the performance of securities markets within the United States and those within other countries, and also factors relating to the general economic, governmental and social conditions of the country or countries where the company is located. The extent to which the Portfolio will be invested in foreign companies and countries and depositary receipts will fluctuate from time to time with the limitations described in the Prospectuses, depending on the adviser’s or sub-adviser’s assessment of prevailing market, economic and other conditions.

Sovereign Debt Securities

Sovereign debt securities are issued by governments of foreign countries. The sovereign debt in which the Portfolio may invest may be rated below investment grade. These securities usually offer higher yields than higher-rated securities but are also subject to greater risk than higher-rated securities.

 

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Supranational Agencies

Securities of supranational agencies are not considered government securities and are not supported directly or indirectly by the U.S. government. Examples of supranational agencies include, but are not limited to, the International Bank for Reconstruction and Development (commonly referred to as the World Bank), which was chartered to finance development projects in developing member countries; the European Union which is a 27-nation organization engaged in cooperative economic activities; and the Asian Development Bank, which is an international development bank established to lend funds, promote investment and provide technical assistance to member nations in the Asian and Pacific regions.

FIXED-INCOME SECURITIES

Adjustable Rate Mortgage Securities

Adjustable rate mortgage securities (“ARMS”) are pass-through mortgage securities collateralized by mortgages with adjustable rather than fixed rates. Generally, ARMS have a specified maturity date and amortize principal over their life. In periods of declining interest rates, there is a reasonable likelihood that ARMS will experience increased rates of prepayment of principal. However, the major difference between ARMS and fixed-rate mortgage securities is that the interest rate and the rate of amortization of principal of ARMS can and do change in accordance with movements in particular, pre-specified, published interest rate index. The amount of interest on ARMS is calculated by adding a specified amount, the “margin,” to the index, subject to limitations on the maximum and minimum interest that can be charged to the mortgagor during the life of the mortgage or to maximum and minimum changes to that interest rate during a given period. Because the interest rates on ARMS generally move in the same direction as market interest rates, the market value of ARMS tends to be more stable than that of long-term fixed-rate securities.

There are two main categories of indices which serve as benchmarks for periodic adjustments to coupon rates on ARMS: those based on U.S. Treasury securities and those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the 11th District Federal Home Loan bank Cost of Funds, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate (“LIBOR”), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds index, often related to ARMS issued by Federal National Mortgage Association (“FNMA”), tend to lag changes in market rate levels and tend to be somewhat less volatile.

Asset-Backed Securities (non-mortgage)

Asset-backed securities are collateralized by short-term loans such as automobile loans, home equity loans, equipment leases or credit card receivables. The payments from the collateral are generally passed through to the security holder. As noted below with respect to Collateralized Mortgage Obligations (“CMOs”) and Real Estate Mortgage Investment Conduits (“REMICs”), the average life for these securities is the conventional proxy for maturity. Asset-backed securities may pay all interest and principal to the holder, or they may pay a fixed rate of interest, with any excess over that required to pay interest going either into a reserve account or to a subordinate class of securities, which may be retained by the originator. The originator or other party may guarantee interest and principal payments. These guarantees often do not extend to the whole amount of principal, but rather to an amount equal to a multiple of the historical loss experience of similar portfolios.

The collateral behind certain types of collateral tend to have prepayment rates that do not vary with interest rates; the short-term nature of the loans may also tend to reduce the impact of any change in prepayment level. Other asset-backed securities, such as home equity asset-backed securities, have prepayment rates that are sensitive to interest rates. Faster prepayments will shorten the average life and slower prepayments will lengthen it. Asset-backed securities may be pass-through, representing actual equity ownership of the underlying assets, or pay-through, representing debt instruments supported by cash flows from the underlying assets.

 

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The coupon rate of interest on mortgage-related and asset-backed securities is lower than the interest rates paid on the mortgages included in the underlying pool, by the amount of the fees paid to the mortgage pooler, issuer, and/or guarantor. Actual yield may vary from the coupon rate, however, if such securities are purchased at a premium or discount, traded in the secondary market at a premium or discount, or to the extent that the underlying assets are prepaid as noted above.

The principal on asset-backed securities, like mortgage-related securities, may normally be prepaid at any time, which will reduce the yield and market value of these securities. Asset-backed securities and commercial mortgage-backed securities generally experience less prepayment than residential mortgage-related securities. In periods of falling interest rates when liquidity is available to borrowers, the rate of prepayments tends to increase (as does price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower rates. During such periods, reinvestment of the prepayment proceeds by a Portfolio will generally be at lower rates of return than the return on the assets which were prepaid. Certain commercial mortgage-backed securities are issued in several classes with different levels of yield and credit protection. A Portfolio’s investments in commercial mortgage-backed securities with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate, credit and prepayment risks. Certain commercial mortgage-backed securities are issued in several classes with different levels of yield and credit protection. While asset-backed securities are designed to allocate risk from pools of their underlying assets, the risk allocation techniques may not be successful, which could lead to the credit risk of these investments being greater than indicated by their ratings. The value of asset-backed securities may be further affected by downturns in the credit markets or the real estate market. It may be difficult to value these instruments because of the transparency or liquidity of some underlying investments, and these instruments may not be liquid. Finally, certain asset-backed securities are based on loans that are unsecured, which means that there is no collateral to seize if the underlying borrower defaults.

Banking Industry Obligations/Short-Term Investments

Banking industry obligations include certificates of deposit, bankers’ acceptances and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning in effect that the bank unconditionally agrees to pay the face value of the instrument on maturity. Certificates of deposit and bankers’ acceptances acquired by the Portfolio will be dollar-denominated obligations of domestic or foreign banks or financial institutions which at the time of purchase have capital, surplus and undivided profits in excess of $100 million (including assets of both domestic and foreign branches), based on latest published reports, or less than $100 million if the principal amount of such bank obligations are fully insured by the U.S. government.

The Portfolio holding instruments of foreign banks or financial institutions may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Domestic banks and foreign banks are subject to different governmental regulations with respect to the amount and types of loans which may be made and interest rates which may be charged. In addition, the profitability of the banking industry depends largely upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operations of the banking industry. Federal and state laws and regulations require domestic banks to maintain specified levels of reserves, limit the amount which they can loan to a single borrower, and subject them to other regulations designed to promote financial soundness. However, such laws and regulations do not necessarily apply to foreign bank obligations that the Portfolio may acquire.

For foreign banks, there is a possibility that liquidity could be impaired because of future political and economic developments; the obligations may be less marketable than comparable obligations of U.S. banks; a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations; foreign deposits may be seized or nationalized; foreign governmental restrictions (such as foreign exchange controls) may be adopted which might adversely affect the payment of principal and interest on those obligations; and

 

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the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks. In addition, the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to U.S. banks. In that connection, foreign banks are not subject to examination by any U.S. government agency or instrumentality.

In addition to purchasing certificates of deposit and bankers’ acceptances, to the extent permitted under its investment objectives and policies stated above and in its Prospectuses, the Portfolio may make interest-bearing time or other interest-bearing deposits in commercial or savings banks. Time deposits are non-negotiable deposits maintained at a banking institution for a specified period of time at a specified interest rate.

Corporate Debt Securities

Corporate debt securities include corporate bonds, debentures, notes and other similar corporate debt instruments, including convertible securities. The investment return on a corporate debt security reflects interest earnings and changes in the market value of the security. The market value of a corporate debt security will generally increase when interest rates decline and decrease when interest rates rise. There is also the risk that the issuer of a debt security will be unable to pay interest or principal at the time called for by the instrument. Investments in corporate debt securities that are rated below investment grade are described in “High-Yield Securities” below.

Debt obligations that are deemed investment grade carry a rating of at least Baa from Moody’s Investors Service, Inc. (“Moody’s”) or BBB- from Standard & Poor’s Ratings Services (“S&P”), or a comparable rating from another rating agency or, if not rated by an agency, are determined by the adviser or sub-adviser to be of comparable quality. Bonds rated Baa- or BBB- have speculative characteristics and changes in economic circumstances are more likely to lead to a weakened capacity to make interest and principal payments than higher rated bonds.

Credit-Linked Notes

A credit-linked note (“CLN”) is generally issued by one party with a credit option, or risk, linked to a second party. The embedded credit option allows the first party to shift a specific credit risk to the CLN holder, or the Portfolio in this case. The CLN is issued by a trust, a special purpose vehicle, collateralized by AAA-rated securities. The CLN’s price or coupon is linked to the performance of the reference asset of the second party. Generally, the CLN holder receives either fixed or floating coupon rate during the life of the CLN and par at maturity. The cash flows are dependent on specific credit-related events. Should the second party default or declare bankruptcy, the CLN holder will receive an amount equivalent to the recovery rate. The CLN holder bears the risk of default by the second party and any unforeseen movements in the reference asset, which could lead to loss of principal and receipt of interest payments. In return for these risks, the CLN holder receives a higher yield. As with most derivative instruments, valuation of a CLN is difficult due to the complexity of the security (i.e., the embedded option is not easily priced). A portfolio engaging in this type of investment cannot assure that it can implement a successful strategy.

Floating or Variable Rate Instruments

Variable rate demand instruments held by the Portfolio may have maturities of more than one year, provided: (1) the Portfolio is entitled to the payment of principal at any time, or during specified intervals not exceeding one year, upon giving the prescribed notice (which may not exceed 30 days), and (2) the rate of interest on such instruments is adjusted at periodic intervals not to exceed one year. In determining whether a variable rate demand instrument has a remaining maturity of one year or less, each instrument will be deemed to have a maturity equal to the longer of the period remaining until its next interest rate adjustment or the period remaining until the principal amount can be recovered through demand. The Portfolio will be able (at any time or during specified periods not exceeding one year, depending upon the note involved) to demand payment on the principal of a note. If an issuer of a variable rate demand note defaulted on its payment obligation, the Portfolio might be unable to dispose of the note and a loss would be incurred to the extent of the default. The Portfolio may invest in variable rate demand notes only when the investment is deemed to involve minimal credit risk. The continuing creditworthiness of issuers of variable rate demand notes held by the Portfolio will

 

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also be monitored to determine whether such notes should continue to be held. Variable and floating rate instruments with demand periods in excess of seven days, which cannot be disposed of promptly within seven business days in the usual course of business, without taking a reduced price, will be treated as illiquid securities.

Guaranteed Investment Contracts

Guaranteed Investment Contracts (“GICs”) are issued by insurance companies. Pursuant to such contracts, the Portfolio makes cash contributions to a deposit fund of the insurance company’s general account. The insurance company then credits to the Portfolio on a monthly basis guaranteed interest which is based on an index. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. The insurance company may assess periodic charges against GICs for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. In addition, because the Portfolio may not receive the principal amount of GICs from the insurance company on seven days’ notice or less, GICs are considered an illiquid investment and, together with other instruments invested in by the Portfolio which are not readily marketable, will not exceed 15% of the Portfolio’s net assets. The term of GICs will be one year or less. In determining average weighted portfolio maturity, GICs will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate.

Government National Mortgage Association Certificates

Government National Mortgage Association Certificates (“GNMA” or “GNMA Certificates”) are mortgage-backed securities representing part ownership of a pool of mortgage loans. GNMA is a U.S. government corporation within the Department of Housing and Urban Development. Such loans are initially made by lenders such as mortgage bankers, commercial banks and savings and loan associations and are either insured by the Federal Housing Administration (“FHA”) or Farmers’ Home Administration (“FMHA”) or guaranteed by the Veteran’s Administration (“VA”). A GNMA Certificate represents an interest in a specific pool of such mortgages which, after being approved by GNMA, is offered to investors through securities dealers. Once approved by GNMA, the timely payment of interest and principal on each certificate is guaranteed by the full faith and credit of the U.S. government.

GNMA Certificates differ from bonds in that principal is scheduled to be paid back by the borrower over the length of the loan rather than returned in a lump sum at maturity. “Modified pass through” type GNMA Certificates, entitle the holder to receive all interest and principal payments owed on the mortgages in the pool (net of issuers’ and GNMA fees), whether or not the mortgagor has made such payment.

GNMA Certificates are created by an “issuer,” which is an FHA-approved mortgage banker who also meets criteria imposed by GNMA. The issuer assembles a pool of FHA, FMHA, or VA insured or guaranteed mortgages with the same interest rate, maturity and type of dwelling. Upon application by the issuer, and after approval by GNMA of the pool, GNMA provides its commitment to guarantee timely payment of principal and interest on the GNMA Certificates backed by the mortgages included in the pool. The GNMA Certificates, endorsed by GNMA, are then sold by the issuer through securities dealers.

GNMA is authorized under the Federal National Housing Act to guarantee timely payment of principal and interest on GNMA Certificates. This guarantee is backed by the full faith and credit of the United States. GNMA may borrow U.S. Treasury funds to the extent needed to make payments under its guarantee. When mortgages in the pool underlying GNMA Certificates are prepaid by mortgagors or by result of foreclosure, such principal payments are passed through to the certificate holders. Accordingly, the life of the GNMA Certificate is likely to be substantially shorter than the stated maturity of the mortgages in the underlying pool. Because of such variation in prepayment rates, it is not possible to predict the life of a particular GNMA Certificate, but FHA statistics indicate that 25 to 30 year single family dwelling mortgages have an average life of approximately 12 years. The majority of GNMA Certificates are backed by mortgages of this type, and accordingly the generally accepted practice has developed to treat GNMA Certificates as 30-year securities which prepay fully in the 12th year.

 

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GNMA Certificates bear a nominal “coupon rate” which represents the effective FHA or VA mortgage rate at the time of issuance, less 0.5% which constitutes the GNMA and issuer’s fees. For providing its guarantees, GNMA receives an annual fee of 0.06% of the outstanding principal on certificates backed by single family dwelling mortgages, and the issuer receives an annual fee of 0.44% for assembling the pool and for passing through monthly payments of interest and principal.

Payments to holders of GNMA Certificates consist of the monthly distributions of interest and principal less the GNMA and issuer’s fees. The actual yield to be earned by a holder of a GNMA Certificate is calculated by dividing such payments by the purchase price paid for the GNMA Certificate (which may be at a premium or a discount from the face value of the certificate). Monthly distributions of interest, as contrasted to semi-annual distributions, which are common for other fixed interest investments, have the effect of compounding and thereby raising the effective annual yield earned on GNMA Certificates. Because of the variation in the life of the pools of mortgages which back various GNMA Certificates, and because it is impossible to anticipate the rate of interest at which future principal payments may be reinvested, the actual yield earned from a portfolio of GNMA Certificates will differ significantly from the yield estimated by using an assumption of a 12 year life for each GNMA Certificate included in such portfolio, as described.

The actual rate of prepayment for any GNMA Certificate does not lend itself to advance determination, although regional and other characteristics of a given mortgage pool may provide some guidance for investment analysis. Also, secondary-market trading of outstanding GNMA Certificates tends to be concentrated in issues bearing the current coupon rate.

Construction loan securities are issued to finance building costs. The funds are disbursed as needed or in accordance with a prearranged plan. The securities provide for the timely payment to the registered holder of interest at the specified rate plus scheduled installments of principal. Upon completion of the construction phase, the construction loan securities are terminated, and project loan securities are issued. It is the Portfolio’s policy to record these GNMA Certificates on trade date, and to segregate assets to cover its commitments on trade date as well.

GNMA Certificates

GNMA Certificates may at times be purchased or sold on a delayed-delivery basis or on a when- issued basis. These transactions arise when GNMA Certificates are purchased or sold with payment and delivery taking place in the future, in order to secure what is considered to be an advantageous price and yield to the Portfolio. No payment is made until delivery is due, often a month or more after the purchase. The settlement date on such transactions will take place no more than 120 days from the trade date. When the Portfolio engages in when-issued and delayed-delivery transactions, it relies on the buyer or seller, as the case may be, to consummate the sale. Failure of the buyer or seller to do so may result in the Portfolio missing the opportunity of obtaining a price considered to be advantageous. While when-issued GNMA Certificates may be sold prior to the settlement date, the Portfolio intends to purchase such securities with the purpose of actually acquiring them unless a sale appears desirable for investment reasons. At the time the Portfolio makes the commitment to purchase a GNMA Certificate on a when-issued basis, it will record the transaction and reflect the value of the security in determining its net asset value (“NAV”). The Portfolio may invest in when-issued securities without other conditions. Such securities either will mature or be sold on or about the settlement date. The Portfolio may earn interest on such account or securities for the benefit of shareholders.

Government Trust Certificates

Government Trust Certificates represent an interest in a government trust, the property of which consists of: (i) a promissory note of a foreign government no less than 90% of which is backed by the full faith and credit guaranty issued by the federal government of the United States (issued pursuant to Title III of the Foreign Operations, Export, Financing and Related Borrowers Programs Appropriations Act of 1998); and (ii) a security interest in obligations of the U.S. Treasury backed by the full faith and credit of the United States sufficient to support the remaining balance (no more than 10%) of all payments of principal and interest on such promissory note; provided that such obligations shall not be rated less than AAA or less than Aaa by a NRSRO.

 

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High-Yield Securities

High-yield securities are debt securities that are rated lower than “Baa” by Moody’s or “BBB-” by S&P’s Corporation, or of comparable quality if unrated.

High-yield securities often are referred to as “junk bonds” and include certain corporate debt obligations, higher yielding preferred stock and mortgage-related securities, and securities convertible into the foregoing. Investments in high-yield securities generally provide greater income and increased opportunity for capital appreciation than investments in higher quality debt securities, but they also typically entail greater potential price volatility and principal and income risk.

High-yield securities are not considered to be investment grade. They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet principal and interest payments. Also, their yields and market values tend to fluctuate more than higher-rated securities. Fluctuations in value do not affect the cash income from the securities, but are reflected in the Portfolio’s NAV. The greater risks and fluctuations in yield and value occur, in part, because investors generally perceive issuers of lower-rated and unrated securities to be less creditworthy.

The yields earned on high-yield securities generally are related to the quality ratings assigned by recognized rating agencies. The following are excerpts from Moody’s description of its bond ratings: Ba — judged to have speculative elements; their future cannot be considered as well assured. B — generally lack characteristics of a desirable investment. Caa — are of poor standing; such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca — speculative in a high degree; often in default. C — lowest rate class of bonds; regarded as having extremely poor prospects. Moody’s also applies numerical indicators 1, 2 and 3 to rating categories. The modifier 1 indicates that the security is in the higher end of its rating category; 2 indicates a mid-range ranking; and 3 indicates a ranking towards the lower end of the category. The following are excerpts from S&P’s description of its bond ratings: BB, B, CCC, CC, C — predominantly speculative with respect to capacity to pay interest and repay principal in accordance with terms of the obligation; BB indicates the lowest degree of speculation and C the highest. D — in payment default. S&P applies indicators “+,” no character, and “-” to its rating categories. The indicators show relative standing within the major rating categories.

Certain securities held by the Portfolio may permit the issuer at its option to call, or redeem, its securities. If an issuer were to redeem securities held by the Portfolio during a time of declining interest rates, the Portfolio may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed.

Risks Associated with High-Yield Securities

The medium- to lower-rated and unrated securities in which the Portfolio invests tend to offer higher yields than those of other securities with the same maturities because of the additional risks associated with them. These risks include:

High-Yield Bond Market - A severe economic downturn or increase in interest rates might increase defaults in high-yield securities issued by highly leveraged companies. An increase in the number of defaults could adversely affect the value of all outstanding high-yield securities, thus disrupting the market for such securities.

Sensitivity to Interest Rate and Economic Changes - High-yield securities are more sensitive to adverse economic changes or individual corporate developments but less sensitive to interest rate changes than are U.S. Treasury or investment grade bonds. As a result, when interest rates rise, causing bond prices to fall, the value of high-yield debt bonds tend not to fall as much as U.S. Treasury or investment grade corporate bonds. Conversely when interest rates fall, high-yield bonds tend to under perform U.S. Treasury and investment grade corporate bonds because high-yield bond prices tend not to rise as much as the prices of these bonds.

 

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The financial stress resulting from an economic downturn or adverse corporate developments could have a greater negative effect on the ability of issuers of high-yield securities to service their principal and interest payments, to meet projected business goals and to obtain additional financing than on more creditworthy issuers. Holders of high-yield securities could also be at a greater risk because high-yield securities are generally unsecured and subordinate to senior debt holders and secured creditors. If the issuer of a high-yield security owned by the Portfolio defaults, the Portfolio may incur additional expenses to seek recovery. In addition, periods of economic uncertainty and changes can be expected to result in increased volatility of market prices of high-yield securities and the Portfolio’s NAV. Furthermore, in the case of high-yield securities structured as zero-coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes and thereby tend to be more speculative and volatile than securities, which pay in cash.

Payment Expectations - High-yield securities present risks based on payment expectations. For example, high-yield securities may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the Portfolio may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, the value of high-yield securities may decrease in a rising interest rate market. In addition, there is a higher risk of non-payment of interest and/or principal by issuers of high-yield securities than in the case of investment grade bonds.

Liquidity and Valuation Risks - Lower-rated bonds are typically traded among a smaller number of broker-dealers rather than in a broad secondary market. Purchasers of high-yield securities tend to be institutions, rather than individuals, a factor that further limits the secondary market. To the extent that no established retail secondary market exists, many high-yield securities may not be as liquid as U.S. Treasury and investment grade bonds. The ability to value or sell high-yield securities will be adversely affected to the extent that such securities are thinly traded or illiquid. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high-yield securities more than other securities, especially in a thinly-traded market. To the extent the Portfolio owns illiquid or restricted high-yield securities; these securities may involve special registration responsibilities, liabilities and costs, and liquidity and valuation difficulties. At times of less liquidity, it may be more difficult to value high-yield securities because this valuation may require more research, and elements of judgment may play a greater role in the valuation since there is less reliable, objective data available.

Taxation - Special tax considerations are associated with investing in high-yield securities structured as zero-coupon or pay-in-kind securities. The Portfolio would report the interest on these securities as income even though it receives no cash interest until the security’s maturity or payment date.

Limitations of Credit Ratings - The credit ratings assigned to high-yield securities may not accurately reflect the true risks of an investment. Credit ratings typically evaluate the safety of principal and interest payments, rather than the market value risk of high-yield securities. In addition, credit agencies may fail to adjust credit ratings to reflect rapid changes in economic or company conditions that affect a security’s market value. Although the ratings of recognized rating services such as Moody’s and S&P are considered, the Adviser or a sub-adviser may primarily rely on its own credit analysis, which includes a study of existing debt, capital structure, ability to service debts and to pay dividends, the issuer’s sensitivity to economic conditions, its operating history and the current trend of earnings. Thus, the achievement of the Portfolio’s investment objective may be more dependent on the Adviser’s or sub-adviser’s own credit analysis than might be the case when the Portfolio invests in higher quality bonds. The Adviser or sub-adviser, when applicable, continually monitors the investments in the Portfolio’s portfolio and carefully evaluates whether to dispose of or retain high-yield securities whose credit ratings have changed. The Portfolio may retain a security whose rating has been changed.

Congressional Proposals - New laws and proposed new laws may negatively affect the market for high-yield securities. Any such proposals, if enacted, could have a negative effect on the Portfolio’s NAV.

Interest/Principal Only Stripped Mortgage Backed Securities

The Portfolio may invest in Interest/Principal only Stripped Mortgage-Backed Securities (“SMBS”) which are created by the Federal Reserve Bank by separating the interest and principal components of an outstanding

 

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U.S. Treasury or agency bond and selling them as individual securities. The market prices of SMBS are generally more volatile than the market prices of securities with similar maturities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than the prices of non-zero coupon securities having similar maturities and credit quality.

Mortgage-Related Securities

Mortgage-related securities include mortgage-related debt securities, CMOs and REMICs. Federal mortgage-related securities include obligations issued or guaranteed by the GNMA, the FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC”). GNMA is a wholly-owned corporate instrumentality of the United States, the securities and guarantees of which are backed by the full faith and credit of the U.S. government. FNMA, a federally chartered and privately owned corporation, and FHLMC, a federal corporation, are instrumentalities of the United States with Presidentially appointed board members. The obligations of FNMA and FHLMC are not explicitly guaranteed by the full faith and credit of the federal government. (See “U. S. Government Securities.”)

Pass-through mortgage-related securities are characterized by monthly payments to the holder, reflecting the monthly payments made by the borrowers who received the underlying loans, represent both principal and interest. Although the underlying mortgage loans are for specified periods of time, often twenty or thirty years, the borrowers can, and typically do, repay such loans sooner. Thus, the security holders frequently receive payments of principal, in addition to the principal that is part of the regular monthly payment. A borrower is more likely to repay a mortgage bearing a relatively high rate of interest. This means that in times of declining interest rates, some higher yielding securities held by the Portfolio might be converted to cash, and the Portfolio could be expected to reinvest such cash at the then prevailing lower rates. The increased likelihood of prepayment when interest rates decline also limits market price appreciation of mortgage-related securities. If the Portfolio buys mortgage-related securities at a premium, mortgage foreclosures or mortgage prepayments may result in losses of up to the amount of the premium paid since only timely payment of principal and interest is guaranteed.

CMOs and REMICs are securities that are collateralized by mortgage pass-through securities. Cash flows from underlying mortgages are allocated to various classes or tranches in a predetermined, specified order. Each sequential tranche has a “stated maturity”—the latest date by which the tranche can be completely repaid, assuming no prepayments—and has an “average life”—the average time to receipt of a principal payment weighted by the size of the principal payment. The average life is typically used as a proxy for maturity because the debt is amortized, rather than being paid off entirely at maturity, as would be the case in a straight debt instrument.

CMOs and REMICs are typically structured as “pass-through” securities. In these arrangements, the underlying mortgages are held by the issuer, which then issues debt collateralized by the underlying mortgage assets. The security holder thus owns an obligation of the issuer and payment of interest and principal on such obligations is made from payments generated by the underlying mortgage assets. The underlying mortgages may or may not be guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government, such as GNMA, or otherwise backed by FNMA or FHLMC. Alternatively, such securities may be backed by mortgage insurance, letters of credit or other credit enhancing features. Both CMOs and REMICs are issued by private entities. They are not directly guaranteed by any government agency and are secured by the collateral held by the issuer. CMOs and REMICs are subject to the type of prepayment risk described above due to the possibility that prepayments on the underlying assets will alter their cash flows.

Risks of Mortgage-Related Investment

Investments in mortgage-related securities involve certain risks. In periods of declining interest rates, prices of fixed-income securities tend to rise. However, during such periods, the rate of prepayment of mortgages underlying mortgage-related securities tends to increase, with the result that such prepayments must be reinvested by the issuer at lower rates. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of the purchase. Unanticipated rates of

 

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prepayment on underlying mortgages can be expected to increase the volatility of such securities. In addition, the value of these securities may fluctuate in response to the market’s perception of the creditworthiness of the issuers of mortgage-related securities. Because investments in mortgage-related securities are interest-rate sensitive, the ability of the issuer to reinvest favorably in underlying mortgages may be limited by government regulation or tax policy. For example, action by the Board of Governors of the Federal Reserve System to limit the growth of the nation’s money supply may cause interest rates to rise and thereby reduce the volume of new residential mortgages. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantees and/or insurance, there is no assurance that private guarantors or insurers will be able to meet their obligations. Further, SMBS are likely to experience greater price volatility than other types of mortgage securities. The yield to maturity on the interest-only class is extremely sensitive, both to changes in prevailing interest rates and to the rate of principal payments (including prepayments) or the underlying mortgage assets. Similarly, the yield to maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are made. The Portfolio could fail to fully recover its initial investment in a CMO residual or a SMBS. (See “U.S. Government Securities.”)

Municipal Securities

Municipal securities are debt obligations issued by state and local governments, territories and possessions of the U.S. regional government authorities, and their agencies and instrumentalities (“municipal securities”). Municipal securities include both notes (which have maturities of less than one year) and bonds (which have maturities of one year or more) that bear fixed or variable rates of interest.

In general, municipal securities debt obligations are issued to obtain funds for a variety of public purposes, such as the construction, repair, or improvement of public facilities, including airports, bridges, housing, hospitals, mass transportation, schools, streets, water and sewer works. Municipal securities may be issued to refinance outstanding obligations and to raise funds for general operating expenses and lending to other public institutions and facilities.

The two principal classifications of municipal securities are “general obligation” securities and “revenue” securities. General obligation securities are secured by the issuer’s pledge of its full faith, credit, and tax power for the payment of principal and interest. Characteristics and methods of enforcement of general obligation bonds vary according to the law applicable to a particular issuer, and the taxes that can be levied for the payment of debt service may be limited or unlimited as to rates or amounts of special assessments. Revenue securities are payable only from the revenues derived from a particular facility, a class of facilities or, in some cases, from the proceeds of a special excise tax. Revenue bonds are issued to finance a wide variety of capital projects, including electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Although the principal security behind these bonds may vary, many provide additional security in the form of a debt service reserve fund, the assets of which may be used to make principal and interest payments on the issuer’s obligations. Housing finance authorities have a wide range of security; including partially or fully insured mortgages, rent subsidized and collateralized mortgages, and the net revenues from housing or other public projects. Some authorities are provided further security in the form of a state’s assistance (although without obligation) to make up deficiencies in the debt service reserve fund.

Insured municipal debt involves scheduled payments of interest and principal guaranteed by a private, non-governmental or governmental insurance company. The insurance does not guarantee the market value of the municipal debt or the value of the shares of the Portfolio.

Securities of issuers of municipal obligations are subject to the provisions of bankruptcy, insolvency and other law affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may become subject to laws enacted in the future by Congress, state legislatures or referenda extending the time for payment of principal or interest, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes. Furthermore, as a result of legislation or other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal obligations may be materially affected.

 

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Moral Obligations Securities - Municipal securities may include “moral obligation” securities which are usually issued by special purpose public authorities. If the issuer of moral obligation bonds cannot fulfill its financial responsibilities from current revenues, it may draw upon a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.

Tax Exempt Industrial Development and Pollution Control Bonds - These are revenue bonds and generally are not payable from the unrestricted revenues of an issuer. They are issued by or on behalf of public authorities to raise money to finance privately operated facilities for business, manufacturing, housing, sport complexes, and pollution control. Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds and any guarantor to meet its financial obligations.

Municipal Lease Obligations - These are lease obligations or installment purchase contract obligations of municipal authorities or entities (“municipal lease obligations”). Although lease obligations do not constitute general obligations of the municipality for which its taxing power is pledged, a lease obligation is ordinarily backed by the municipality’s covenant to budget for, appropriate and make the payment due under the lease obligation. “Certificates of participation” are securities issued by a particular municipality or municipal authority to evidence a proportionate interest in base rental or lease payments relating to a specific project to be made by the municipality, agency or authority. However, certain lease obligations contain “non-appropriation” clauses that provide that the municipality has no obligation to make lease or installment purchase payments in any year unless money is appropriated for such purpose for such year. Although “non-appropriation” lease obligations are secured by the leased property, disposition of the property in the event of default and foreclosure might prove difficult. In addition, these securities represent a relatively new type of financing, and certain lease obligations may therefore be considered to be illiquid securities.

The Portfolio will attempt to minimize the special risks inherent in municipal lease obligations and certificates of participation by purchasing only lease obligations which meet the following criteria: (1) rated A or better by at least one nationally recognized securities rating organization (“NRSRO”); (2) secured by payments from a governmental lessee that has actively traded debt obligations; (3) determined by the adviser or sub-adviser to be critical to the lessee’s ability to deliver essential services; and (4) contain legal features which the adviser or sub-adviser deems appropriate, such as covenants to make lease payments without the right of offset or counterclaim, requirements for insurance policies, and adequate debt service reserve funds.

Short-term Municipal Obligations. These securities include the following:

Tax Anticipation Notes are used to finance working capital needs of municipalities and are issued in anticipation of various seasonal tax revenues, to be payable from these specific future taxes. They are usually general obligations of the issuer, secured by the taxing power of the municipality for the payment of principal and interest when due.

Revenue Anticipation Notes are issued in expectation of receipt of other kinds of revenue, such as federal revenues available under the Federal Revenue Sharing Program. They also are usually general obligations of the issuer.

Bond Anticipation Notes are normally issued to provide interim financing until long-term financing can be arranged. The long-term bonds then provide the money for the repayment of the notes.

Construction Loan Notes are sold to provide construction financing for specific projects. After successful completion and acceptance, many projects receive permanent financing through the FNMA or the GNMA.

Short-Term Discount Notes (tax-exempt commercial paper) are short-term (365 days or less) promissory notes issued by municipalities to supplement their cash flow.

 

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Savings Association Obligations

The certificates of deposit (interest-bearing time deposits) in which the Portfolio may invest are issued by savings banks or savings and loan associations that have capital, surplus and undivided profits in excess of $100 million, based on latest published reports, or less than $100 million if the principal amount of such obligations is fully insured by the U.S. government.

Subordinated Mortgage Securities

Subordinated mortgage securities have certain characteristics and certain associated risks. In general, the subordinated mortgage securities in which the Portfolio may invest consist of a series of certificates issued in multiple classes with a stated maturity or final distribution date. One or more classes of each series may be entitled to receive distributions allocable only to principal, principal payments, interest or any combination thereof to one or more other classes, or only after the occurrence of certain events, and may be subordinated in the right to receive such distributions on such certificates to one or more senior classes of certificates. The rights associated with each class of certificates are set forth in the applicable pooling and servicing agreement, form of certificate and offering documents for the certificates.

The subordination terms are usually designed to decrease the likelihood that the holders of senior certificates will experience losses or delays in the receipt of their distributions and to increase the likelihood that the senior certificate holders will receive aggregate distributions of principal and interest in the amounts anticipated. Generally, pursuant to such subordination terms, distributions arising out of scheduled principal, principal prepayments, interest or any combination thereof that otherwise would be payable to one or more other classes of certificates of such series (i.e., the subordinated certificates) are paid instead to holders of the senior certificates. Delays in receipt of scheduled payments on mortgage loans and losses on defaulted mortgage loans are typically borne first by the various classes of subordinated certificates and then by the holders of senior certificates.

In some cases, the aggregate losses in respect of defaulted mortgage loans that must be borne by the subordinated certificates and the amount of the distributions otherwise distributable on the subordinated certificates that would, under certain circumstances, be distributable to senior certificate holders may be limited to a specified amount. All or any portion of distributions otherwise payable to holders of subordinated certificates may, in certain circumstances, be deposited into one or more reserve accounts for the benefit of the senior certificate holders. Since a greater risk of loss is borne by the subordinated certificate holders, such certificates generally have a higher stated yield than the senior certificates.

A series of certificates may consist of one or more classes as to which distributions allocable to principal will be allocated. The method by which the amount of principal to be distributed on the certificates on each distribution date is calculated and the manner in which such amount could be allocated among classes varies and could be effected pursuant to a fixed schedule, in relation to the occurrence of certain events or otherwise. Special distributions are also possible if distributions are received with respect to the mortgage assets, such as is the case when underlying mortgage loans are prepaid.

A mortgage-related security that is senior to a subordinated residential mortgage security will not bear a loss resulting from the occurrence of a default on an underlying mortgage until all credit enhancements protecting such senior holder are exhausted. For example, the senior holder will only suffer a credit loss after all subordinated interests have been exhausted pursuant to the terms of the subordinated residential mortgage security. The primary credit risk of investing in subordinated residential mortgage securities is potential losses resulting from defaults by the borrowers under the underlying mortgages. The Portfolio would generally realize such a loss in connection with a subordinated residential mortgage security only if the subsequent foreclosure sale of the property securing a mortgage loan does not produce an amount at least equal to the sum of the unpaid principal balance of the loan as of the date the borrower went into default, the interest that was not paid during the foreclosure period and all foreclosure expenses.

The adviser or sub-advisers will seek to limit the risks presented by subordinated residential mortgage securities by reviewing and analyzing the characteristics of the mortgage loans that underlie the pool of mortgages securing both the senior and subordinated residential mortgage securities. The adviser or sub-advisers

 

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have developed a set of guidelines to assist in the analysis of the mortgage loans underlying subordinated residential mortgage securities. Each pool purchase is reviewed against the guidelines. The Portfolio seeks opportunities to acquire subordinated residential mortgage securities when, in the view of the adviser or sub-advisers, the potential for a higher yield on such instruments outweighs any additional risk presented by the instruments. The adviser will seek to increase yield to shareholders by taking advantage of perceived inefficiencies in the market for subordinated residential mortgage securities.

U.S. Government Securities

Investments in U.S. government securities include instruments issued by the U.S. Treasury, such as bills, notes and bonds. These instruments are direct obligations of the U.S. government and, such as, are backed by the full faith and credit of the United States. They differ primarily in their interest rates, the lengths of their maturities and the dates of their issuances. In addition, U.S. government securities include securities issued by instrumentalities of the U.S. government, such as the GNMA, which are also backed by the full faith and credit of the United States. Also included in the category of U.S. government securities are instruments issued by instrumentalities established or sponsored by the U.S. government, such as the Student Loan Marketing Association, the FNMA and the FHLMC. While these securities are issued, in general, under the authority of an Act of Congress, the U.S. government is not obligated to provide financial support to the issuing instrumentalities, although under certain conditions certain of these authorities may borrow from the U.S. Treasury. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate prepayment, and may not be able to assert a claim against the United States itself if the agency or instrumentality does not meet its commitment. The Portfolio generally will invest in securities of such agencies or instrumentalities only when the adviser or sub-adviser are satisfied that the credit risk with respect to any instrumentality is comparable to the credit risk of U.S. government securities backed by the full faith and credit of the United States.

Zero-Coupon and Pay-In-Kind Securities

Zero-coupon and deferred interest securities, are debt obligations that do not entitle the holder to any periodic payment of interest prior to maturity or a specified date when the securities begin paying current interest rates (the “cash payment date”) and therefore are issued and traded at a discount from their face amounts or par value. The discount varies, depending on the time remaining until maturity or cash payment date, prevailing interest rates, liquidity of the security and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, decreases as the final maturity or cash payment date of the security approaches. A pay-in-kind bond pays interest during the initial few years in additional bonds rather than in cash. Later the bond may pay cash interest. Pay-in-kind bonds are typically callable at about the time they begin paying cash interest. The market prices of zero-coupon and deferred interest securities generally are more volatile than the market prices of securities with similar maturities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do non zero-coupon securities having similar maturities and credit quality.

The risks associated with lower-rated debt securities apply to these securities. Zero-coupon and pay-in-kind securities are also subject to the risk that in the event of a default, the Portfolio may realize no return on its investment, because these securities do not pay cash interest.

OTHER INVESTMENTS

Derivatives

Generally, derivatives can be characterized as financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Types of derivatives include options, futures contracts, options on futures, forward contracts and swap agreements. Derivative instruments may be used for a variety of reasons; including to enhance return, hedge certain market risks, or provide a substitute for purchasing or selling particular securities. Derivatives may provide a cheaper, quicker or more specifically focused way for the Portfolio to invest than “traditional” securities would.

 

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Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular derivative and the portfolio as a whole. Derivatives permit the Portfolio to increase or decrease the level of risk, or change the character of the risk, to which its portfolio is exposed in much the same way as the Portfolio can increase or decrease the level of risk, or change the character of the risk, of its portfolio by making investments in specific securities.

Derivatives may be purchased on established exchanges or through privately negotiated transactions referred to as over-the-counter derivatives. Exchange-traded derivatives generally are guaranteed by the clearing agency, which is the issuer or counterparty to such derivatives. This guarantee usually is supported by a daily payment system (i.e., margin requirements) operated by the clearing agency to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty credit risk associated with derivatives purchased on an exchange. By contrast, no clearing agency guarantees over-the-counter derivatives. Therefore, each party to an over-the-counter derivative bears the risk that the counterparty will default. Accordingly, the Portfolio will consider the creditworthiness of counterparties to over-the-counter derivatives in the same manner, as they would review the credit quality of a security to be purchased by the Portfolio. Over-the-counter derivatives are less liquid than exchange-traded derivatives since the other party to the transaction may be the only investor with sufficient understanding of the derivative to be interested in bidding for it.

The value of some derivative instruments in which the Portfolio invests may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of the Portfolio, the ability of the Portfolio to successfully utilize these instruments may depend in part upon the ability of the sub-adviser to forecast interest rates and other economic factors correctly. If the adviser or sub-adviser incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Portfolio could be exposed to the risk of loss.

The Portfolio might not employ any of the strategies described below, and no assurance can be given that any strategy used will succeed. If the adviser or sub-adviser incorrectly forecasts interest rates, market values or other economic factors in utilizing a derivatives strategy for the Portfolio, the Portfolio might have been in a better position if it had not entered into transaction at all. Also, suitable derivative transactions may not be available in all circumstances. The use of these strategies involves certain special risks, including a possible imperfect correlation, or even no correlation, between price movements of derivative instruments and price movements of relates investments. While some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in related investments or otherwise, due to the possible inability of the Portfolio to purchase or sell a portfolio security at a time that otherwise would be favorable or the possible need to sell a portfolio security at a disadvantageous time because the Portfolio is required to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments, and the possible inability of the Portfolio to close out or to liquidate its derivatives positions. In addition, the Portfolio’s use of such instruments may cause the Portfolio to realize higher amounts of short-term capital gains (generally taxed at ordinary income tax rates) than if it had not used such instruments.

Financial Futures Contracts and Related Options

The Portfolio may enter into futures contracts or options thereon that are traded on national futures exchanges and are standardized as to maturity date and underlying financial instrument. The futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission (“CFTC”).

A futures contract provides for the future sale by one party and purchase by another party of a specified amount of a financial instrument or a specific stock market index for a specified price at a designated time, date, and place. Brokerage fees are incurred when a futures contract is bought or sold at expiration, and margin deposits must be maintained.

 

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Although interest rate futures contracts typically require actual future delivery of and payment for the underlying instruments, those contracts are usually closed out before the delivery date. Stock index futures contracts do not contemplate actual future delivery and will be settled in cash at expiration or closed out prior to expiration. Closing out an open futures contract sale or purchase is effected by entering into an offsetting futures contract purchase or sale, respectively, for the same aggregate amount of the identical type of underlying instrument and the same delivery date. There can be no assurance, however, that the Portfolio will be able to enter into an offsetting transaction with respect to a particular contract at a particular time. If the Portfolio is not able to enter into an offsetting transaction, it will continue to be required to maintain the margin deposits on the contract.

The prices of futures contracts are volatile and are influenced by, among other things, actual and anticipated changes in interest rates and equity prices, which in turn are affected by fiscal and monetary policies and national and international political and economic events. Small price movements in futures contracts may result in immediate and potentially unlimited loss or gain to the Portfolio relative to the size of the margin commitment. A purchase or sale of a futures contract may result in losses in excess of the amount initially invested in the futures contracts.

When using futures contracts as a hedging technique, at best the correlation between changes in prices of futures contracts and of the securities being hedged can be only approximate. The degree of imperfection of correlation depends upon circumstances such as: variations in speculative market demand for futures and for securities, including technical influences in futures trading, and differences between the financial instruments being hedged and the instruments underlying the standard futures contracts available for trading. Even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior or stock market or interest rate trends (as well as expenses associated with creating the hedge). If the values of the assets being hedged do not move in the same amount or direction as the underlying security or index, the hedging strategy for the Portfolio might not be successful and the Portfolio could sustain losses on its hedging transactions which would not be offset by gains on its portfolio. It is also possible that there are may be a negative correlation between the security underlying a futures or option contract and the portfolio securities being hedged, which could result in losses both on the hedging transaction and the portfolio securities. In such instances, the Portfolio’s overall return could be less than if the hedging transactions had not been undertaken.

Investments in futures contracts on fixed-income securities involve the risk that if an adviser or a sub-adviser’s judgment concerning the general direction of interest rates is incorrect, the Portfolio’s overall performance may be poorer than if it had not entered into any such contract. For example, if the Portfolio has been hedged against the possibility that an increase in interest rates would adversely affect the price of bonds held in its portfolio, and interest rates decrease instead, the Portfolio will lose part or all of the benefit of the increased value of its bonds which have been hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell bonds from its portfolio to meet daily variation margin requirements, possibly at a time when it may be disadvantageous to do so. Such sale of bonds may be at increased prices, which reflect the rising market.

Most U.S. futures exchanges limit the amount of fluctuation permitted in interest rate futures contract prices during a single trading day, and temporary regulations limiting price fluctuations for stock index futures contracts are also now in effect. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular type contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some persons engaging in futures transactions to substantial losses.

Sales of futures contracts that are intended to hedge against a change in the value of securities held by the Portfolio may affect the holding period of such securities and, consequently, the nature of the gain or loss of such securities upon disposition.

 

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“Margin” is the amount of funds that must be deposited with a commodities broker in a custodian account in order to initiate futures trading and to maintain open positions in the Portfolio’s futures contracts. A margin deposit is intended to assure the Portfolio’s performance of the futures contract. The margin required for a particular futures contract is set by the exchange on which the contract is traded and may be significantly modified from time to time by the exchange during the term of the contract.

If the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy the margin requirement, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Portfolio. These daily payments to and from the Portfolio are called variation margin. At times of extreme price volatility, intra-day variation margin payments may be required. In computing daily NAVs, the Portfolio will mark-to-market the current value of its open futures contracts. The Portfolio expects to earn interest income on its initial margin deposits.

When the Portfolio buys or sells a futures contract, unless it already owns an offsetting position, it will designate cash and/or liquid securities having an aggregate value at least equal to the full “notional” value of the futures contract, thereby insuring that the leveraging effect of such futures contract is minimized, in accordance with regulatory requirements.

The Portfolio can buy and write (sell) options on futures contracts.

Potential Lack of a Liquid Secondary Market - Prior to exercise or expiration, a futures or option position may be terminated only by entering into a closing purchase or sale transaction, which requires a secondary market on the exchange on which the position was originally established. While the Portfolio will establish a futures or option position only if there appears to be a liquid secondary market, there can be no assurance that such a market will exist for any particular futures or option contract at any specific time. In such event, it may not be possible to close out a position held by the Portfolio, which could require the Portfolio to purchase or sell the instrument underlying the position, make or receive a cash settlement, or meet ongoing variation margin requirements. The inability to close out futures or option positions also could have an adverse impact on the Portfolio’s ability to effectively hedge its portfolio, or the relevant portion thereof.

The trading of futures and options is also subject to the risk of trading halts, suspensions, exchange or clearing house equipments failures, government intervention, insolvency of the brokerage firm or clearing house or other distributions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments.

Forward Foreign Currency Contracts

Forward contracts for foreign currency (forward exchange contracts) obligate the seller to deliver and the purchaser to take a specific amount of a specified foreign currency at a future date at a price set at the time of the contract. These contracts are generally traded in the interbank market conducted directly between currency traders and their customers. The Portfolio may enter into a forward exchange contract in order to “lock in” the U.S. dollar price of a security denominated in a foreign currency, which it has purchased or sold but which has not yet settled (a transaction hedge); to lock in the value of an existing portfolio security (a position hedge); or to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and a foreign currency. Forward exchange contracts include standardized foreign currency futures contracts which are traded on exchanges and are subject to procedures and regulations applicable to futures. The Portfolio may also enter into a forward exchange contract to sell a foreign currency that differs from the currency in which the underlying security is denominated. This is done in the expectation that there is a greater correlation between the foreign currency of the forward exchange contact and the foreign currency of the underlying investment than between the U.S. dollar and the foreign currency of the underlying investment. This technique is referred to as “cross hedging.” The success of cross hedging is dependent on many factors, including the ability of the sub-adviser to correctly identify and monitor the correlation between foreign currencies and the U.S. dollar. To the extent that the correlation is not identical, the Portfolio may experience losses or gains on both the underlying security and the cross currency hedge.

 

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Forward exchange contracts may be used to protect against uncertainty in the level of future exchange rates. The use of forward exchange contracts does not eliminate fluctuations in the prices of the underlying securities the Portfolio owns or intends to acquire, but it does fix a rate of exchange in advance. In addition, although forward exchange contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase.

The precise matching of the forward contact amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of these securities between the date the forward contract is entered into and the date it is sold. Accordingly, it may be necessary for the Portfolio to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase), if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Forward contracts involve the risk that anticipated currency movements will not be accurately predicted, causing the Portfolio to sustain losses on these contacts and transactions costs.

At or before the maturity of a forward exchange contract requiring the Portfolio to sell a currency, the Portfolio may either sell a portfolio security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Portfolio will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. Similarly, the Portfolio may close out a forward contract requiring it to purchase a specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. The Portfolio would realize a gain or loss as a result of entering into such an offsetting forward contract under either circumstance to the extent the exchange rate(s) between the currencies involved moved between the execution dates of the first contract and the offsetting contract.

The cost of engaging in forward exchange contracts varies with factors such as currencies involved, the length of the contract period and the market conditions then prevailing. Because forward contracts are usually entered into on a principal basis, no fees or commissions are involved. Because such contracts are not traded on an exchange, the adviser or sub-adviser must evaluate the credit and performance risk of each particular counterparty under a forward contract.

Although the Portfolio values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. The Portfolio may convert foreign currency from time to time. Foreign exchange dealers do not charge a fee for conversion, but they do seek to realize a profit based on the difference between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer.

Foreign Currency Options

The Portfolio may purchase and write puts and calls on foreign currencies that are traded on a securities or commodities exchange or quoted by major recognized dealers in such options for the purpose of protecting against declines in the dollar value of foreign securities and against increases in the dollar cost of foreign securities to be acquired. If a rise is anticipated in the dollar value of a foreign currency in which securities to be acquired are denominated, the increased cost of such securities may be partially offset by purchasing calls or writing put on that foreign currency. If a decline in the dollar value of a foreign currency is anticipated, the decline in value of portfolio securities denominated in that currency may be partially offset by writing calls or purchasing puts on that foreign currency. In such circumstances, the Portfolio collateralizes the position by designating cash and/or liquid securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked-to-market daily. In the event of rate fluctuations adverse to the Portfolio’s position, it would lose the premium it paid and transactions costs. A call written on a foreign currency by the Portfolio is covered if the Portfolio owns the underlying foreign currency covered by the call or has an

 

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absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration specially designated) upon conversation or exchange of other foreign currency held in its portfolio.

Foreign Futures Contracts and Foreign Options

Participation in foreign futures contracts and foreign options transactions involves the execution and clearing of trades on, or subject to, the rules of a foreign board of trade. Neither the CFTC, the National Futures Association (“NFA”), nor any domestic exchange regulates activities of any foreign boards of trade including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign laws. Generally, the foreign transaction will be governed by applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures contracts or foreign options transaction occurs. Investors that trade foreign futures contracts or foreign options contracts may not be afforded certain of the protective measures provided by domestic exchanges, including the right to use reparations proceedings before the CFTC and arbitration proceedings provided by the NFA. In particular, funds received from customers for foreign futures contracts or foreign options transactions may not be provided the same protections as funds received for transactions on a U.S. futures exchange. The price of any foreign futures contracts or foreign options contract and, therefore, the potential profit and loss thereon, may be affected by any variance in the foreign exchange rate between the time an order is placed and the time it is liquidated, offset or exercised.

Additional Restrictions on the Use of Futures and Option Contracts

The Portfolio expects that at least 75% of futures contract purchases will be “completed”; that is, upon the sale of these long contracts, equivalent amounts of related securities will have been or are then being purchased by the Portfolio in the cash market. With respect to futures contracts or related options that are entered into for purposes that may be considered speculative, the aggregate initial margin for futures contracts and premiums for options will not exceed 5% of the Portfolio’s net assets, after taking into account realized profits and unrealized losses on such futures contracts.

Risks of Investing in Options

There are several risks associated with transactions in options on securities and indices. Options may be more volatile than the underlying instruments and, therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves. There are also significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular options may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of option of underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or clearing corporation may not at all times be adequate to handle current trading volume; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class of series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.

A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. The extent to which the Portfolio may enter into options transactions may be limited by the Code requirements for qualification of the Portfolio as a regulated investment company. (See “Dividends, Distributions and Taxes.”)

 

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In addition, foreign option exchanges do not afford to participants many of the protections available in U. S. option exchanges. For example, there may be no daily price fluctuation limits in such exchanges or markets, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, the Portfolio as an option writer could lose amounts substantially in excess of its initial investment, due to the margin and collateral requirements typically associated with such option writing. See “OTC Options”.

Index-, Currency- and Equity-Linked Securities

Indexed-linked notes are debt securities of companies that call for interest payments and/or payment at maturity in different terms than the typical note where the borrower agrees to make fixed interest payments and to pay a fixed sum at maturity. Principal and/or interest payments on an index-linked note depend on the performance of one or more market indices, such as the S&P 500® Composite Stock Price Index (“S&P 500® Index”). At maturity, the principal amount of an equity-linked debt security is exchanged for common stock of the issuer or is payable in an amount based on the issuer’s common stock price at the time of maturity. Currency-linked debt securities are short-term or intermediate-term instruments having a value at maturity, determined by reference to one or more foreign currencies. Payment of principal or periodic interest may be calculated as a multiple of the movement of one currency against another currency, or against an index.

Index- and currency-linked securities are derivative instruments that may entail substantial risks. Such instruments may be subject to significant price volatility. The company issuing the instrument may fail to pay the amount due on maturity. The underlying investment or security may not perform as expected by the adviser or sub-adviser. Markets, underlying securities and indices may move in a direction that was not anticipated by the adviser or sub-adviser. Performance of the derivatives may be influenced by interest rate and other market changes in the United States and abroad. Certain derivative instruments may be illiquid.

Options on Futures

A futures option gives the Portfolio the right, in return for the premium paid, to assume a long position (in the case of a call) or short position (in the case of a put) in a futures contract at a specified exercise price prior to the expiration of the option. Upon exercise of a call option, the purchaser acquires a long position in the futures contract and the writer of the option is assigned the opposite short position. In the case of a put option, the converse is true. A futures option may be closed out (before exercise or expiration) by an offsetting purchase or sale of a futures option by the Portfolio.

Over-the-Counter Options

The staff of the SEC has taken the position that purchased over-the-counter options (“OTC Options”) and the assets used as cover for written OTC Options are illiquid securities. The Portfolio intends to establish standards for the creditworthiness of dealers with which it may enter into OTC Option contracts and those standards, as modified from time to time, will be implemented and monitored by the adviser. Under these special arrangements, the Portfolio will enter into contracts with dealers that provide that the Portfolio has the absolute right to repurchase an option it writes at any time at a repurchase price which represents the fair market value, as determined in good faith through negotiation between the parties, but that in no event will exceed a price determined pursuant to a formula contained in the contract. Although the specific details of the formula may vary between contracts with different dealers, the formula will generally be based on multiple of the premium received by the Portfolio for writing the option, plus the amount, if any, by which the options is “in-the-money.” The formula will also include a factor to account for the difference between the price of the security and the strike price of the option if the option is written “out-of-the-money.” “Strike price” refers to the price at which an option will be exercised. “Covered Assets” refers to the amount of cash, liquid assets or high quality debt instruments that must be segregated to collateralize the value of the futures contracts written by the Portfolio. Under such circumstances, the Portfolio will treat as illiquid that amount of the cover assets equal to the amount by which the formula price for the repurchase of the option is greater than the amount by which the market value of the security subject to the option exceeds the exercise price of the option (the amount by which the option is “in-the-money”). Although each agreement will provide that the Portfolio’s

 

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repurchase price shall be determined in good faith (and that it shall not exceed the maximum determined pursuant to the formula), the formula price will not necessarily reflect the market value of the option written. Therefore, the Portfolio might pay more to repurchase the OTC Option contract than the Portfolio would pay to close out a similar exchange traded option.

Put and Call Options

A call option gives the holder (buyer) the right to buy and to obligate the writer (seller) to sell a security or financial instrument at a stated price (strike price) at any time until a designated future date when the option expires (expiration date). A put option gives the holder (buyer) the right to sell and to obligate the writer (seller) to purchase a security or financial instrument at a stated price at any time until the expiration date. The Portfolio may write or purchase put or call options listed on national securities exchanges in standard contracts or may write or purchase put or call options with or directly from investment dealers meeting the creditworthiness criteria of the sub-adviser.

The Portfolio will not write call options on when-issued securities. The Portfolio purchases call options primarily as a temporary substitute for taking positions in certain securities or in the securities that comprise a relevant index. The Portfolio may also purchase call options on an index to protect against increases in the price of securities underlying that index that the Portfolio intends to purchase pending its ability to invest in such securities in an orderly manner.

So long as the obligation of the writer of a call option continues, the writer may be assigned an exercise notice by the broker-dealer through which such option was settled, requiring the writer to deliver the underlying security against payment of the exercise price. This obligation terminates upon the expiration of the call option, by the exercise of the call option, or by entering into an offsetting transaction.

When writing a call option, in return for the premium, the writer gives up the opportunity to profit from the price increase in the underlying security above the exercise price, but conversely retains the risk of loss should the price of the security decline. If a call option expires unexercised, the writer will realize a gain in the amount of the premium. However, such a gain may be offset by a decline in the market value of the underlying security during the option period. If the call option is exercised, the writer would realize a gain or loss from the transaction depending on what it received from the call and what it paid for the underlying security.

An option on an index (or a particular security) is a contract that gives the purchaser of the option, in return for the premium paid, the right to receive from the writer of the option cash equal to the difference between the closing price of the index (or security) and the exercise price of the option, expressed in dollars, times a specified multiple (the multiplier).

The Portfolio may write calls on and futures contracts provided that it enters into an appropriate offsetting position or that it designates liquid assets or high-quality debt instruments in an amount sufficient to cover the underlying obligation in accordance with regulatory requirements. The risk involved in writing call options on futures contracts or market indices is that the Portfolio would not benefit from any increase in value above the exercise price. Usually, this risk can be eliminated by entering into an offsetting transaction. However, the cost to do an offsetting transaction and terminate the Portfolio’s obligation might be more or less than the premium received when it originally wrote the option. Further, the Portfolio might occasionally not be able to close the option because of insufficient activity in the options market.

In the case of a put option, as long as the obligation of the put writer continues, it may be assigned an exercise notice by the broker-dealer through which such option was sold, requiring the writer to take delivery of the underlying security against payment of the exercise price. A writer has no control over when it may be required to purchase the underlying security, since it may be assigned an exercise notice at any time prior to the expiration date. This obligation terminates earlier if the writer effects a closing purchase transaction by purchasing a put of the same series as that previously sold.

If a put option is sold by the Portfolio, the Portfolio will designate liquid securities with a value equal to the exercise price, or else will hold an offsetting position in accordance with regulatory requirements. In writing

 

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puts, there is the risk that the writer may be required to by the underlying security at a disadvantageous price. The premium the writer receives from writing a put option represents a profit, as long as the price of the underlying instrument remains above the exercise price. However, if the put is exercised, the writer is obligated during the option period to buy the underlying instrument from the buyer of the put at exercise price, even though the value of the investment may have fallen below the exercise price. If the put lapse unexercised, the writer realizes a gain in the amount of the premium. If the put is exercised, the writer may incur a loss, equal to the difference between the exercise price and the current market value of the underlying instrument.

The purchase of put options may be used to protect the Portfolio’s holdings in an underlying security against a substantial decline in market value. Such protection, of course, only provided during the life of the put option when the Portfolio, as the holder of the put option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security’s market price. By using put options in this manner, the Portfolio will reduce any profit it might otherwise have realized in its underlying security by the premium paid for the put option and by transaction costs. The purchase of put options also may be used by the Portfolio when it does not hold the underlying security.

The premium received from writing a call or put option, or paid for purchasing a call or put option will reflect, among other things, the current market price of the underlying security, the relationship of the exercise price to such market price, the historical price volatility of the underlying security, the length of the option period, and the general interest rate environment. The premium received by the Portfolio for writing call options will be recorded as a liability in the statement of assets and liabilities of the Portfolio. This liability will be adjusted daily to the option’s current market value. The liability will be extinguished upon expiration of the option, by the exercise of the option, or by entering into an offsetting transaction. Similarly, the premium paid by the Portfolio when purchasing a put option will be recorded as an asset in the statement of assets and liabilities of the Portfolio. This asset will be adjusted daily to the option’s current market value. The asset will be extinguished upon expiration of the option, by selling an identical option in a closing transaction, or by exercising the option.

Closing transactions will be effected in order to realize a profit on an outstanding call or put option, to prevent an underlying security from being called or put, or to permit the exchange or tender of the underlying security. Furthermore, effecting a closing transaction will permit the Portfolio to write another call option, or purchase another put option, on the underlying security with either a different exercise price or expiration date or both. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, or purchased a put option, it will seek to effect a closing transaction prior to, or concurrently with, the date of the security. There is, of course, no assurance that the Portfolio will be able to effect a closing transaction at a favorable price. If the Portfolio cannot enter into such a transaction, it maybe required to hold a security that it might otherwise have sold, in which case it would continue to be at market risk on the security. The Portfolio will pay brokerage commissions in connection with the sale or purchase of options to close out previously established option positions. These brokerage commissions are normally higher as a percentage of underlying asset values than those applicable to purchases and sales of portfolio securities.

Stock Index Options

Stock index options include put and call options with respect to the S&P 500® Index and other stock indices. These may be purchased as a hedge against changes in the values of portfolio securities or securities which it intends to purchase or sell, or to reduce risks inherent in the ongoing management of the Portfolio.

The distinctive characteristics of options on stock indices create certain risks not found in stock options generally. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Portfolio will realize a gain or loss on the purchase or sale of an option on an index depends upon movements in the level of stock prices in the stock market generally rather than movements in the price of a particular stock. Accordingly, successful use by the Portfolio of options on a stock index depends on the adviser’s or sub-adviser’s ability to predict correctly movements in the direction of the stock market generally. This requires different skills and techniques than predicting changes in the price of individual stock.

 

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Index prices may be distorted if circumstances disrupt trading of certain stock included in the index, such as if trading were halted in a substantial number of stock included in the index. If this happens, the Portfolio could not be able to close out options, which it had purchased, and if restrictions on exercise were imposed, the Portfolio might be unable to exercise an option it holds, which could result in substantial losses to the Portfolio. The Portfolio purchases put or call options only with respect to an index which the adviser or sub-adviser believes includes a sufficient number of stock to minimize the likelihood of a trading halt in the index.

Straddles

A straddle consists of a combination of a call and a put written on the same underlying security. A straddle is “covered” when sufficient assets are deposited to meet the Portfolio’s immediate obligations. The Portfolio may use the same liquid assets or high-quality debt instruments to cover both the call and put options when the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Portfolio will segregate liquid assets or high quality debt instruments equivalent to the amount, if any, by which the put is “in the money.”

Warrants

A warrant gives the holder a right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay a fixed dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of the Portfolio’s entire investment therein).

Other Investment Companies

An investment company is a company engaged in the business of pooling investors’ money and trading in securities for them. Examples include face-amount certificate companies, unit investment trusts and management companies. When the Portfolio invests in other investment companies, shareholders of the Portfolio bear their proportionate share of the underlying investment companies’ fees and expenses.

The Portfolio may invest in other investment companies to the extent permitted under the 1940 Act and the rules and regulations thereunder. The Portfolio may also make indirect foreign investments through other investment companies that have comparable investment objectives and policies as the Portfolio. The Portfolio will not invest in other investment companies in reliance on Section 12(d)(1)(F) or (G) of the 1940 Act.

There are some potential disadvantages associated with investing in other investment companies. In addition to the advisory and operational fees the Portfolio bears directly in connection with its own operation, the Portfolio would also bear its pro rata portions of each other investment company’s advisory and operational expenses. When the Portfolio invests in other investment companies, shareholders indirectly pay a proportionate share of the expenses of that other investment company (including management fees, administration fee, and custodial fees in addition to the expenses of the Portfolio.

Investment Companies that Invest in Senior Loans

Other investment companies include those that invest primarily in interests in variable or floating rate loans or notes (“Senior Loans”). Senior Loans, in most circumstances, are fully collateralized by assets of a corporation, partnership, limited liability company, or other business entity. Senior Loans vary from other types of debt in that they generally hold a senior position in the capital structure of a borrower. Thus, Senior Loans are generally repaid before unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and preferred or common stockholders.

Substantial increases in interest rates may cause an increase in loan defaults as borrowers may lack resources to meet higher debt service requirements. The value of the Portfolio’s assets may also be affected by other uncertainties such as economic developments affecting the market for Senior Loans or affecting borrowers generally.

 

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Senior Loans usually include restrictive covenants that must be maintained by the borrower. Under certain interests in Senior Loans, an investment company investing in a Senior Loan may have an obligation to make additional loans upon demand by the borrower. Senior Loans, unlike certain bonds, usually do not have call protection. This means that interests, while having a stated one to ten-year term, may be prepaid, often without penalty. The rate of such prepayments may be affected by, among other things, general business and economic conditions, as well as the financial status of the borrower. Prepayment would cause the actual duration of a Senior Loan to be shorter than its stated maturity.

Credit Risk

Information about interests in Senior Loans generally is not in the public domain, and interests are generally not currently rated by any nationally recognized rating service. Senior Loans are subject to the risk of nonpayment of scheduled interest or principal payments. Issuers of Senior Loans generally have either issued debt securities that are rated lower than investment grade, or, if they had issued debt securities, such debt securities would likely be rated lower than investment grade. However, unlike other types of debt securities, Senior Loans are generally fully collateralized.

In the event of a failure to pay scheduled interest or principal payments on Senior Loans, an investment company investing in that Senior Loan could experience a reduction in its income, and would experience a decline in the market value of the particular Senior Loan so affected, and may experience a decline in the NAV or the amount of the dividends. In the event of a bankruptcy of the borrower, the investment company could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing the Senior Loan.

Collateral

Senior Loans typically will be secured by pledges of collateral from the borrower in the form of tangible assets and intangible assets. In some instances, an investment company may invest in Senior Loans that are secured only by stock of the borrower or its subsidiaries or affiliates. The value of the collateral may decline below the principal amount of the Senior Loan subsequent to an investment in such Senior Loans. In addition, to the extent that collateral consists of stock of the borrower or its subsidiaries or affiliates, there is a risk that the stock may decline in value, be relatively illiquid, or may lose all or substantially all of its value, causing the Senior Loan to be under-collateralized.

Limited Secondary Market

Although it is growing, the secondary market for Senior Loans is currently limited. There is no organized exchange or board of trade on which Senior Loans may be traded; instead, the secondary market for Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly, Senior Loans may be illiquid. In addition, Senior Loans generally require the consent of the borrower prior to sale or assignment. These consent requirements may delay or impede the Portfolio’s ability to sell Senior Loans. In addition, because the secondary market for Senior Loans may be limited, it may be difficult to value Senior Loans. Market quotations may not be available and valuation may require more research than for liquid securities. In addition, elements of judgment may play a greater role in the valuation, because there is less reliable, objective data available.

Hybrid Loans

The growth of the syndicated loan market has produced loan structures with characteristics similar to Senior Loans but which resemble bonds in some respects, and generally offer less covenant or other protections than traditional Senior Loans while still being collateralized (“Hybrid Loans”). With Hybrid Loans, the Portfolio may not possess a senior claim to all of the collateral securing the Hybrid Loan. Hybrid Loans also may not include covenants that are typical of Senior Loans, such as covenants requiring the maintenance of minimum

 

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interest coverage ratios. As a result, Hybrid Loans present additional risks besides those associated with traditional Senior Loans, although they may provide a relatively higher yield. Because the lenders in Hybrid Loans waive or forego certain loan covenants, their negotiating power or voting rights in the event of a default may be diminished. As a result, the lenders’ interests may not be represented as significantly as in the case of a conventional Senior Loan. In addition, because an investment company’s security interest in some of the collateral may be subordinate to other creditors, the risk of nonpayment of interest or loss of principal may be greater than would be the case with conventional Senior Loans.

Subordinated and Unsecured Loans

The primary risk arising in connection with subordinated loans is that because the holder’s interest is subordinated, there is the potential for loss in the event of default by the issuer of the loans. Subordinated loans in an insolvency bear an increased share, relative to senior secured lenders, of the ultimate risk that the borrower’s assets are insufficient to meet its obligations to its creditors. Unsecured loans are not secured by any specific collateral of the borrower. They do not enjoy the security associated with collateralization and may pose a greater risk of nonpayment of interest or loss of principal than do secured loans.

Exchange-Traded Funds

Exchange-Traded Funds (“ETFs”) are passively managed investment companies traded on a securities exchange whose goal is to track or replicate a desired index. ETFs present risks similar to those of an investment in the underlying securities held by the ETF. Because ETFs trade on an exchange, they may not trade at NAV. Sometimes, the prices of ETFs may vary significantly from the NAVs of the ETF’s underlying securities. Additionally, if the Portfolio elects to redeem its ETF shares rather than selling them on the secondary market, the Portfolio may receive the underlying securities which it must then sell in order to obtain cash. Additionally, shareholders may pay a proportionate share of the expenses of the ETF in addition to the expenses of the Portfolio.

Holding Company Depositary Receipts (“HOLDRs”)

HOLDRs are trust-issued receipts that represent the Portfolio’s beneficial ownership of a specific group of stock. HOLDRs involve risks similar to the risks of investing in common stock. For example, the Portfolio’s investments will decline in value if the underlying stock decline in value. Because HOLDRs are not subject to concentration limits, the relative weight of an individual stock may increase substantially, causing the HOLDRs to be less diverse and creating more risk.

Private Funds

U.S. or foreign private limited partnerships or other investment funds are referred to herein as “Private Funds”. Investments in Private Funds may be highly speculative and volatile. Because Private Funds generally are investment companies for purposes of the 1940 Act, the Portfolio’s ability to invest in them will be limited. In addition, Portfolio shareholders will remain subject to the Portfolio’s expenses while also bearing their pro rata share of the operating expenses of the Private Funds. The ability of the Portfolio to dispose of interests in Private Funds is very limited and involves risks, including loss of the Portfolio’s entire investment in the Private Fund.

Private Funds include a variety of pooled investments. Generally, these pooled investments are structured as a trust, a special purpose vehicle, and are exempted from registration under the 1940 Act. As an investor, the Portfolio owns a proportionate share of the trust. Typically, the trust does not employ a professional investment manager. Instead, the pooled investment tracks some index by investing in the issuers or securities that comprise the index. The Portfolio receives a stream of cash flows in the form of interest payments from the underlying assets. However, some pooled investments may not dispose of the underlying securities regardless of the adverse events affecting the issuers depending on the investment strategy utilized. In this type of strategy, the pooled investment continues to hold the underlying securities as long as the issuers of the securities remain members of the tracked index.

 

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The pooled investments allow the Portfolio to synchronize the receipt of interest and principal payments and also, diversify some of the risks involved with investing in fixed-income securities. Because the trust holds securities of many issuers, the default of a few issuers would not impact the Portfolio significantly. However, the Portfolio bears any expenses incurred by the trust. In addition, the Portfolio assumes the liquidity risks generally associated the privately offered pooled investments.

Pooled investments that are structured as a trust contain many similarities to Private Funds that are structured as limited partnerships. The primary difference between the trust and the limited partnership structure is the redemption of the ownership interest. Typically, the ownership interests in a typical Private Fund are redeemable only by the general partners and thus, are restricted from transferring from one party to another. Conversely, the ownership interests in the trust are generally not redeemable by the trust, except under certain circumstances, and are transferable among the general public for publicly offered securities and “qualified purchasers” or “qualified institutional buyers” for privately offered securities.

The Portfolio cannot assure that it can achieve better results by investing in a pooled investment versus investing directly in the individual underlying assets.

Private Funds also include investments in certain structured securities. Structured securities include notes, bonds or debentures that provide for the payment of principal of, and/or interest in, amounts determined by reference to changes in the value of specific currencies, interest rates, commodities, indices or other financial indicators (the “Reference”) or the relative change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. The terms of structured securities may provide that under certain circumstances no principal is due at maturity and, therefore, may result in the loss of Portfolio’s investment. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, the change in interest rate or the value of the security at maturity may be a multiple of the change in the value of the Reference. Consequently, leveraged structure securities entail a greater degree of market risk than other types of debt obligations. Structured securities may also be more volatile, less liquid, and more difficult to accurately price than less complex fixed-income investments.

Real Estate Securities

The Portfolio’s investments in real estate securities include investment in Real Estate Investment Trusts (“REITs”) and other Real Estate Operating Companies (“REOCs”). A REOC is a company that derives at least 50% of its gross revenues or net profits from either (1) the ownership, development, construction, financing, management or sale of commercial, industrial or residential real estate, or (2) products or services related to the real estate industry, such as building supplies or mortgage servicing. A REIT is a corporation or business trust that meets the definitional requirements of the Code. Investing in REITs involve certain unique risks in addition to those risks associated with investing in the real estate industry in general. Although the Portfolio will not invest directly in real estate, the Portfolio may invest in equity securities of issuers primarily engaged in or related to the real estate industry. Therefore, an investment in REITs is subject to certain risks associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning laws; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in rents; changes in interest rates; and acts of terrorism, war or other acts of violence. To the extent that assets underlying the REITs’ investments are concentrated geographically, by property type or in certain other respects, the REITs may subject to certain of the foregoing risks to a greater extent. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified, are subject to heavy cash flow dependency, default by borrowers and self- liquidation. REITs are also subject to the possibilities of failing to qualify for tax-free pass-through of income under the Code and failing to maintain their exemptions from registration under the 1940 Act.

 

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REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REIT’s investment in fixed-rate obligations can be expected to rise. During periods of declining interest rates, certain mortgage REITs may hold mortgages that the mortgagers elect to prepay, which prepayment may diminish the yield on securities issued by such mortgage REITs. Conversely, when interest rates rise, the value of a REIT’s investment in fixed-rate obligations can be expected to decline. In contrast, as interest rates on adjustable rate mortgage loans are reset periodically, yields on a REIT’s investment in such loans will gradually align themselves to reflect changes in market interest rates, causing the value of such investments to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed-rate obligations. Additionally, rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Mortgage REITs may also be affected by the ability of borrowers to repay when due the debt extended by the REIT and equity REITs may be affected by the ability of tenants to pay rent.

Investing in REITs involves risks similar to those associated with investing in small capitalization companies. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than larger company securities. Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through the Portfolio, a shareholder will bear not only his/her proportionate share of the expenses of the Portfolio, but also, indirectly, similar expenses of the REITs. REITs depend generally on their ability to generate cash flow to make distributions to shareholders.

Restricted and Illiquid Securities

The Portfolio may invest in a restricted security or an illiquid security if the adviser and sub-advisers believe that it presents an attractive opportunity. Generally, a security is considered illiquid if it cannot be disposed of within seven days. Its illiquidity might prevent the sale of such a security at a time when the adviser or a sub-adviser might wish to sell, and these securities could have the effect of decreasing the overall level of the Portfolio’s liquidity. Further, the lack of an established secondary market it may make it more difficult to value illiquid securities, requiring the Portfolio to rely on judgments that may be somewhat subjective in determining value, which could vary from the amount that the Portfolio could realize upon disposition.

Because of the nature of these securities, a considerable period of time may elapse between the Portfolio’s decision to dispose of these securities and the time when the Portfolio is able to dispose of them, during which time the value of the securities could decline. The expenses of registering restricted securities (excluding securities that may be resold by pursuant to Rule 144A under the 1933 Act) may be negotiated at the time such securities are purchased by the Portfolio. When registration is required before the securities may be resold, a considerable period may elapse between the decision to sell the securities and the time when the Portfolio would be permitted to sell them. Thus, the Portfolio may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. Some securities are eligible for purchase or sale without SEC registration by certain “qualified institutional buyers.” Such restricted securities could be treated as liquid because a trading market exists. However, these securities could be less liquid than registered securities traded on established secondary markets. Some liquid and restricted securities include Private Funds.

The Portfolio may also acquire securities through private placements. Such securities may have contractual restrictions on their resale, which might prevent their resale by the Portfolio at a time when such resale would be desirable. Securities that are not readily marketable will be valued by the Portfolio in good faith pursuant to procedures adopted by the Company’s Board.

Restricted securities, including private placements, are subject to legal or contractual restrictions on resale. They can be eligible for purchase without SEC registration by certain institutional investors known as “qualified institutional buyers,” and under the Portfolio’s procedures, restricted securities could be treated as liquid. However, some restricted securities may be illiquid and restricted securities that are treated as liquid could be less liquid than registered securities traded on established secondary markets.

 

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To Be Announced Sale Commitments

The Portfolio may enter into To Be Announced (“TBA”) sale commitments wherein the unit price and the estimated principal amount are established upon entering into the contract, with the actual principal amount being within a specified range of the estimate. The Portfolio will enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, the Portfolio will maintain, in a segregated account, cash or marketable securities in an amount sufficient to meet the purchase price. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss of the commitment without regard to any unrealized gain or loss on the underlying security. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or loss from the sale of the securities, based upon the unit price established at the date the commitment was entered into.

INVESTMENT TECHNIQUES

Borrowing

If the Portfolio borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the Portfolio makes additional investments while borrowings are outstanding, this may be considered a form of leverage. Under the 1940 Act, the Portfolio is required to maintain continuous asset coverage of 300% with respect to such borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of the Portfolio’s holdings may be disadvantageous from an investment standpoint.

When the Portfolio borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the Portfolio makes additional investments while borrowings are outstanding, this may be construed as a form of leverage.

Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of the portfolio securities or the Portfolio’s NAV, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the income received from the securities purchased with borrowed funds.

Lending of Portfolio Securities

In order to generate additional income, the Portfolio may lend portfolio securities to broker-dealers, major banks, or other recognized domestic institutional borrowers of securities provided that the value of the loaned securities do not exceed 33 1/3% of the Portfolio’s total assets. No lending may be made to any companies affiliated with the adviser. These loans earn income for the Portfolio and are collateralized by cash, securities or letters of credit. The Portfolio might experience a loss if the financial institution defaults on the loan. The Portfolio seeks to mitigate this risk through contracted indemnification upon default.

The borrower at all times during the loan must maintain with the Portfolio cash or cash equivalent collateral or provide to the Portfolio an irrevocable letter of credit equal in value to at least 100% of the value of the securities loaned. During the time portfolio securities are on loan, the borrower pays the Portfolio any interest paid on such securities, and the Portfolio may invest the cash collateral and earn additional income, or it may receive an agreed-upon amount of interest income from the borrower who has delivered equivalent collateral or a letter of credit. Loans are subject to termination at the option of the Portfolio or the borrower at any time. The Portfolio may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the income earned on the cash to the borrower or placing broker. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially. There is the risk that when lending portfolio securities, the securities may not be available to the Portfolio on a timely basis and the Portfolio may, therefore, lose the opportunity to sell the securities at a desirable price. Engaging in securities lending could have a leveraging effect, which may

 

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intensify the market risk, credit risk or other risks associated with investments in the Portfolio. When the Portfolio lends its securities, it is responsible for investing the cash collateral it receives from the borrower of the securities. The Portfolio could incur losses in connection with the investment of such collateral.

Repurchase Agreements

Repurchase agreements may be considered to be loans by the Portfolio for purposes of the 1940 Act. Each repurchase agreement must be collateralized fully, in accordance with the provisions of Rule 5b-3 under the 1940 Act, at all times. Pursuant to such repurchase agreements, the Portfolio acquires securities from financial institutions such as brokers, dealers and banks, subject to the seller’s agreement to repurchase and the Portfolio’s agreement to resell such securities at a mutually agreed upon date and price. The term of such an agreement is generally quite short, possibly overnight or for a few days, although it may extend over a number of months (up to one year) from the date of delivery. The repurchase price generally equals the price paid by the Portfolio plus interest negotiated on the basis of current short-term rates (which may be more or less than the rate on the underlying portfolio security). The securities underlying a repurchase agreement will be marked to market every business day so that the value of the collateral is at least equal to the value of the loan, including the accrued interest thereon, and the adviser or sub-adviser will monitor the value of the collateral. Securities subject to repurchase agreements will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent foreign system. If the seller defaults on its repurchase obligation, the Portfolio holding the repurchase agreement will suffer a loss to a extent that the proceeds from a sale of the underlying securities is less than the repurchase price under the agreement. Bankruptcy or insolvency of such a defaulting seller may cause the Portfolio’s rights with respect to such securities to be delayed or limited. Repurchase agreements maturing in more than seven days will not exceed 10% of the total assets of the Portfolio.

Reverse Repurchase Agreements and Dollar roll Transactions

Reverse repurchase agreement transactions involve the sale of U.S. government securities held by the Portfolio, with an agreement that the Portfolio will repurchase such securities at an agreed upon price and date. The Portfolio will employ reverse repurchase agreements when necessary to meet unanticipated net redemptions so as to avoid liquidating other portfolio investments during unfavorable market conditions. At the time it enters into a reverse repurchase agreement, the Portfolio will place in a segregated custodial account cash, liquid assets and/or high quality debt instruments having a dollar value equal to the repurchase price. Reverse repurchase agreements are considered to be borrowings under the 1940 Act. Reverse repurchase agreements, together with other permitted borrowings, may constitute up to 33 1/3% of the Portfolio’s total assets. Under the 1940 Act, the Portfolio is required to maintain continuous asset coverage of 300% with respect to borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of the Portfolio’s holdings may be disadvantageous from an investment standpoint. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of the portfolio securities or the Portfolio’s NAV, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the income received from the securities purchased with borrowed funds.

In order to enhance portfolio returns and manage prepayment risks, the Portfolio may engage in dollar roll transactions with respect to mortgage securities issued by GNMA, FNMA, and FHLMC. In a dollar roll transaction, the Portfolio sells a mortgage security held in the portfolio to a financial institutional such as bank or broker-dealer, and simultaneously agrees to repurchase a substantially similar security (same type, coupon and maturity) from the institution at a later date at an agreed upon price. The mortgage securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. During the period between the sale and the repurchase, the Portfolio will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in short-term instruments, and the income from these investments, together with any additional fee income received on the sale, could generate income for the Portfolio exceeding the yield on the sold security. When the Portfolio enters into a dollar roll transaction, cash, liquid assets and/or high quality debt instruments of the Portfolio, in a dollar amount sufficient to make payment for the obligations to be repurchased, are segregated with its custodian at the trade date. These securities are marked daily and are maintained until the transaction is settled.

 

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Whether a reverse purchase agreement or dollar roll transaction produces a gain for the Portfolio depends upon the “costs of the agreements” (e.g., a function of the difference between the amount received upon the sale of its securities and the amount to be spent upon the purchase of the same or “substantially the same” security) and the income and gains of the securities purchased with the proceeds received from the sale of the mortgage security. If the income and gains on the securities purchased with the proceeds of the agreements exceed the costs of the agreements, then the Portfolio’s NAV will increase faster than otherwise would be the case; conversely, if the income and gains on such securities purchased fail to exceed the costs of the structure, NAV will decline faster than otherwise would be the case. Reverse repurchase agreements and dollar roll transactions, as leveraging techniques, may increase the Portfolio’s yield in the manner described above; however, such transactions also increase the Portfolio’s risk of loss and may result in the shareholder’s loss of principal.

Securities, Interest Rate and Currency Swaps

Interest rate swaps, currency swaps and other types of swap agreements, including swaps on securities and indices in which the Portfolio may invest are described in the Prospectuses. The Portfolio will enter into swap transactions with appropriate counterparties pursuant to master netting agreements. A master netting agreement provides that all swaps done between the Portfolio and that counterparty under that master agreement shall be regarded as parts of an integral agreement. If on any date amounts are payable in the same currency in respect of one or more swap transactions, the net amount payable on that date in the currency shall be paid. In addition, the master netting agreement may provide that if one party defaults generally or on one swap, the counterparty may terminate the swaps with that party. Under such agreements, if there is a default resulting in a loss to one party, the measure of that party’s damages is calculated by reference to the average cost of a replacement swap with respect to each swap (i.e., the marked-to-market value at the time of the termination of each swap). The gains and losses on all swaps are then netted, and the result is the counterparty’s gain or loss on termination. The termination of all swaps and the netting of gains and losses on termination are generally referred to as “aggregation.”

Swap Transactions

Swap transactions, include, but are not limited to, swap agreements on interest rates, security or commodity indices, specific securities and commodities, credit default swaps and event-linked swaps. To the extent the Portfolio may invest in foreign currency-denominated securities, it may also invest in currency exchange rate swap agreements. The Portfolio may also enter into options on swap agreements (“swap options”).

The Portfolio may enter into swap transactions for any legal purpose consistent with its investment objective and policies, such as for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets, to protect against currency fluctuations, as a duration management technique, to protect against any increase in the price of securities the Portfolio anticipates purchasing at a later date, or to gain exposure to certain markets in the most economical way possible.

Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket” of securities or commodities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in

 

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an attempt to protect itself against interest rate movements exceeding given minimum levels. Consistent with the Portfolio’s investment objectives and general investment policies, the Portfolio may invest in commodity swap agreements. For example, an investment in a commodity swap agreement may involve the exchange of floating-rate interest payments for the total return on a commodity index. In a total return commodity swap, the Portfolio will receive the price appreciation of a commodity index, a portion of the index, or a single commodity in exchange for paying an agreed-upon fee. If the commodity swap is for one period, the Portfolio may pay a fixed fee, established at the outset of the swap. However, if the term of the commodity swap is more than one period, with interim swap payments, the Portfolio may pay an adjustable or floating fee. With a “floating” rate, the fee may be pegged to a base rate, such as the LIBOR, and is adjusted each period. Therefore, if interest rates increase over the term of the swap contract, the Portfolio may be required to pay a higher fee at each swap reset date.

The Portfolio may enter into credit swap agreements. The “buyer” in a credit contract is obligated to pay the “seller” a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or “par value,” of the reference obligation in exchange for the reference obligation. The Portfolio may be either the buyer or seller in a credit default swap transaction. If the Portfolio is a buyer and no event of default occurs, the Portfolio will lose its investment and recover nothing. However, if an event of default occurs, the Portfolio (if the buyer) will receive the full notional value of the reference obligation that may have little or no value. As a seller, the Portfolio receives a fixed rate of income throughout the term of the contract, which typically is between six months and three years, provided that there is no default event. If an event of default occurs, the seller must pay the buyer the full notional value of the reference obligation. Credit default swap transactions involve greater risks than if the Portfolio had invested in the reference obligation directly.

A swap option is a contract that gives a counterparty the right (but not the obligation) in return for payment of a premium, to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Portfolio may write (sell) and purchase put and call swap options.

Most swap agreements entered into by the Portfolio involve calculating the obligations of the parties to the agreement on a “net basis.” Consequently, the Portfolio’s current obligations (or rights) under a swap agreement 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 party to the agreement (the “net amount”). The Portfolio’s current obligations under a swap agreement will be accrued daily (offset against any amounts owed to the Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the segregation of assets determined to be liquid by the sub-adviser in accordance with procedures established by the Board, to avoid any potential leveraging of the Portfolio’s portfolio. Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes of the Portfolio’s investment restriction concerning senior securities.

Whether the Portfolio’s use of swap agreements or swap options will be successful in furthering its investment objective of total return will depend on the sub-adviser’s ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they generally have terms of greater than seven days, swap agreements generally are considered to be illiquid. Moreover, the Portfolio bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a counterparty. The Portfolio will enter into swap agreements only with counterparties that meet certain standards of creditworthiness (generally, such counterparties would have to be eligible counterparties under the terms of the Portfolio’s repurchase agreement guidelines). Certain restrictions imposed on the Portfolio by the Code may limit the Portfolio’s ability to use swap agreements. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect the Portfolio’s ability to terminate existing swap agreements or to realize amounts to be received under such agreements.

 

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Depending on the terms of the particular option agreement, the Portfolio will generally incur a greater degree of risk when it writes a swap option than it will incur when it purchases a swap option. When the Portfolio purchases a swap option, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when the Portfolio writes a swap option, upon exercise of the option the Portfolio will become obligated to make payments according to the terms of the underlying agreement.

Certain swap agreements are exempt from most provisions of the Commodity Exchange Act (“CEA”) and, therefore, are not regulated as futures or commodity option transactions under the CEA, pursuant to regulations approved by the CFTC. To qualify for this exemption, a swap agreement must be entered into by “eligible participants,” which, provided the participants’ total assets exceed established levels, include the following: a bank or trust company, savings association or credit union, insurance company, investment company subject to regulation under the 1940 Act, commodity pool, corporation, partnership, proprietorship, organization, trust or other entity, employee benefit plan, governmental entity, broker-dealer, futures commissions merchant, natural person, or regulated foreign person. To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee benefit plans must have assets exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First, the swap agreement may not be part of a fungible class of agreements that are standardized as to their material economic terms. Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement terms. Third, swap agreements may not be entered into and traded on or through a multilateral transaction execution facility.

This exemption is not exclusive, and participants may continue to rely on existing exclusions foe swaps, such as the Policy Statement issued in July 1989 which recognized a safe harbor for swap transactions from regulation as futures or commodity option transactions under the CEA or its regulations. The Policy Statement applies to swap transactions settled in cash that (1) have individually tailored terms, (2) lack exchange-style offset and the use of a clearing organization or margin system, (3) are undertaken in conjunction with a line of business, and (4) are not marketed to the public.

Temporary Defensive Positions

The Portfolio may invest in short-term, high-quality debt instruments and in U.S. government securities for the following purposes: (i) to meet anticipated day-to-day operating expenses; (ii) to invest cash flow pending the adviser’s or the sub-adviser’s determination to do so within the investment guidelines and policies of the Portfolio; (iii) to permit the Portfolio to meet redemption requests; and (iv) to take a temporary defensive position. Although it is expected that the Portfolio will normally be invested consistent with its investment objectives and policies, the short-term instruments in which the Portfolio may invest for temporary defensive purposes include (i) short-term obligations of the U.S. government and its agencies, instrumentalities, authorities or political subdivisions; (ii) other short- term debt securities; (iii) commercial paper, including master notes; (iv) bank obligations, including certificates of deposit, time deposits and bankers’ acceptances; and (v) repurchase agreements. The Portfolio will invest in short-term instruments that do not have a maturity of greater than one year.

Short Sales

The Portfolio may make a short sale of securities it already owns or have the right to acquire at no added cost through conversion or exchange of other securities it owns (referred to as short sales “against the box”). In a short sale that is not “against the box,” the Portfolio sells a security, which it does not own, in anticipation of a decline in the market value of the security. To complete the sale, the Portfolio must borrow the security (generally from the broker through which the short sale is made) in order to make delivery to the buyer. The Portfolio must replace the security borrowed by purchasing it at the market price at the time of replacement. The Portfolio is said to have a “short position” in the securities sold until it delivers them to the broker. The period during which the Portfolio has a short position can range from one day to more than a year. Until the Portfolio replaces the security, the proceeds of the short sale are retained by the broker, and the Portfolio must pay to the broker a negotiated portion of any dividends or interest, which accrue during the period of the loan. To meet current margin requirements, the Portfolio must deposit with the broker additional cash or securities so that it maintains with the broker a total deposit equal to 150% of the current market value of the securities

 

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sold short (100% of the current market value if a security is held in the account that is convertible or exchangeable into the security sold short within ninety (90) days without restriction other than the payment of money).

Short sales by the Portfolio that are not made against the box create opportunities to increase the Portfolio’s return but, at the same time, involve specific risk considerations and may be considered a speculative technique. Since the Portfolio in effect profits from a decline in the price of the securities sold short without the need to invest the full purchase price of the securities on the date of the short sale, the Portfolio’s NAV per share tends to increase more when the securities it has sold short decrease in value, and to decrease more when the securities it has sold short increase in value, than would otherwise be the case if it had not engaged in such short sales. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, dividends or interest the Portfolio may be required to pay in connection with the short sale. Short sales theoretically involve unlimited loss potential, as the market price of securities sold short may continually increase, although the Portfolio may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions the Portfolio might have difficulty purchasing securities to meet its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.

If the Portfolio makes a short sale against the box, the Portfolio would not immediately deliver the securities sold and would not receive the proceeds from the sale. The seller is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. To secure its obligation to deliver securities sold short, the Portfolio will deposit in escrow in a separate account with the Custodian an equal amount of the securities sold short or securities convertible into or exchangeable for such securities. The Portfolio can close out its short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Portfolio, because the Portfolio might want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short.

The Portfolio’s decision to make a short sale against the box may be a technique to hedge against market risks when the adviser or sub-adviser believes that the price of a security may decline, causing a decline in the value of a security owned by the Portfolio or a security convertible into or exchangeable for such security. In such case, any future losses in the Portfolio’s long position would be reduced by a gain in the short position. The extent to which such gains or losses in the long position are reduced will depend upon the amount of securities sold short relative to the amount of the securities the Portfolio owns, either directly or indirectly, and, in the case where the Portfolio owns convertible securities, changes in the investment values or conversion premiums of such securities.

In the view of the SEC, a short sale involves the creation of a “senior security” as such term is defined in the 1940 Act, unless the sale is against the box and the securities sold short are placed in a segregated account (not with the broker), or unless the Portfolio’s obligation to deliver the securities sold short is “covered” by placing in a segregated account (not with the broker) cash, U.S. government securities or other liquid debt or equity securities in an amount equal to the difference between the market value of the securities sold short at the time of the short sale and any such collateral required to be deposited with a broker in connection with the sale (not including the proceeds from the short sale), which difference is adjusted daily for changes in the value of the securities sold short. The total value of the cash, U.S. government securities or other liquid debt or equity securities deposited with the broker and otherwise segregated may not at any time be less than the market value of the securities sold short at the time of the short sale. The Portfolio will comply with these requirements. In addition, as a matter of policy, the Portfolio’s Board has determined that no Portfolio will make short sales of securities or maintain a short position if to do so could create liabilities or require collateral deposits and segregation of assets aggregating more than 25% of the Portfolio’s total assets, taken at market value.

The extent to which the Portfolio may enter into short sales transactions may be limited by the Code requirements for qualification of the Portfolio as a regulated investment company. (See “Dividends, Distributions and Taxes.”)

 

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When-Issued Securities and Delayed-Delivery Securities

In order to secure prices or yields deemed advantageous at the time the Portfolio may purchase or sell securities on a when-issued or a delayed-delivery basis generally 15 to 45 days after the commitment is made. The Portfolio may also enter into forward commitments. The Portfolio will enter into a when-issued transaction for the purpose of acquiring portfolio securities and not for the purpose of leverage. In such transactions, delivery of the securities occurs beyond the normal settlement periods, but no payment or delivery is made by, and no interest accrues to, the Portfolio prior to the actual delivery or payment by the other party to the transaction. Due to fluctuations in the value of the securities purchased on a when-issued or a delayed-delivery basis, the yields obtained on such securities may be higher or lower than the yields available in the market on the dates when the investments are actually delivered to the buyers. Similarly, the sale of securities for delayed delivery can involve the risk that the prices available in the market when delivery is made may actually be higher than those obtained in the transaction itself. The Portfolio will segregate on its books or those of its custodian assets consisting of cash, liquid assets and/or higher quality debt instruments in an amount equal to the amount of its when-issued and delayed-delivery commitments which will be “marked to market” daily. The Portfolio will only make commitments to purchase such securities with the intention of actually acquiring the securities, but the Portfolio may sell these securities before the settlement date if deemed an advisable investment strategy. In these cases, the Portfolio may realize a capital gain or loss. When the Portfolio engages in when-issued, forward commitment, and delayed delivery transactions, it relies on the other party to consummate the trade. Failure to do so may result in the Portfolio’s incurring a loss or missing an opportunity to obtain a price credited to be advantageous.

When the time comes to pay for the securities acquired on a delayed-delivery basis, the Portfolio will meet its obligations from the available cash flow, sale of the securities held in the segregated account, sale of other securities or, although it would not normally expect to do so, from sale of the when-issued securities themselves (which may have a market value greater or less than the Portfolio’s payment obligation). Depending on market conditions, the Portfolio could experience fluctuations in share price as a result of delayed-delivery or when-issued purchases.

Trust-Preferred Securities

Trust-preferred securities, also known as trust-issued securities, are those that have the characteristics of both debt and equity instruments. Generally, trust-preferred securities are cumulative preferred stock issued by a trust that is wholly-owned by a financial institution, usually, a bank holding company. The financial institution creates the trust and will subsequently own the trust’s common securities, which represents 3% of the trust’s assets. The remaining 97% consists of trust-preferred securities, which are then sold to investors. The trust uses the sale proceeds to purchase a subordinated debt issued by the financial institution. The financial institution uses the proceeds from the subordinated debt sale to increase its capital while the trust receives periodic interest payments from the financial institution for holding the subordinated debt. The trust will use the funds received to make dividend payments to the holders of the trust-preferred securities. The primary advantage for this particular structure is that the trust-preferred securities are treated by the financial institution as debt securities for tax purposes, and as equity for the purpose of calculating capital requirements.

In certain instances, these structures involve more than one financial institution and, accordingly, more than one trust. In this pooled offering, a separate trust is created that issues securities to investors and uses the proceeds to purchase the trust-preferred securities issued by the special-purpose trust subsidiaries of the participating financial institutions. Therefore, the trust-preferred securities held by investors are backed by the trust- preferred securities issued by the trust subsidiaries.

In identifying the risks of trust-preferred securities, the adviser and sub-advisers evaluate the financial condition of the financial institution, as the trust typically has no business operations other than to issue the trust-preferred securities. If the financial institution is unsound and defaults on interest payments to the trust, the trust will not be able to make dividend payments to the Portfolio.

 

45


Portfolio Turnover

A change in securities held in the portfolio of the Portfolio is known as “portfolio turnover” and may involve the payment by the Portfolio of dealer mark-ups or brokerage or underwriting commissions and other transaction costs on the sale of securities, as well as on the reinvestment of the proceeds in other securities. Portfolio turnover rate for a fiscal year is the percentage determined by dividing the lesser of the cost of purchases or proceeds from sales of portfolio securities by average of the value of portfolio securities during such year, all excluding securities whose maturities at acquisition were one year or less. The Portfolio cannot accurately predict its turnover rate. However the rate will be higher when the Portfolio finds it necessary to significantly change its portfolio to adopt a temporary defensive position or respond to economic or market events. A high turnover rate involves greater expenses to the Portfolio, including brokerage commissions and other transaction costs which may have an adverse impact on performance and may involve realization of capital gains by the Portfolio. The Portfolio’s historical turnover rates will be included in the Financial Highlights tables in the Prospectuses, when available.

 

46


DIRECTORS AND OFFICERS

Management of the Company

Set forth in the table below is information about each Director of the Company and the Portfolio.

 

Name, Address and Age

  

Position(s) Held
with each Company

  

Term of Office and
Length of Time
Served(1)

  

Principal
Occupation(s)
During the Past

5 Years

  

Number of
Portfolios in Fund
Complex Overseen
by Director(2)

  

Other Board
Memberships held
by Director

Directors who are “Non-Interested Persons”

Albert E. DePrince, Jr.

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 67

   Director   

June 1998 –

Present

   Professor of Economics and Finance, Middle Tennessee State University (August 1991 – Present). Formerly, Director of Business and Economic Research Center, Middle Tennessee State University (August 1999 - August 2003).    35    Academy of Economics and Finance (February 2002 – Present); International Atlantic Economic Society (October 2002 - October 2005); Tennessee Tax Structure Commission (December 2002-December 2004); and Director, Business and Economic Research Center (August 1999-August 2003).

Maria Teresa Fighetti

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 64

   Director    April 1994 – Present    Retired. Formerly, Associate Commissioner/Attorney, New York City Department of Mental Health (June 1973 – October 2002).    35    None.

Russell Jones

7337 East Doubletree Ranch Rd.

Scottsdale, AZ 85258

Age 64

   Director    December 2007 – Present    Senior Vice President, Chief Investment Officer and Treasurer, Kaman Corporation (1973-Present).    34    None

Sidney Koch

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 73

   Director    April 1994 – Present    Self-Employed Consultant (June 2000 – Present).    35    None.

Corine T. Norgaard

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 70

   Director    June 1991 – Present    Retired. Formerly, President, Thompson Enterprises (September 2004 – September 2005); and Dean of the Barney School of Business, University of Hartford (August 1996 June 2004).    35    Mass Mutual Corporate and Participation Investors (April 1997 – Present); Mass Mutual Premier Series (December 2004 – Present); and Mass Mutual MML Series II (December 2005 – Present).

Joseph E. Obermeyer

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 50

   Director    January 2003 – Present   

President, Obermeyer & Associates, Inc.

(November 1999 – Present).

   35    None.

 

47


Name, Address and Age

  

Position(s) Held
with each Company

  

Term of Office and
Length of Time
Served(1)

  

Principal
Occupation(s)
During the Past

5 Years

  

Number of
Portfolios in Fund
Complex Overseen
by Director(2)

  

Other Board
Memberships held
by Director

Directors who are “Interested Persons”

Shaun Mathews(3)(4)

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 52

   Director    December 2007 – Present    President and Chief Executive Officer, ING Investments, LLC (December 2006 – Present). Formerly, Head of ING USFS Mutual Funds and Investment Products (November 2004 – December 2006). CMO, ING USFS (April 2002 – October 2004), and Head of Rollover/Payout (October 2001 – December 2003).    211    Mark Twain House & Museum (September 2002 – Present); Connecticut Forum (May 2002 – Present); Capital Community College Foundation (February 2002 – Present); ING Services Holding Company, Inc. (May 2000 – Present); Southland Life Insurance Company (June 2002 – Present); and ING Capital Corporation, LLC, ING Funds Distributor, LLC, ING Funds Services, LLC, ING Investments, LLC and ING Pilgrim Funding, Inc. (March 2006 – Present).

Fredric A. Nelson III(4)

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 51

   Director    December 2007 – Present    Chief Investment Officer, ING (April 2003 – Present).    34    None.

 

(1)

Directors serve until their successors are duly elected and qualified.

 

(2) For the purposes of this table, “Fund Complex” means the following investment companies: ING GET Fund; ING Series Fund, Inc.; ING Strategic Allocation Portfolios, Inc.; ING VP Balanced Portfolio, Inc.; ING VP Intermediate Bond Portfolio; ING VP Money Market Portfolio; ING Variable Funds; ING Variable Portfolios, Inc. The number in the Fund Complex is as of March 31, 2008.

 

(3) Mr. Mathews is also a director of the following investment companies: ING Asia Pacific High Dividend Equity Income Fund, ING Equity Trust; ING Funds Trust; ING Global Equity Dividend and Premium Opportunity Fund; ING Global Advantage and Premium Opportunity Fund; ING International High Dividend Equity Income Fund; ING Investors Trust; ING Mayflower Trust; ING Mutual Funds; ING Prime Rate Trust; ING Risk Managed Natural Resources Fund; ING Senior Income Fund; ING Separate Portfolios Trust; ING Variable Insurance Trust; ING Variable Products Trust; ING Partners, Inc.. Therefore, for the purposes of this table with reference to Mr. Mathews, “Fund Complex” includes these investment companies.

 

(4) “Interested person,” as defined in the 1940 Act, by virtue of this Director’s affiliation with any of the Portfolios, ING or any of ING’s affiliates.

 

48


Officers

Information about each Company’s Officers are set forth in the table below:

 

Name, Address and Age

  

Position Held with the

Company/Trust

  

Term of Office and Length

of Time Served (1)

  

Principal Occupation(s) During
the Last Five Years

Shaun P. Mathews

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 52

   President and Chief Executive Officer    December 2006 – Present    President and Chief Executive Officer, ING Investments, LLC(2) and ING Funds Services, LLC 3 (December 2006 – Present). Formerly, Head of ING USFS Mutual Funds and Investment Products (November 2004 – November 2006); CMO, ING USFS (April 2002 – October 2004); and Head of Rollover/Payout (October 2001 – December 2003).

Michael J. Roland

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 50

   Executive Vice President    April 2002 – Present    Head of Mutual Fund Platform (February 2007 – Present); and Executive Vice President ING Investments, LLC(2) and ING Funds Services, LLC3 (December 2001 – Present). Formerly, Head of Product Management (January 2005 – January 2007); Chief Compliance Officer, ING Investments, LLC (2) and Directed Services LLC(4) (October 2004 – December 2005); and Chief Financial Officer and Treasurer, ING Investments, LLC (2) (December 2001 – March 2005).

Stanley D. Vyner

230 Park Avenue

New York, NY 10169

Age: 58

   Executive Vice President    March 2002 – Present    Executive Vice President, ING Investments, LLC (2) (July 2000 – Present); and Chief Investment Risk Officer, ING Investments, LLC (January 2003 – Present). Formerly, Chief Investment Officer of International Investments (August 2000 – January 2003).

Joseph M. O’Donnell

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 53

  

Chief Compliance Officer

Executive Vice President

  

November 2004 – Present

March 2006 – Present

   Chief Compliance Officer of the ING Funds (November 2004 – Present); and ING Investments, LLC(2) and Directed Services LLC(4) (March 2006 – Present); and Executive Vice President of the ING Funds (March 2006 – Present). Formerly, Chief Compliance Officer of ING Life Insurance and Annuity Company (March 2006 – December 2006); and Vice President, Chief Legal Counsel, Chief Compliance Officer and Secretary of Atlas Securities, Inc., Atlas Advisers, Inc. and Atlas Funds (October 2001 – October 2004).

Todd Modic

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 40

  

Senior Vice President,

Chief/Principal Financial Officer and Assistant Secretary

   March 2005 – Present    Senior Vice President, ING Funds Services, LLC (3) (April 2005 – Present). Formerly, Vice President, ING Funds Services, LLC (3) (September 2002 – March 2005).

Robert Terris

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 37

   Senior Vice President    June 2006 – Present    Senior Vice President, Head of Division Operations, ING Funds (May 2006 – Present), and Vice President, Head of Division Operations, ING Funds Services, LLC(3) (March 2006 – Present). Formerly, Vice President of Administration, ING Funds Services, LLC(3) (October 2001 – March 2006).

Kimberly A. Anderson

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 43

   Senior Vice President    December 2003 – Present    Senior Vice President, ING Investments, LLC (2) (October 2003 – Present). Formerly, Vice President and Assistant Secretary, ING Investments, LLC (2) (January 2001 – October 2003).

Robyn L. Ichilov

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 40

   Vice President and Treasurer    March 2002 – Present    Vice President and Treasurer, ING Funds Services, LLC (3) (November 2005 – Present).

 

49


Name, Address and Age

  

Position Held with the

Company/Trust

  

Term of Office and Length

of Time Served (1)

  

Principal Occupation(s) During
the Last Five Years

Lauren D. Bensinger

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 54

   Vice President    March 2003 – Present    Vice President and Chief Compliance Officer, ING Funds Distributor, LLC (5) (August 1995 – Present); and Vice President, ING Investments, LLC (2) (February 1996 – Present); and Director of Compliance, ING Investments, LLC (2) (October 2004 – Present). Formerly, Chief Compliance Officer, ING Investments, LLC (2) (October 2001 – October 2004).

Maria M. Anderson

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 50

   Vice President    September 2004 – Present    Vice President, ING Funds Services, LLC (3) (September 2004 – Present). Formerly, Assistant Vice President, ING Funds Services, LLC (3) (October 2001 – September 2004).

William Evans

10 State House Square

Hartford, Connecticut 06103

Age: 35

   Vice President    September 2007 – Present    Vice President, Head of Mutual Fund Advisory Group (April 2007-present), Vice President, U.S. Mutual Funds and Investment Products (May 2005-April 2007), Senior Fund Analyst, U.S. Mutual Funds and Investment Products (May 2002-May 2005).

Denise Lewis

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 43

   Vice President    April 2007 – Present    Vice President, ING Funds Services, LLC (December 2006 – Present). Formerly, Senior Vice President, UMB Investment Services Group, LLC (November 2003 – December 2006); and Vice President, Wells Fargo Funds Management, LLC (December 2000 – August 2003).

Kimberly K. Springer

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 51

   Vice President    March 2006 – Present    Vice President, ING Funds Services, LLC (3) (March 2006 – Present). Formerly, Assistant Vice President, ING Funds Services, LLC (3) (August 2004 – March 2006); Manager, Registration Statements, ING Funds Services, LLC (3) (May 2003 – August 2004); Associate Partner, AMVESCAP PLC (October 2000 – May 2003); and Director of Federal Filings and Blue Sky Filings, INVESCO Funds Group, Inc. (March 1994 – May 2003).

Susan P. Kinens

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 31

   Assistant Vice President    March 2003 – Present    Assistant Vice President, ING Funds Services, LLC (3) (December 2002 – Present); and has held various other positions with ING Funds Services, LLC for more than the last five years.

Theresa K. Kelety

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 45

   Secretary    September 2003 – Present    Senior Counsel, ING Americas, U.S. Legal Services (April 2003 – Present). Formerly, Senior Associate with Shearman & Sterling (February 2000 – April 2003).

Huey P. Falgout, Jr.

7337 East Doubletree Ranch Rd.

Scottsdale, Arizona 85258

Age: 44

   Assistant Secretary    September 2003 – Present    Chief Counsel, ING Americas, U.S. Legal Services (September 2003 – Present). Formerly, Counsel, ING Americas, U.S. Legal Services (November 2002 – September 2003).

 

(1) The Officers hold office until the next annual meeting of Directors and until their successors shall have been elected and qualified.

 

(2) ING Investments, LLC was previously named ING Pilgrim Investments, LLC. ING Pilgrim Investments, LLC is the successor in interest to ING Pilgrim Investments, Inc., which was previously known as Pilgrim Investments, Inc. and before that, was known as Pilgrim America Investments, Inc.

 

(3) ING Funds Services, LLC was previously named ING Pilgrim Group, LLC. ING Pilgrim Group, LLC is the successor in interest to ING Pilgrim Group, Inc., which was previously known as Pilgrim Group, Inc. and before that, was known as Pilgrim America Group, Inc.

 

(4) Directed Services LLC is the successor in interest to Directed Services Inc.

 

(5) ING Funds Distributor, LLC is the successor in interest to ING Funds Distributor, Inc., which was previously known as ING Pilgrim Securities, Inc., and before that, was known as Pilgrim Securities.

 

50


BOARD

The Board governs the Portfolio and is responsible for protecting the interests of shareholders. The Directors are experienced executives who oversee the Portfolio’s activities, review contractual arrangements with companies that provide services to the Portfolio, and review the Portfolio’s performance.

Frequency

The Board currently conducts regular meetings five (5) times a year. The Audit Committee also meets regularly four (4) times per year, and the remaining Committees meet as needed. In addition, the Board or the Committees may hold special meetings by telephone or in person to discuss specific matters that may require action prior to the next regular meeting. Each Committee listed below operates pursuant to a Charter approved by the Board.

Committees

The Board has established an Audit Committee whose function includes, among other things, meeting with the independent registered public accounting firm of the Portfolio to review the scope of the Portfolio’s audit, its financial statements and interim accounting controls, and to meet with management concerning these matters. The Audit Committee currently consists of Dr. DePrince, Ms. Fighetti, Mr. Jones, Mr. Koch, Dr. Norgaard and Mr. Obermeyer. Mr. Obermeyer currently serves as Chairperson and Dr. Nogaard currently serves as Vice Chairperson of the Audit Committee. The Audit Committee held four (4) meetings during the fiscal year ended December 31, 2007.

The Board has established a Contracts Committee whose function is to consider, evaluate and make recommendations to the full Board concerning contractual arrangements with service providers to the Portfolio and all other matters in which the investment adviser or any affiliated entity has an actual or potential conflict of interest with the Portfolio or its shareholders. The Contracts Committee currently consists of Dr. DePrince, Ms. Fighetti, Mr. Jones, Mr. Koch, Dr. Norgaard and Mr. Obermeyer. Mr. Koch currently serves as Chairperson and Dr. DePrince currently serves as Vice Chairperson of the Contracts Committee. The Contracts Committee held seven (7) meetings during the fiscal year ended December 31, 2007.

The Board has established a Nominating Committee for the purpose of considering and presenting to the Board candidates it proposes for nomination to fill Independent Director vacancies on the Board. The Nominating Committee currently consists of Dr. DePrince, Ms. Fighetti, Mr. Jones, Mr. Koch, Dr. Norgaard and Mr. Obermeyer. Dr. DePrince currently serves as Chairperson and there is no Vice Chairperson of the Nominating Committee. The Nominating Committee is willing to consider nominations for vacancies received from shareholders in the same manner as it reviews its own nominees. Shareholders wishing to submit a nomination for Director at an annual or special meeting of shareholders must provide such recommendation in a sufficiently timely manner (and in any event no later than the date specified for receipt of shareholder proposals in any applicable proxy statement with respect to the Portfolio) in writing to the Nominating Committee, c/o the Secretary of the Portfolio, ING Variable Products Funds, 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258. Any recommendation made by a shareholder must contain sufficient information for the Nominating Committee to make an assessment of the candidate’s suitability for the position of Independent Director. The Nominating Committee held one (1) meeting during the fiscal year ended December 31, 2007.

The Board has established a Valuation Committee for the purpose of approving fair value determinations at the time they are being considered by management. The Valuation Committee currently consists of Mr. Jones, Mr. Koch, Dr. DePrince, Ms. Fighetti, Dr. Norgaard, Mr. Nelson, Mr. Mathews and Mr. Obermeyer. There is not an elected Chairperson or Vice Chairperson of the Valuation Committee. The Valuation Committee held no meetings during the fiscal year ended December 31, 2007.

 

51


The Board has established a Compliance Committee for the purposes of (1) providing oversight with respect to compliance by the Portfolio and its service providers with applicable laws, regulations and internal policies and procedures affecting the operations of the Portfolio and (2) to serve as a committee, and in such capacity to receive, retain and act upon reports of evidence of possible material violations of applicable U.S. federal or state securities laws and breaches of fiduciary duty arising under U.S. federal or state laws. The Compliance Committee currently consists of Dr. DePrince, Ms. Fighetti, Mr. Jones, Mr. Koch, Dr. Norgaard and Mr. Obermeyer. Dr. Norgaard currently serves as Chairperson and Mr. Obermeyer serves as the Vice Chairperson of the Compliance Committee. The Compliance Committee meets as needed. The Compliance Committee held four (4) meetings during the fiscal year ended December 31, 2007.

DIRECTOR OWNERSHIP OF SECURITIES

Set forth below is the dollar range of equity securities owned by each Director.

 

Name of Director

  

Dollar Range of shares in the Fund

  

Aggregate Dollar Range of Securities in all
Registered Investment Companies Overseen by
Director in Family of Investment Companies

Independent Directors

Albert E. DePrince, Jr.

   None   

Over $100,000

Over $100,000(1)

Maria T. Fighetti

   None    Over $100,000(1)

Russell H. Jones(2)

   None    $10,001-$50,000(1)

Sidney Koch

   None    Over $100,000

Corine T. Norgaard

   None    Over $100,000

Joseph E. Obermeyer

   None    Over $100,000(1)

Interested Directors

Shaun P. Mathews(2)

   None   

Over $100,000

Over $100,000(1)

Rick A. Nelson(2)

   None   

Over $100,000

Over $100,000.00(1)

 

(1) Includes the value of shares in which a Director has an indirect interest through a deferred compensation and/or a 401K plan.

 

(2) Messrs. Jones, Mathews and Nelson commenced services as Directors effective December 19, 2007.

Independent Director Ownership of Securities

Set forth in the table below is the information regarding each Independent Director’s (and his/her immediate family members) share ownership as of December 31, 2007 in securities of the Portfolio’s adviser or principal underwriter, and the ownership of securities in an entity controlling, controlled by or under common control with the adviser or principal underwriter of the Portfolio (not including registered investment companies).

 

Name of

Director

   Name of Owner’s
and Relationship
to Director
   Company    Title of Class    Value of
Securities
   Percentage of Class

Albert E. DePrince, Jr.

   N/A    N/A    N/A    $ —      N/A

Maria Teresa Fighetti

   N/A    N/A    N/A    $ —      N/A

Russell Jones(1)

   N/A    N/A    N/A    $ —      N/A

Sidney Koch

   N/A    N/A    N/A    $ —      N/A

Corine T. Norgaard

   N/A    N/A    N/A    $ —      N/A

Edward T. O’Dell

   N/A    N/A    N/A    $ —      N/A

Joseph E. Obermeyer

   N/A    N/A    N/A    $ —      N/A

 

(1) Mr. Jones commenced services as Director effective December 19, 2007.

 

52


DIRECTOR COMPENSATION

The Fund pays each Director who is not an interested person a pro rata share, as described below, of: (i) an annual retainer of $66,000; (ii) $7,500 for each in person meeting of the Board; (iii) $7,500 for each Contracts Committee attended in person; (iv) $3,500 per attendance of any Committee meeting (except Contracts Committee) held in conjunction with a meeting of the Board and $5,000 for meetings (except Contracts Committee) not held in conjunction with a meeting of the Board; (v) $2,500 per telephonic meeting; (vi) $45,000 annual fee to the Chairperson of the Contracts Committee, $15,000 annual fee to the Chairpersons of the Audit and Compliance Committees, $5,000 annual fee to the Chairperson of the Nominating Committee (for periods in which the Committee has operated); and (vii) $25,000 annual fee to the Vice Chairperson of the Contracts Committee and $7,500 annual fee to the Vice Chairperson of both the Audit and Compliance Committees. The pro rata share paid by the Fund is based on the Fund’s average net assets as a percentage of the average net assets of all the funds managed by the Adviser for which the Directors serve in common as Directors.

The following table sets forth information provided by the Portfolio’s adviser regarding estimated future compensation of Directors by the Portfolio for the fiscal year ended December 31, 2008 and actual compensation of Directors by other funds managed by ING Investments, LLC and its affiliates for the fiscal year ended December 31, 2007. Officers of the company and Directors who are interested persons of the company do not receive any compensation from the Portfolio or any other funds managed by ING Investments, LLC or its affiliates. None of the Directors was entitled to receive pension or retirement benefits.

 

Name of Director

  

ING RussellTM Global

Large Cap Index 85%

Portfolio

   Total Compensation from the
Portfolios and ING Mutual
Funds Complex Paid to
Directors

Corine Norgaard

      $ 200,000

Russell Jones(1)

        N/A

Sidney Koch

      $ 215,000

Maria Teresa Fighetti(2)

      $ 177,000

Albert E. DePrince, Jr.

      $ 199,375

Edward T. O’Dell(3)

      $ 185,625

Joseph E. Obermeyer(2)

      $ 193,125

 

(1) Mr. Jones commenced services as Director effective December 19, 2007.

 

(2) Includes amounts deferred pursuant to a deferred compensation plan during the fiscal year ended December 31, 2007, Ms. Fighetti, and Mr. Obermeyer deferred $30,000 and $39,500 respectively, of their compensation from the Portfolios.

 

(3) Mr. O’Dell retired as Director effective March 31, 2007.

The Board has adopted a retirement policy under with each Independent Director is subject to mandatory retirement as of the later of (i) the March 31 next occurring after he or she attains the age of 72 and (ii) the date his or her successor is elected or appointed to the Board, provided that each Independent Director under the age of 72 as of March 31, 2002 who held office as of that date may, upon the vote of the other Independent Directors, be granted up to three one-year extensions commencing as of the March 31 next occurring after he or she attains the age of 72. The Independent Directors voted to grant Mr. Koch such an extension at a Board meeting held on March 13, 2008.

CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS

Control is defined by the 1940 Act to include the beneficial ownership, either directly or through one or more controlled companies, of more than 25% of the voting securities of a company. A control person may be able to take action regarding the Portfolio without the consent or approval of shareholders.

As of the date of this SAI no officers or Directors owned any of the outstanding shares of the Portfolio. Shares of the Portfolio will be issued in connection with investments in VA Contracts and VLI Policies issued through

 

53


separate accounts of life insurance companies and qualified pension plans. Because the Portfolio had not commenced operations as of the date of this SAI, the only outstanding shares of the Portfolio are held by the adviser as the sole shareholder of the Portfolio.

ADVISER

The investment adviser for the Portfolio is ING Investments, which is registered with the SEC as an investment adviser and serves as an investment adviser to registered investment companies (or series thereof), as well as structured finance vehicles. ING Investments, subject to the authority of the Directors of the Portfolio, has the overall responsibility for the management of the Portfolio subject to delegation of certain responsibilities to other ING Investments advisers including ING Investment Management Co. (“ING IM” or “Sub-Adviser”). ING IM is the Sub-Adviser to the Portfolio. ING Investments and ING IM are indirect, wholly-owned subsidiaries of ING Groep (NYSE: ING). ING Groep is a global financial institution of Dutch origin offering banking, investments, life insurance, and retirement services to over 75 million private, corporate, and institutional clients in more than 50 countries. With a diverse workforce of about 125,000 people, ING Groep comprises a broad spectrum of prominent companies that increasingly serve their clients under the ING brand. The principal executive offices of ING Groep are located at Amstelveensesweg 500, 1081 KL Amsterdam, P.O. Box 810, 1000 AV Amsterdam, the Netherlands.

On February 26, 2001, the name of the Adviser changed from “Pilgrim Investments, Inc.” to “ING Pilgrim Investments, LLC.” On March 1, 2002, the name of the Adviser was changed from “ING Pilgrim Investments, LLC” to “ING Investments, LLC.”

ING Investments serves pursuant to an investment management agreement (“Investment Advisory Agreement”) between ING Investments and the Company on behalf of the Portfolio. The Investment Advisory Agreement requires ING Investments to oversee the provision of all investment advisory and portfolio management services for the Portfolio. Pursuant to a sub-advisory agreement between ING Investments and ING IM (“Sub-Advisory Agreement”) ING Investments has delegated certain management responsibilities to ING IM. ING Investments oversees the investment management of the Sub-Adviser for the Portfolio.

The Investment Advisory Agreement requires ING Investments to provide, subject to the supervision of the Board, investment advice and investment services to the Portfolio and to furnish advice and recommendations with respect to investment of the Portfolio’s assets and the purchase or sale of its portfolio securities. The Investment Advisory Agreement provides that ING Investments is not subject to liability to the Portfolio for any act or omission in the course of, or connected with, rendering services under the Investment Advisory Agreement, except by reason of willful misfeasance, bad faith, negligence or reckless disregard of its obligations and duties under the Investment Advisory Agreement.

After an initial term of two years, the Investment Advisory Agreement and Sub-Advisory Agreement continues in effect from year to year so long as such continuance is specifically approved at least annually by: (a) the Board; or (b) the vote of a “majority” (as defined in the 1940 Act) of the Fund’s outstanding shares voting as a single class; provided, that in either event the continuance is also approved by at least a majority of the Board who are not “interested persons” (as defined in the 1940 Act) of ING Investments or ING IM by vote cast in person at a meeting called for the purpose of voting on such approval.

Please see the Portfolio’s semi-annual shareholder report that will be dated June 30, 2008 for information regarding the basis of the Board’s approval of the investment advisory and investment sub-advisory relationships.

The Investment Advisory Agreement may be terminated without penalty with not less than 60 days’ notice by the Board or by a vote of the holders of a majority of the Portfolio’s outstanding shares voting as a single class, or upon not less than 60 days’ notice by ING Investments. The Investment Advisory Agreement will terminate automatically in the event of its “assignment” (as defined in the 1940 Act).

 

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Advisory Fees

ING Investments bears the expense of providing its services and pays the fees of the Sub-Adviser. For its services, the Portfolio pays ING Investments a monthly fee in arrears equal to the following as a percentage of the Portfolio’s average daily net assets during the month:

 

Portfolio

  

Annual Advisory Fee

ING RussellTM Global Large Cap Index 85%

   0.46% on all assets

The Portfolio may seek to achieve a return on uninvested cash or for other reasons, the Portfolio may invest its assets in ING Institutional Prime Money Market Fund and/or one or more other money market funds advised by ING affiliates (“ING Money Market Funds”). The Portfolio’s purchase of shares of an ING Money Market Fund will result in the Portfolio paying a proportionate share of the expenses of the ING Money Market Fund. The Portfolio’s Adviser will waive its fee in an amount equal to the advisory fee received by the adviser of the ING Money Market Fund in which the Portfolio invests resulting from the Portfolio’s investment into the ING Money Market Fund.

Total Advisory Fees Paid

Because the Portfolio had not commenced operations as of the date of this SAI, no Advisory Fees were paid by the Portfolio as of the fiscal year ended December 31, 2007.

SUB-ADVISER

The Investment Advisory Agreement for the Portfolio provides that ING Investments, with the approval of the Portfolio’s Board, may select and employ investment advisers to serve as sub-advisers for the Portfolio, and shall monitor the Sub-Adviser’s investment programs and results, and coordinate the investment activities of the Sub-Adviser to ensure compliance with regulatory restrictions. ING Investments pays all of its expenses arising from the performance of its obligations under the Investment Management Agreement, including all fees payable to the Sub-Adviser, executive salaries and expenses of the Directors and officers of the Portfolio who are employees of ING Investments or its affiliates and office rent of the Portfolio. The Sub-Adviser pays all of its expenses arising from the performance of its obligations under the Sub-Advisory Agreement.

Subject to the expense reimbursement provisions described in this SAI, other expenses incurred in the operation of the Portfolio are borne by the Portfolio, including, without limitation, investment advisory fees; brokerage commissions; interest; legal fees and expenses of attorneys; fees of independent registered public accounting firms, transfer agents and dividend disbursing agents, accounting agents, and custodians; the expense of obtaining quotations for calculating the Portfolio’s NAV; taxes, if any, and the preparation of the Portfolio’s tax return; cost of stock certificates and any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares; fees and expenses of registering and maintaining the registration of shares of the Portfolio under federal and state laws and regulations, expenses of printing and distributing reports, notices and proxy materials to existing shareholders; expenses of printing and filing reports and other documents filed with governmental agencies; expenses of annual and special shareholder meetings; expenses of printing and distributing prospectuses and statement of additional information to existing shareholders; fees and expenses of Directors of the Portfolio who are not employees of the Adviser or the Sub-Adviser, or their affiliates; membership dues in trade associations; insurance premiums; and extraordinary expenses such as litigation expenses.

The Sub-Advisory Agreement may be terminated without payment of any penalties by the Adviser, the Directors, on behalf of the Portfolio, or the shareholders of the Portfolio upon 60 days’ prior written notice. Otherwise, the Sub-Advisory Agreement will remain in effect from year to year, subject to the annual approval of the appropriate Board, on behalf of the Portfolio, or the vote of a majority of the outstanding voting

 

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securities, and the vote, cast in person at a meeting duly called and held, of a majority of the Directors, on behalf of the Portfolio who are not parties to the Sub-Advisory Agreement or “interested persons” (as defined in the 1940 Act) of any such party.

Pursuant to the Sub-Advisory Agreement between the Adviser and ING IM, ING IM acts as Sub-Adviser to the Portfolio. In this capacity, ING IM, subject to the supervision and control of the Adviser and the Board, on behalf of the Portfolio, manages the Portfolio’s portfolio investments consistently with the Portfolio’s investment objective, and executes any of the Portfolio’s investment policies that it deems appropriate to utilize from time to time. Fees payable under the Sub-Advisory Agreement accrue daily and are paid monthly by the Adviser. ING IM’s address is 230 Park Avenue, New York, NY 10169. ING IM is a wholly-owned subsidiary of ING Groep.

The Adviser has received an exemptive order from the SEC that allows the Adviser to enter into new investment sub-advisory agreements and to make material changes to the Sub-Advisory Agreement with the approval of the Portfolio’s Board, but without shareholder approval. This authority is subject to certain conditions, including the requirement that the Board (including a majority of the Board’s disinterested Directors) of the Portfolio must approve a new or amended Sub-Advisory Agreement with the Sub-Adviser. In accordance with the exemptive order received from the SEC, an information statement describing any sub-adviser changes will be provided to shareholders within 90 days of the change. The Adviser remains responsible for providing general management services to the Portfolio, including overall supervisory responsibility for the general management services to the Portfolio, including overall supervisory responsibility for the general management and investment of the Portfolio’s assets, and, subject to the review and approval of the Board, will among other things: (i) set the Portfolio’s overall investment strategies; (ii) evaluate, select and recommend a sub-adviser to manage all or part of the Portfolio’s assets; (iii) when appropriate, allocate and reallocate the Portfolio’s assets among multiple sub-advisers; (iv) monitor and evaluate the investment performance of the sub-adviser and (v) implement procedures reasonably designed to ensure that the sub-adviser complies with the Portfolio’s investment objective, policies and restrictions.

Sub-Advisory Fees

As compensation to ING IM for its services, ING Investments pays ING IM a monthly fee in arrears equal to 0.21% of the Portfolio’s average net daily assets managed during the month.

Sub-Advisory Fees Paid

As the Portfolio had not commenced operations as of the date of this SAI, the Sub-Adviser did not receive any sub-advisory fees for the fiscal year ended December 31, 2007.

Portfolio Managers

Other Accounts Managed

The following table shows the number of accounts and total assets in the accounts managed by the portfolio managers as of December 31, 2007.

 

Portfolio Manager

   Registered Investment
Companies
   Other Pooled Investment
Vehicles
   Other Accts
   Number of
Accounts
   Total Assets
(in billions)
   Number of
Accounts
   Total Assets
(in billions)
   Number of
Accounts (1)
   Total Assets
(in billions)

Omar Aguilar

   65    $ 9,708,686,753    11    $ 625,837,928    30    $ 5,096,631,968

Vincent Costa

   65    $ 9,708,686,753    11    $ 625,837,928    30    $ 5,096,631,968

 

(1)

One of these Accounts with Total Assets of $65,219,463 has an advisory fee that is also based on the performance of the Account.

 

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Potential Material Conflicts of Interest

A portfolio manager may be subject to potential conflicts of interest because the portfolio manager is responsible for other accounts in addition to a Portfolio. These other accounts may include, among others, other mutual funds, separately managed advisory accounts, commingled trust accounts, insurance separate accounts, wrap fee programs and hedge funds. Potential conflicts may arise out of the implementation of differing investment strategies for the portfolio manager’s various accounts, the allocation of investment opportunities among those accounts or differences in the advisory fees paid by the portfolio manager’s accounts.

A potential conflict of interest may arise as a result of the portfolio manager’s responsibility for multiple accounts with similar investment guidelines. Under these circumstances, a potential investment may be suitable for more than one of the portfolio manager’s accounts, but the quantity of the investment available for purchase is less than the aggregate amount the accounts would ideally devote to the opportunity. Similar conflicts may arise when multiple accounts seek to dispose of the same investment.

A portfolio manager may also manage accounts whose objectives and policies differ from that of the portfolio. These differences may be such that under certain circumstances, trading activity appropriate for one account managed by the portfolio manager may not be appropriate for the Portfolio. For example, if an account were to sell a significant position in a security, which could cause the market price of that security to decrease, while the Portfolio maintained its position in that security.

A potential conflict may arise when a portfolio manager is responsible for accounts that have different advisory fees – the difference in the fees may create an incentive for the portfolio manager to favor one account over another, for example, in terms of access to particularly appealing investment opportunities. This conflict may be heightened where an account is subject to a performance-based fee.

As part of its compliance program, ING IM has adopted policies and procedures reasonably designed to address the potential conflicts of interest described above.

Finally, a potential conflict of interest may arise because the investment mandates for certain other accounts, such as hedge funds, may allow extensive use of short sales, which, in theory, could allow them to enter into short positions in securities where other accounts hold long positions. ING IM has policies and procedures reasonably designed to limit and monitor short sales by the other accounts to avoid harm to the Portfolios.

Compensation

For each of the portfolio managers (each a “Portfolio Manager” and collectively the “Portfolio Managers”) of the Portfolio listed above, compensation consists of (a) fixed base salary; (b) bonus which is based on ING IM performance, one and three year pre-tax performance of the accounts the portfolio managers are primarily and jointly responsible for relative to account benchmarks and peer universe performance, and revenue growth of the accounts they are responsible for; and, in certain instances, (c) long-term equity awards tied to the performance of the parent company, ING Groep.

The Portfolio Managers for the Portfolio listed above are also eligible to participate in an annual cash incentive plan. The overall design of the annual incentive plan was developed to tie pay to both performance and cash flows, structured in such a way as to drive performance and promote retention of top talent. As with base salary compensation, individual target awards are determined and set based on external market data and internal comparators. Investment performance is measured on both relative and absolute performance in all areas. ING IM has defined indices (the Russell Global Large Cap Index and the Lehman Brothers U.S. Aggregate Index for the Portfolio.) and where applicable, peer groups including but not limited to Russell, Morningstar, Lipper and Lehman and set performance goals to appropriately reflect requirements for each investment team. The measures for each team are outlined on a “scorecard” that is reviewed on an annual

 

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basis. These scorecards measure investment performance versus peer groups over one- and three-year periods and year-to-date net cash flow (changes in the accounts’ net assets not attributable to changes in the value of the accounts’ investments) for all accounts managed by each team. The results for overall ING IM scorecards are calculated on an asset weighted performance basis of the individual team scorecards.

Investment professionals’ performance measures for bonus determinations are weighted by 25% being attributable to the overall ING IM performance and 75% attributable to their specific team results (60% investment performance and 15% net cash flow).

Based on job function, internal comparators and external market data, portfolio managers participate in the ING Long-Term Incentive Plan. Plan awards are based on the current year’s performance as defined by the ING IM component of the annual incentive plan. The awards vest in three years and are paid in a combination of ING restricted stock, stock options and restricted performance units.

Portfolio Managers whose base salary compensation exceeds a particular threshold may participate in ING IM’s deferred compensation plan. The plan provides an opportunity to invest deferred amounts of compensation in mutual funds, ING IM stock or at an annual fixed interest rate. Deferral elections are done on an annual basis and the amount of compensation deferred is irrevocable.

Portfolio Manager Ownership of Securities

The following table shows the dollar range of shares of the Portfolio owned by the portfolio managers as of June 30, 2008, including investments by their immediate family members and amounts invested through retirement and deferred compensation plans.

 

Portfolio Manager

  

Dollar Range of Securities of the Portfolio Owned

Omar Aguilar

   None

Vincent Costa

   None

ADMINISTRATOR

ING Funds Services, LLC (“ING Funds Services” or “Administrator”) serves as administrator for the Portfolio pursuant to an Administration Agreement. The Administrator is an affiliate of ING Investments. The address of the Administrator is 7337 East Doubletree Ranch Road, Scottsdale, AZ 85258. Subject to the supervision of the Board, the Administrator provides the overall business management and administrative services necessary to properly conduct the Portfolio’s business, except for those services performed by ING Investments under the Investment Advisory Agreement, the Sub-Adviser under the Sub-Advisory Agreement, the custodian under the Custodian Agreement, the transfer agent under the Transfer Agency Agreement, and such other service providers as may be retained by the Portfolios from time to time. The Administrator acts as a liaison among these service providers to the Portfolio. The Administrator is also responsible for monitoring the Portfolio in compliance with applicable legal requirements and for investment policies and restrictions of the Portfolio.

The Administration Agreement may be cancelled by the Board, without payment of any penalty, by a vote of a majority of the Directors upon sixty (60) days’ written notice to the Administrator, or by the Administrator at any time, without the payment of any penalty, upon sixty (60) days’ written notice to the Company.

Administration Fees Paid

For its services, the Administrator is entitled to receive from the Portfolio a fee at an annual rate of 0.10% of the Portfolio’s average daily net assets.

The Portfolio had not commenced operations as of the date of this SAI. As a result, no administration fees were paid to the Administrator for the fiscal year ended December 31, 2007.

 

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EXPENSE LIMITATION AGREEMENT

ING Investments has entered into an expense limitation agreement with the Portfolio, pursuant to which ING Investments has agreed to waive or limit its fees. In connection with this agreement and certain U.S. tax requirements, ING Investments will assume other expenses so that the total annual ordinary operating expenses of the Portfolio which exclude interest, taxes, brokerage commissions, other investment-related costs, acquired fund fees and expenses, extraordinary expenses such as litigation, other expenses not incurred in the ordinary course of the Portfolio’s business, and expenses of any counsel or other persons or services retained by the Portfolio’s Directors who are not “interested persons” (as defined in the 1940 Act) of ING Investments do not exceed the expense limitation shown on the following table:

 

Portfolio

   ADV Class     Class I     Class S  

ING RussellTM Global Large Cap Index 85%

   1.10 %   0.60 %   0.85 %

The Portfolio may at a later date reimburse ING Investments for investment management fees waived or reduced and other expenses assumed by ING Investments during the previous thirty-six (36) months, but only if, after such reimbursement, the Portfolio’s expense ratio does not exceed the percentage described above. ING Investments will only be reimbursed for fees waived or expenses assumed after the effective date of the expense limitation agreement.

The expense limitation agreement provides that the expense limitations shall continue until May 1, 2009. The expense limitation agreement is contractual and, after the initial term, shall renew automatically for one-year terms unless the Adviser provides written notice of termination of the agreement to the lead Independent Director upon thirty (30) days’ prior to the end of the then-current term or upon termination of the Investment Advisory Agreement. The Expense Limitation Agreement may also be terminated by the Portfolio, without payment of any penalty, upon ninety (90) days’ prior written notice to the Adviser at its principal place of business.

CUSTODIAN

The cash and securities owned by the Portfolio are held by The Bank of New York Mellon Corporation (formerly, the Bank of New York), One Wall Street, New York, New York 10286, as custodian, which takes no part in the decisions relating to the purchase or sale of the Portfolio’s securities.

The custodian does not participate in determining the investment policies of the Portfolio nor in deciding which securities are purchased or sold by the Portfolio. The Portfolio may, however, invest in obligations of the custodian and may purchase or sell securities from or to the custodian.

TRANSFER AGENT

DST Systems, Inc., 330 West 9th Street, Kansas City, Missouri 64105-1514 serves as the transfer agent and dividend-paying agent to the Portfolio.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

KPMG LLP serves as the independent registered public accounting firm to the Portfolio. KPMG LLP provides audit services, tax return preparation and assistance and consultation in connection with review of SEC filings. KPMG LLP is located at 99 High Street, Boston, MA 02110.

LEGAL COUNSEL

Legal matters for the Portfolio are passed upon by Goodwin Procter LLP, Exchange Place, 53 State Street, Boston, MA 02109.

 

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PRINCIPAL UNDERWRITER

Shares of the Portfolio are offered on a continuous basis. The Portfolio’s principal underwriter is ING Funds Distributor, LLC, 7337 Doubletree Ranch Road, Scottsdale, Arizona 85258. ING Funds Distributor, LLC is a Delaware Corporation and is an indirect wholly-owned subsidiary of ING Groep and an affiliate of ING Investments, LLC. As principal underwriter for the Portfolio, ING Funds Distributor, LLC has agreed to use its best efforts to distribute the shares of the Portfolio.

DISTRIBUTION SERVICING ARRANGEMENTS

Shares are distributed by the Distributor. The Class S shares of the Portfolio are subject to a distribution plan (“Distribution Plan”) adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Class S Distribution Plan, the Distributor is paid an annual distribution fee at the rate of 0.25% of the average daily net assets regardless of expenses of the Class S shares of the Portfolio. The distribution fee may be used to cover expenses incurred in promoting the sale of Class S shares, including (a) the costs of printing and distributing to prospective investors Prospectuses, statement of additional information and sale literature; (b) payments to investment professionals and other persons who provide support services in connection with the distribution of shares; (c) overhead and other distribution related expenses; and (d) accruals for interest on the amount of the forgoing expenses that exceed the distribution fee. The Distributor may re-allow all or a portion of these fees to broker-dealers entering into selling agreements with it, including its affiliates.

The Distributor is required to report in writing to the Board at least quarterly on the amounts and purpose of any payment made under the Distribution Plan and any related agreements, as well as to furnish the Board with such other information as may reasonably be requested in order to enable the Board to make an informed determination whether the Plan should be continued. The terms and provisions of the Plan relating to required reports, term and approval are consistent with the requirements of Rule 12b-1.

The Distribution Plan continues from year to year, provided such continuance is approved annually by a vote of the Board, including a majority of Independent Directors. The Distribution Plan may not be amended to increase the amount to be spent for the services provided by the Distributor without shareholder approval. All amendments to the Distribution Plan must be approved by the Board in the manner described above. The Distribution Plan may be terminated at any time, without penalty, by a vote of a majority of the Independent Directors upon not more than thirty (30) days notice to any other party to the Distribution Plan. All persons who are under common control of the Portfolio could be deemed to have a financial interest in the Plan. No other interested person of the Portfolio has a financial interest in the Plan.

In approving the Distribution Plan, the Board considered all the features of the distribution system, including 1) the advantages to the shareholders of economies of scale resulting from growth in the Portfolio’s assets and potential continued growth, 2) the services provided to the Portfolio and its shareholders by the Distributor, and 3) the Distributor’s shareholder distribution-related expenses and costs.

ING Investments and the Sub-Adviser or their affiliates may make payments to securities dealers that enter into agreements providing the Distributor with access to registered representatives of the securities dealer.

The Portfolio had not commenced operations as of the date of this SAI. As a result, no distribution fees were paid to the Distributor for the fiscal year ended December 31, 2007.

SHAREHOLDER SERVICE AND DISTRIBUTION ARRANGEMENTS

The Class S shares of the Portfolio are subject to a shareholder service and/or distribution plan (“Class S Plan”) adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Class S Plan, the Distributor is paid an

 

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annual shareholder service and/or distribution fee at the rate of 0.25% of the average daily net assets regardless of expenses of the Class S shares of the Portfolio. The shareholder service and/or distribution fees may be used to pay securities dealers (including the Distributor) and other financial institutions, plan administrators and organizations for services (“Services”) including, but not limited to: acting as the shareholder of record; processing purchase and redemption orders; maintaining participant account records; answering participant questions regarding the Portfolio; facilitation of the tabulation of shareholder votes in the event of a meeting of Portfolio shareholders; the conveyance of information relating to shares purchased and redeemed and share balances to the Portfolio and to service providers, provision of support services including providing information about the Portfolio and answering questions concerning the Portfolio, and provision of other services as may be agreed upon from time to time. The shareholder service and/or distribution fee may be used to cover expenses incurred in promoting the sale of Class S shares, including (a) the costs of printing and distributing to prospective investors Prospectuses, statements of additional information and sale literature; (b) payments to investment professionals and other persons who provide support services in connection with the distribution of shares; (c) overhead and other distribution related expenses; and (d) accruals for interest on the amount of the forgoing expenses that exceed the distribution fee. The Distributor may re-allow all or a portion of these fees to broker-dealers entering into selling agreements with it, including its affiliates.

The Distributor is required to report in writing to the Board at least quarterly on the amounts and purpose of any payment made under the Class S Plan and any related agreements, as well as to furnish the Board with such other information as may reasonably be requested in order to enable the Board to make an informed determination whether the Class S Plan should be continued. The terms and provisions of the Class S Plan relating to required reports, term and approval are consistent with the requirements of Rule 12b-1.

The Class S Plan continues from year to year, provided such continuance is approved annually by a vote of the Board, including a majority of Independent Directors. The Class S Plan may not be amended to increase the amount to be spent for the services provided by the Distributor without shareholder approval. All amendments to the Class S Plan must be approved by the Board in the manner described above. The Class S Plan may be terminated at any time, without penalty, by a vote of a majority of the Independent Directors upon not more than thirty (30) days notice to any other party to the Class S Plan. All persons who are under common control of the Portfolio could be deemed to have a financial interest in the Plan. No other interested person of the Portfolio has a financial interest in the Plan.

In approving the Class S Plan, the Board considered all the features of the distribution system, including 1) the advantages to the shareholders of economies of scale resulting from growth in the Portfolio’s assets and potential continued growth, 2) the services provided to the Portfolio and its shareholders by the Distributor, and 3) the Distributor’s shareholder distribution-related expenses and costs.

ING Investments and the Sub-Advisers or their affiliates may make payments to securities dealers that enter into agreements providing the Distributor with access to registered representatives of the securities dealer.

The Portfolio had not commenced operations as of the date of this SAI. As a result, no distribution fees were paid to the Distributor for the fiscal year ended December 31, 2007.

SHAREHOLDER SERVICE AND DISTRIBUTION PLAN

ADV Class shares of the Portfolio are subject to a Shareholder Service and Distribution Plan (the “Plan”). Under the Plan, the Distributor is paid an annual shareholder service fee at the rate of 0.25% and an annual distribution fee at the rate of 0.25% of the average daily net assets attributable to its ADV Class shares.

The shareholder service fees may be used to pay securities dealers (including the Distributor) and other financial institutions, plan administrators and organizations for services (“Services”) including, but not limited to: acting as the shareholder of record; processing purchase and redemption orders; maintaining participant account records; answering participant questions regarding the Portfolio; facilitation of the tabulation of

 

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shareholder votes in the event of a meeting of Portfolio shareholders; the conveyance of information relating to shares purchased and redeemed and share balances to the Portfolio and to service providers, provision of support services including providing information about the Portfolio and answering questions concerning the Portfolio, and provision of other services as may be agreed upon from time to time.

The distribution fee may be used to cover expenses incurred in promoting the sale of ADV Class and Class S shares, including (a) the costs of printing and distributing to prospective investors Prospectuses, statements of additional information and sale literature; (b) payments to investment professionals and other persons who provide support services in connection with the distribution of shares; (c) overhead and other distribution related expenses; and (d) accruals for interest on the amount of the forgoing expenses that exceed the distribution fee. The Distributor may re-allow all or a portion of these fees to broker-dealers entering into selling agreements with it, including its affiliates.

The Plan has been approved by the Board, including all of the Directors who are not “interested persons”, as defined in the 1940 Act, and who have no direct or indirect financial interest in the operation of the Plan (“Independent Directors”), cast in person at a meeting called for that purpose. The Plan must be renewed annually by the Board, including the Independent Directors. The Plan may be terminated at any time, without any penalty, by such Directors on not more than 30 days’ written notice.

Any material amendments to the Plan must be approved by the Independent Directors.

DISCLOSURE OF THE PORTFOLIO’S PORTFOLIO SECURITIES

The Portfolio is required by the SEC to file its complete portfolio holdings schedule with the SEC on a quarterly basis. This schedule is filed with the Portfolio’s annual and semi-annual shareholder reports on Form N-CSR for the second and fourth fiscal quarters and on Form N-Q for the first and third fiscal quarters.

In addition, the Portfolio posts its portfolio holdings schedule on ING’s website on a calendar-quarter basis and are available on the first day of the second month of the next quarter. The portfolio holdings schedule is as of the preceding quarter-end (e.g., the Portfolio will post the quarter-ending June 30 holdings on August 1).

The Portfolio also compiles a list composed of its ten largest holdings (“Top Ten”). This information is produced monthly, and is made available on ING’s website, on the tenth day of each month. The Top Ten holdings information is as of the last day of the previous month.

Investors (both individual and institutional), financial intermediaries that distribute the Portfolio’s shares and most third parties may receive the Portfolio’s annual or semi-annual shareholder reports, or view them on ING’s website, along with the Portfolio’s portfolio holdings schedule. The Top Ten lists are also provided in quarterly Portfolio descriptions that are included in the offering materials of variable life insurance products and variable annuity contracts.

Other than in regulatory filings or on ING’s website, the Portfolio may provide its complete portfolio holdings to certain unaffiliated third-parties and affiliates when the Portfolio has a legitimate business purpose for doing so. Unless otherwise noted below, the Portfolio’s disclosure of its portfolio holdings will be on an as-needed basis, with no lag time between the date of which the information is requested and the date the information is provided. Specifically, the Portfolio’s disclosure of its portfolio holdings may include disclosure:

 

   

To the Portfolio’s independent registered public accounting firm, named herein, for use in providing audit opinions;

 

   

To financial printers for the purpose of preparing the Portfolio’s regulatory filings;

 

   

For the purpose of due diligence regarding a merger or acquisition;

 

   

To a new adviser or sub-adviser prior to the commencement of its management of the Portfolio;

 

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To rating and ranking agencies such as Bloomberg, Morningstar, Lipper and S&P’s, such agencies may receive more raw data for the Portfolio that is posted on the Portfolio’s website;

 

   

To consultants for use in providing asset allocation advice in connection with investments by affiliated funds-of-funds in the Portfolio;

 

   

To service providers, such as proxy voting and class action services providers, on a daily basis, in connection with their providing services benefiting the Portfolio; and

 

   

To a third party for purposes of effecting in-kind redemptions of securities to facilitate orderly redemption of portfolio assets and minimal impact on remaining Portfolio’s shareholders.

In all instances of such disclosure the receiving party, by agreement, is subject to a duty of confidentiality, including a duty not to trade on such information.

The Portfolio’s Board has adopted policies and procedures (“Policies”) designed to ensure that disclosure of information regarding the Portfolio’s portfolio securities is in the best interests of Portfolio shareholders, including procedures to address conflicts between the interests of the Portfolio’s shareholders, on the one hand, and those of the Portfolio’s adviser, sub-advisers, principal underwriter or any affiliated person of the Portfolio, its adviser, or its principal underwriter, on the other. Such Policies authorize the Portfolio’s administrator to implement the Board’s Policies and direct the administrator to document the expected benefit to shareholders. Among other considerations, the administrator is directed to consider whether such disclosure may create an advantage for the recipient or its affiliates or their clients over that of the Portfolio’s shareholders. Similarly, the administrator is directed to consider, among other things, whether the disclosure of portfolio holdings creates a conflict between the interests of shareholders and the interests of the adviser, sub-advisers, principal underwriter and their affiliates. The Board has authorized the senior officers of the Portfolio’s administrator to authorize the release of the Portfolio’s portfolio holdings, as necessary, in conformity with the foregoing principles and to monitor for compliance with the Policies. The Portfolio’s administrator reports quarterly to the Board regarding the implementation of the Policies.

The Portfolio has the following ongoing arrangements with certain third parties to provide the Portfolio’s portfolio holdings:

 

Party

  

Purpose

  

Frequency

  

Time Lag Between Date of
Information and Date Information
Released

Institutional Shareholder Services, Inc.   

Proxy Voting & Class Action

Services

   Daily    None

Charles River Development

   Compliance    Daily    None

All of the arrangements in the table above are subject to the Policies adopted by the Board to ensure such disclosure is for a legitimate business purpose and is in the best interests of the Portfolio and its shareholders. The Portfolio’s Board must approve any material change to the Policies. The Policies may not be waived, or exceptions made, without the consent of ING’s Legal Department. All waivers and exceptions involving the Portfolio will be disclosed to the Portfolio’s Board no later than its next regularly scheduled quarterly meeting. No compensation or other consideration may be received by the Portfolio, the Adviser, or any other party in connection with the disclosure of portfolio holdings in accordance with the Policies.

PURCHASE AND REDEMPTION OF SHARES

Shares of the Portfolio are purchased and redeemed at the NAV next determined after receipt of a purchase or redemption order in acceptable form as described in the Portfolio’s Prospectuses. The value of shares redeemed may be more or less than the shareholder’s costs, depending upon the market value of the portfolio securities at the time of redemption.

 

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Redemption of shares, or payment, may be suspended at times (a) when the New York Stock Exchange (“NYSE”) is closed for other than customary weekend or holiday closings, (b) when trading on NYSE is restricted, (c) when an emergency exists, as a result of which disposal by the Portfolio of securities owned by it is not reasonably practicable, or it is not reasonably practicable for the Portfolio fairly to determine the value of its net assets, or during any other period when the SEC, by order, so permits; provided that applicable rules and regulations of the SEC shall govern as to whether the conditions prescribed in (b) or (c) exist. The NYSE is not open for business on the following holidays (nor on the nearest Monday or Friday if the holiday falls on a weekend), on which the Portfolio will not redeem shares: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

If you invest in the Portfolio through a financial intermediary, you may be charged a commission or transaction fee by the financial intermediary for the purchase and sale of Portfolio shares.

Shares of the Portfolio are offered, on a continuous basis, to both registered and unregistered separate accounts of affiliated Participating Insurance Companies to Portfolio VA Contracts and VLI Policies. Each separate account contains divisions, each of which corresponds to the Portfolio. Net purchase payments under the VA Contracts are placed in one or more of the divisions of the relevant separate account and the assets of each division are invested in the shares of the Portfolio which corresponds to that division. Each separate account purchases and redeems shares of the Portfolio for its divisions as NAV without sales or redemption charges.

The Portfolio may offer its shares to certain pension and retirement plans qualified under the Code. The relationships of pension and retirement plans and pension and retirement plan participants to the Portfolio would be subject, in part, to the provisions of the individual pension and retirement plans and applicable law. Accordingly, such relationships could be different from those described in the prospectus for separate accounts and owners of VA Contracts and VLI Policies, in such areas, for example, as tax matters and voting privileges.

The Board monitors for possible conflict among separate accounts (and will do so for pension and retirement plans) buying shares of the Portfolio. Conflicts could develop for a variety of reasons. For example, differences in treatment under tax and other laws or the failure by a separate account to comply with such laws could cause a conflict. To eliminate a conflict, the Board may require a separate account or Plan to withdraw its participation in the Portfolio. The Portfolio’s NAV could decrease if it had to sell investment securities to pay redemption proceeds to a separate account (or pension and retirement plan) withdrawing because of a conflict.

The Portfolio ordinarily effects orders to purchase or redeem its shares that are based on transactions under VLI Policies or VA Contracts (e.g. purchase or premium payments, surrender or withdrawal requests, etc.) at the Portfolio’s NAV per share next computed on the day on which the separate account processes such transactions. The Portfolio effects orders to purchase or redeem its shares that are not based on such transactions at the Portfolio’s NAV per share next computed on the day on which the Portfolio receives the orders.

Please refer to the appropriate separate account prospectus related to your VA Contract for more information regarding the contract.

PORTFOLIO TRANSACTIONS

The Adviser or a Sub-Adviser for the Portfolio places orders for the purchase and sale of investment securities for a Portfolio, pursuant to authority granted in the Advisory Agreement or Sub-Advisory Agreements. Subject to policies and procedures approved by the Portfolios’ Board, the Adviser or the Sub-Adviser has discretion to make decisions relating to placing these orders, including, where applicable, selecting the brokers or dealers that will execute the purchase and sale of investment securities, negotiating the commission or other compensation paid to the broker or dealer executing the trade, or using an electronic trading network (“ECN”)

 

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or alternative trading system (“ATS”). In situations where the Sub-Adviser resigns or the Adviser otherwise assumes day to day management of the Portfolio pursuant to its Advisory Agreement with the Portfolio, the Adviser will perform the services described herein as being performed by the Sub-Adviser.

How Securities Transactions are Effected

Purchases and sales of securities on a securities exchange (which include most equity securities) are effected through brokers who charge a commission for their services. In transactions on securities exchanges in the United States, these commissions are negotiated, while on many foreign securities exchanges commissions are fixed. Securities traded in the over-the-counter markets (such as fixed-income securities and some equity securities) are generally traded on a “net” basis with market makers acting as dealers; in these transactions, the dealers act as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. Transactions in certain over-the counter securities also may be effected on an agency basis, when, in the Adviser’s or the Sub-Adviser’s opinion, the total price paid (including commission) is equal to or better than the best total price available from a market maker. In underwritten offerings, securities are usually purchased at a fixed price, which includes an amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid. The Adviser or the Sub-Adviser may also place trades using an ECN or ATS.

How the Sub-Adviser Selects Broker-Dealers

The Adviser or the Sub-Adviser has a duty to seek to obtain best execution of the Portfolio’s orders, taking into consideration a full range of factors designed to produce the most favorable overall terms reasonably available under the circumstances. In selecting brokers and dealers to execute trades, the Adviser or the Sub-Adviser may consider both the characteristics of the trade and the full range and quality of the brokerage services available from eligible broker-dealers. This consideration often involves qualitative as well as quantitative judgments. Factors relevant to the nature of the trade may include, among others, price (including the applicable brokerage commission or dollar spread), the size of the order, the nature and characteristics (including liquidity) of the market for the security, the difficulty of execution, the timing of the order, potential market impact, and the need for confidentiality, speed, and certainty of execution. Factors relevant to the range and quality of brokerage services available from eligible brokers and dealers may include, among others, the firms’ execution, clearance, settlement, and other operational facilities; willingness and ability to commit capital or take risk in positioning a block of securities, where necessary; special expertise in particular securities or markets; ability to provide liquidity, speed and anonymity; the nature and quality of other brokerage and research services provided to the Adviser or the Sub-Adviser (consistent with the “safe harbor” described below); and the firms’ general reputation, financial condition and responsiveness to the Adviser or the Sub-Adviser, as demonstrated in the particular transaction or other transactions. Subject to its duty to seek best execution of the Portfolio’s orders, the Adviser or the Sub-Adviser may select broker-dealers that participate in commission recapture programs that have been established for the benefit of the Portfolio. Under these programs, the participating broker-dealers will return to the Portfolio (in the form of a credit to the Portfolio) a portion of the brokerage commissions paid to the broker-dealers by the Portfolio. Theses credits are used to pay certain expenses of a Portfolio. These commission recapture payments benefit the Portfolio, and not the Adviser or Sub-Adviser.

The Safe Harbor for Soft Dollar Practices

In selecting broker-dealers to execute a trade for the Portfolio, the Adviser or Sub-Adviser may consider the nature and quality of brokerage and research services provided to the Adviser or the Sub-Adviser as a factor in evaluating the most favorable overall terms reasonably available under the circumstances. As permitted by Section 28(e) of the 1934 Act, the Adviser or Sub-Adviser may cause the Portfolio to pay a broker-dealer a commission for effecting a securities transaction for the Portfolio that is in excess of the commission which another broker-dealer would have charged for effecting the transaction, if the Adviser or the Sub-Adviser

 

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makes a good faith determination that the broker’s commission paid by the Portfolio is reasonable in relation to the value of the brokerage and research services provided by the broker-dealer, viewed in terms of either the particular transaction or the Adviser’s or the Sub-Adviser’s overall responsibilities to the Portfolio and its other investment advisory clients. The practice of using a portion of the Portfolio’s commission dollars to pay for brokerage and research services provided to the Adviser or Sub-Adviser is sometimes referred to as “soft dollars.” Section 28(e) is sometimes referred to as a “safe harbor,” because it permits this practice, subject to a number of restrictions, including the Adviser’s or the Sub-Adviser’s compliance with certain procedural requirements and limitations on the type of brokerage and research services that qualify for the safe harbor.

Brokerage and Research Products and Services Under the Safe Harbor – Research products and services may include, but are not limited to, general economic, political, business and market information and reviews, industry and company information and reviews, evaluations of securities and recommendations as to the purchase and sale of securities, financial data on a company or companies, performance and risk measuring services and analysis, stock price quotation services, computerized historical financial databases and related software, credit rating services, analysis of corporate responsibility issues, brokerage analysts’ earning estimates, computerized links to current market data, software dedicated to research, and portfolio modeling. Research services may be provided in the form of reports, computer-generated data feeds and other services, telephone contacts, and personal meetings with securities analysts, as well as in the form of meetings arranged with corporate officers and industry spokespersons, economists, academics and governmental representatives. Brokerage products and services assist in the execution, clearance and settlement of securities transactions, as well as functions incidental thereto, including but not limited to related communication and connectivity services and equipment, and software related to order routing, market access, algorithmic trading, and other trading activities. On occasion, a broker-dealer may furnish the Adviser or Sub-Adviser with a service that has a mixed use (that is, the service is used both for brokerage and research activities that are within the safe harbor and for other activities). In this case, the Adviser or Sub-Adviser is required to reasonably allocate the cost of the service, so that any portion of the service that does not qualify for the safe harbor is paid for by the Adviser or the Sub-Adviser from its own funds, and not by portfolio commissions paid by the Portfolio.

Benefits to the Adviser or Sub-Adviser – Research products and services provided to the Adviser or Sub-Adviser by broker-dealers that effect securities transactions for the Portfolio may be used by the Adviser or Sub-Adviser in servicing all of its accounts. Accordingly, not all of these services may be used by the Adviser or Sub-Adviser in connection with the Portfolio. Some of these products and services are also available to the Adviser or Sub-Adviser for cash, and some do not have an explicit cost or determinable value. The research received does not reduce the advisory fees paid to the Adviser or the sub-advisory fees payable to the Sub-Adviser for services provided to the Portfolio. The Adviser’s or the Sub-Adviser’s expenses would likely increase if the Adviser or a Sub-Adviser had to generate these research products and services through its own efforts, or if it paid for these products or services itself.

Broker-dealers that are Affiliated with the Advisor or a Sub-Adviser

Portfolio transactions may be executed by brokers affiliated with the ING Groep or the Adviser or the Sub-Adviser, so long as the commission paid to the affiliated broker is reasonable and fair compared to the commission that would be charged by an unaffiliated broker in a comparable transaction. The placement of portfolio brokerage with broker-dealers who have sold shares of the Portfolio is subject to rules adopted by the SEC and the Financial Industry Regulatory Authority (“FINRA”). Under these rules, the Sub-Adviser may not consider a broker’s promotional or sales efforts on behalf of the Portfolio when selecting a broker-dealer for portfolio transactions, and neither the Portfolio nor the Sub-Adviser may enter into an agreement under which the Portfolio directs brokerage transactions (or revenue generated from such transactions) to a broker-dealer to pay for distribution of Portfolio shares. The Portfolio has adopted policies and procedures, approved by the Board, that are designed to attain compliance with these prohibitions.

 

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Principal Trades and Research

Purchases of securities for the Portfolio also may be made directly from issuers or from underwriters. Purchase and sale transactions may be effected through dealers which specialize in the types of securities which the Portfolio will be holding. Dealers and underwriters usually act as principals for their own account. Purchases from underwriters will include a concession paid by the issuer to the underwriter and purchases from dealers will include the spread between the bid and the asked price. If the execution and price offered by more than one dealer or underwriter are comparable, the order may be allocated to a dealer or underwriter which has provided such research or other services as mentioned above.

More Information About Trading in Fixed-Income Securities

Purchases and sales of fixed-income securities will usually be principal transactions. Such securities often will be purchased or sold from or to dealers serving as market makers for the securities at a net price. The Portfolio may also purchase such securities in underwritten offerings and will, on occasion, purchase securities directly from the issuer. Generally, fixed-income securities are traded on a net basis and do not involve brokerage commissions. The cost of executing fixed-income securities transactions consists primarily of dealer spreads and underwriting commissions. In purchasing and selling fixed-income securities, it is the policy of the Portfolio to obtain the best results, while taking into account the dealer’s general execution and operational facilities, the type of transaction involved and other factors, such as the dealer’s risk in positioning the securities involved. While the Adviser or the Sub-Adviser generally seeks reasonably competitive spreads or commissions, the Portfolio will not necessarily pay the lowest spread or commission available.

Transition Management

Changes in Sub-Advisers and investment personnel and reorganizations of the Portfolio may result in the sale of a significant portion or even all of the Portfolio’s portfolio securities. This type of change will increase trading costs and the portfolio turnover for the Portfolio. The Portfolio, the Adviser, or the Sub-Adviser may engage a broker-dealer to provide transition management services in connection with a change in Sub-Adviser, a reorganization, or other changes.

Allocation of Trades

Some securities considered for investment by the Portfolio may also be appropriate for other clients served by the Portfolio’s Sub-Adviser. If the purchase or sale of securities consistent with the investment policies of the Portfolio and one or more of these other clients is considered at or about the same time, transactions in such securities will be placed on an aggregate basis and allocated among the Portfolio and such other clients in a manner deemed fair and equitable, over time, by the Sub-Adviser and consistent with the Sub-Adviser’s written policies and procedures. Sub-Advisers may use different methods of allocating the results aggregated trades. The Sub-Adviser’s relevant policies and procedures and the results of aggregated trades in which the Portfolio participated are subject to periodic review by the Board. To the extent the Portfolio seeks to acquire (or dispose of) the same security at the same time, the Portfolio may not be able to acquire (or dispose of) as large a position in such security as it desires, or it may have to pay a higher (or receive a lower) price for such security. It is recognized that in some cases, this system could have a detrimental effect on the price or value of the security insofar as the Portfolio are concerned. However, over time, the Portfolio’s ability to participate in aggregate trades is expected to provide better execution for the Portfolio.

Cross-Transactions

The Board has adopted a policy allowing trades to be made between affiliated registered investment companies or series thereof provided they meet the terms of Rule 17a-7 under the 1940 Act.

Because the Portfolio had not commenced operations as of the date of this SAI, no brokerage commissions were paid by the Portfolio for the fiscal year ended December 31, 2007.

 

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CODE OF ETHICS

The Portfolio, ING Investments, the Sub-Adviser and the Distributor have adopted a code of ethics (“Code of Ethics” or written supervisory procedures) governing personal trading activities of all “access persons,” as defined by the 1940 Act, who, in connection with their regular functions, play a role in the recommendation of any purchase or sale of a security by the Portfolio or obtain information pertaining to such purchase or sale. The Code of Ethics is intended to prohibit fraud against the Portfolio that may rise from personal trading of securities that may be purchased or held by the Portfolio or of Portfolio shares. The Code of Ethics also prohibits short-term trading of the Portfolio by persons subject to the Code of Ethics. Personal trading is permitted by such persons subject to certain restrictions; however such persons are generally required to pre-clear all holdings and security transactions with the ING Funds’ Compliance Officer or her designee and to report all transactions on a regular basis.

PROXY VOTING PROCEDURES

The Board has adopted proxy voting procedures and guidelines to govern the voting of proxies relating to the Portfolio’s portfolio securities. The procedures delegate to ING Investments the authority to vote proxies relating to portfolio securities, and provide a method for responding to potential conflicts of interest. In delegating voting authority to ING Investments, the Board has also approved ING Investments’ proxy voting procedures, which require ING Investments to vote proxies in accordance with the Portfolio’s proxy voting procedures and guidelines. An independent proxy voting service has been retained to assist in the voting of Portfolio proxies through the provision of vote analysis, implementation and recordkeeping and disclosure services. A copy of the proxy voting procedures and guidelines of the Portfolio, including the procedures of ING Investments, is attached hereto as Appendix A. No later than August 31st of each year, information regarding how the Portfolio voted proxies relating to portfolio securities for the one-year period ending June 30th is available through the ING Funds’ website (www.ingfunds.com) or by accessing the SEC’s EDGAR database (www.sec.gov).

NET ASSET VALUE

As noted in the Prospectuses, the NAV and offering price of each class of the Portfolio’s shares will be determined once daily as of the close of regular trading (“Market Close”) on the New York Stock Exchange (“NYSE”) (normally 4:00 p.m. Eastern time unless otherwise designated by the NYSE) during each day on which the NYSE is open for trading. As of the date of this Statement of Additional Information, the NYSE is closed on the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

Portfolio securities listed or traded on a national securities exchange will be valued at the last reported sale price on the valuation day. Securities traded on an exchange for which there has been no sale that day and other securities traded in the over-the-counter market will be valued at the mean between the last reported bid and asked prices on the valuation day. Portfolio securities reported by NASDAQ will be valued at the NASDAQ Official Closing Price on the valuation day. In cases in which securities are traded on more than one exchange, the securities are valued on the exchange that is normally the primary market. Investments in securities maturing in 60 days or less are valued at amortized cost, which, when combined with accrued interest, approximates market value. This involves valuing a security at cost on the date of acquisition and thereafter assuming a constant accretion of a discount or amortization of a premium to maturity, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price the Portfolio would receive if it sold the instrument. (See “Net Asset Value” in the “Information for Investors” section of the Prospectuses.) The long-term debt obligations held in the Portfolio’s portfolio will be valued at the mean between the most recent bid and asked prices as obtained from one or more dealers that make markets in the securities when over-the counter market quotations are readily available.

 

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Securities and assets for which market quotations are not readily available (which may include certain restricted securities which are subject to limitations as to their sale) or are deemed unreliable are valued at their fair values as determined in good faith by or under the supervision of the Portfolio’s Board, in accordance with methods that are specifically authorized by the Board. Securities traded on exchanges, including foreign exchanges, which close earlier than the time that the Portfolio calculates its NAV, may also be valued at their fair values as determined in good faith by or under the supervision of a Portfolio’s Board, in accordance with methods that are specifically authorized by the Board. The valuation techniques applied in any specific instance may vary from case to case. With respect to a restricted security, for example, consideration is generally given to the cost of investment, the market value of any unrestricted securities of the same class at the time of valuation, the potential expiration of restrictions on the security, the existence of any registration rights, the costs to the Portfolio related to registration of the security, as well as factors relevant to the issuer itself. Consideration may also be given to the price and extent of any public trading in similar securities of the issuer or comparable companies’ securities.

The value of a foreign security traded on an exchange outside the United States is generally based on its price on the principal foreign exchange where it trades as of the time the Portfolio determines its NAV or if the foreign exchange closes prior to the time the Portfolio determines its NAV, the most recent closing price of the foreign security on its principal exchange. Trading in certain non-U.S. securities may not take place on all days on which the NYSE is open. Further, trading takes place in various foreign markets on days on which the NYSE is not open. Consequently, the calculation of the Portfolio’s NAV may not take place contemporaneously with the determination of the prices of securities held by the Portfolio in foreign securities markets. Further, the value of the Portfolio’s assets may be significantly affected by foreign trading on days when a shareholder cannot purchase or redeem shares of the Portfolio. In calculating the Portfolio’s NAV, foreign securities denominated in foreign currency are converted to U.S. dollar equivalents.

If a significant event which is likely to impact the value of one or more foreign securities held by the Portfolio occurs after the time at which the foreign market for such securities closes but before the time that the Portfolio’s NAV is calculated on any business day, such event may cause the closing price on the foreign exchange to not represent a readily available reliable market value quotation for such securities at the time the Portfolio determines its NAV. In such a case, the Portfolio will use the fair value of such securities as determined under the Portfolio’s valuation procedures. Events after the close of trading on a foreign market that could require the Portfolio to fair value some or all of its foreign securities include, among others, securities trading in the United States and other markets, corporate announcements, natural and other disasters, and political and other events. Among other elements of analysis in determination of a security’s fair value, the Board has authorized the use of one or more research services to assist with such determinations. An independent research service may use statistical analyses and quantitative models to help determine fair value as of the time a Portfolio calculates its NAV. There can be no assurance that such models accurately reflect the behavior of the applicable markets or the effect of the behavior of such markets on the fair value of securities, nor that such markets will continue to behave in a fashion that is consistent with such models. Unlike the closing price of a security on an exchange, fair value determinations employ elements of judgment. Consequently, the fair value assigned to a security may not represent the actual value that the Portfolio could obtain if it were to sell the security at the time of the close of the NYSE. Pursuant to procedures adopted by the Board, the Portfolio is not obligated to use the fair valuations suggested by any research service, and valuation recommendations provided by such research services may be overridden if other events have occurred, or if other fair valuations are determined in good faith to be more accurate. Unless an event is such that it causes the Portfolio to determine that the closing prices for one or more securities do not represent readily available reliable market value quotations at the time the Portfolio determines its NAV, events that occur between the time of the close of the foreign market on which they are traded and the close of regular trading on the NYSE will not be reflected in the Portfolio’s NAV.

Options on securities, currencies, futures and other financial instruments purchased by the Portfolio are valued at their last bid price in the case of listed options or at the average of the last bid prices obtained from dealers in the case of OTC Options.

 

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The fair value of other assets is added to the value of all securities positions to arrive at the value of the Portfolio’s total assets. The Portfolio’s liabilities, including accruals for expenses, are deducted from its total assets. Once the total value of the Portfolio’s net assets is so determined, that value is then divided by the total number of shares outstanding (excluding treasury shares), and the result, rounded to the nearest cent, is the NAV per share.

In computing the NAV for a class of shares of the Portfolio, all class-specific liabilities incurred or accrued are deducted from the class’ net assets. The resulting net assets are divided by the number of shares of the class outstanding at the time of the valuation and the result (adjusted to the nearest cent) is the NAV per share.

Orders received by dealers prior to Market Close will be confirmed at the offering price computed as of Market Close provided the order is received by the Transfer Agent prior to Market Close that same day. It is the responsibility of the dealer to insure that all orders are transmitted timely to the Portfolio. Orders received by dealers after Market Close will be confirmed at the next computed offering price as described in the Prospectuses.

TAX CONSIDERATIONS

The following is only a limited discussion of certain additional tax considerations generally affecting the Portfolio. No attempt is made to present a detailed explanation of the tax treatment of the Portfolio and no explanation is provided with respect to the tax treatment of any Portfolio shareholder. The discussions here and in the Prospectuses are not intended as substitutes for careful tax planning. Holders of VA Contracts or VLI Policies must consult the contract prospectus, prospectus summary or disclosure statement for information concerning the federal income tax consequences of owning such VA Contracts or VLI Policies.

Qualification as a Regulated Investment Company

The Portfolio intends to elect to qualify as a “regulated investment company” (“RIC”) under the provisions of Subchapter M of the Code. If the Portfolio qualifies as a RIC and complies with the appropriate provisions of the Code, it will be relieved of federal income tax on the amounts of income it attributes.

To qualify for treatment as a RIC, the Portfolio generally must, among other things: (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of securities or foreign currencies, and other income (including gains from certain options, futures, and forward contracts) derived with respect to its business of investing in securities or foreign currencies; (b) diversify its holdings so that at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Portfolio’s assets is represented by cash, cash items, U.S. government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5.00% of the value of the Portfolio’s total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. government securities or the securities of other regulated investment companies), or of two or more issuers which the Portfolio controls and which are engaged in the same or similar trades or businesses or related trades or businesses; and (c) distribute in each taxable year at least 90% of the sum of its investment company taxable income and its net tax-exempt interest income. If the Portfolio does not meet all of these Code requirements, it will be taxed as an ordinary corporation and its distributions (to the extent of available earnings and profits) will be taxed to shareholders as ordinary income (except to the extent a shareholder is exempt form tax).

Excise Tax

Generally, in order to avoid a 4% nondeductible excise tax, the Portfolio must distribute to its shareholders during the calendar year the following amounts:

 

   

98% of the Portfolio’s ordinary income for the calendar year;

 

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98% of the Portfolio’s capital gain net income (all capital gains, both long-term and short-term, minus all such capital losses), all computed as if the Portfolio were on a taxable year ending October 31 of the year in question and beginning the previous November 1; and

 

   

any undistributed ordinary income or capital gain net income for the prior year.

The excise tax generally is inapplicable to any RIC whose sole shareholders are either tax-exempt pension trusts or separate accounts of life insurance companies funding variable contracts. Although the Portfolio believes that it is not subject to the excise tax, it intends to make the distributions required to avoid the imposition of such a tax.

Diversification

The Portfolio also intends to comply with the separate diversification requirements imposed by Section 817(h) of the Code and the regulations thereunder on certain insurance company separate accounts. These requirements, which are in addition to the diversification requirements imposed on the Portfolio by the 1940 Act and Subchapter M of the Code, place certain limitations on assets of each insurance company separate account used to fund variable contracts. Because Section 817(h) and those regulations treat the assets of the Portfolio as assets of the related separate account, these regulations are imposed on the assets of the Portfolio. Specifically, the regulations provide that, after a one year start-up period or except as permitted by the “safe harbor” described below, as of the end of each calendar quarter or within 30 days thereafter no more than 55% of the total assets of the Portfolio may be represented by any one investment, no more than 70% by any two investments, no more than 80% by any three investments and no more than 90% by any four investments. For this purpose, all securities of the same issuer are considered a single investment, and each U.S. government agency and instrumentality is considered a separate issuer. Section 817(h) provides, as a safe harbor, that a separate account will be treated as being adequately diversified if the diversification requirements under Subchapter M of the Code are satisfied and no more than 55% of the value of the account’s total assets is attributable to cash and cash items (including receivables), U.S. government securities and securities of other RICs. Failure by the Portfolio to both qualify as a RIC and to satisfy the Section 817(h) requirements would generally cause the Variable Contracts to lose their favorable tax status and require a contract holder to include in ordinary income any income accrued under the contracts for the current and all prior taxable years. Under certain circumstances described in the applicable U.S. Treasury regulations, inadvertent failure to satisfy the applicable diversification requirements may be corrected, but such a correction would require a payment to the Internal Revenue Service (“IRS”) based on the tax contract holders would have incurred if they were treated as receiving the income on the contract for the period during which the diversification requirements were not satisfied. Any such failure may also result in adverse tax consequences for the insurance company issuing the contracts. Failure by the Portfolio to qualify as a RIC would also subject it to federal and state income taxation on all of its taxable income and gain, whether or not distributed to shareholders.

The U.S. Treasury Department announced that it would issue future regulations or rulings addressing the circumstances in which a Variable Contract owner’s control of the investments of the separate account may cause the contract owner, rather than the insurance company, to be treated as the owner of the assets held by the separate account. To date, the Treasury Department has issued only a few such pronouncements. If the contract owner is considered the owner of the securities underlying the separate account, income and gains produced by those securities would be included currently in the contract owner’s gross income. It is not known what standards will be set forth in the regulations or rulings.

In the event that rules or regulations are adopted, there can be no insurance that the Portfolio will be able to operate as currently described, or that the Portfolio will not have to change its investment objective or investment policies. The Portfolio’s investment objective and the investment policies of the Portfolio may be modified as necessary to prevent any such prospective rules and regulations from causing Variable Contract owners to be considered the owners of the shares of the Portfolio.

 

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Foreign Investments

Investment income from foreign securities may be subject to foreign taxes withheld at the source. It is impossible to determine the effective rate of foreign tax in advance since the amount of the Portfolio’s assets to be invested in various countries is not known.

General Summary

The discussion of “Taxes” in the Prospectuses, in conjunction with the foregoing, is a general summary of applicable provisions of the Code and U.S. Treasury regulations now in effect as currently interpreted by the courts and the IRS. The Code and these U.S. Treasury Regulations, as well as the current interpretations thereof, may be changed at any time.

PERFORMANCE INFORMATION

Average Annual Total Return

Quotations of average annual total return for the Portfolio will be expressed in terms of the average annual compounded rate of return of a hypothetical investment in the Portfolio over a period of one, five and ten years (or, if less, up to the life of the Portfolio), calculated pursuant to the formula:

P (1 + T)n = ERV

 

Where:    P =    a hypothetical initial payment of $1,000
   T =    an average annual total return
   n =    the number of years
   ERV =    the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5, or 10 year period at the end of the 1, 5, or 10 year period (or fractional portion thereof).

All total return figures reflect the deduction of Portfolio expenses (an on annual basis), and assume that all dividends and distributions on shares are reinvested when paid.

Because the Portfolio had not commenced operations as of the date of this SAI, no performance information is provided.

Performance information for the Portfolio may be compared, in reports and promotional literature, to: (a) the S&P 500® Index, the Russell 2000 Index, the Russell 3000 Index, Lehman Brothers® Aggregate Bond Index, Lehman Brothers® Intermediate Government Bond Index, Merrill Lynch High-Yield Index, Salomon Brothers Broad Investment Grade Bond Index, Dow Jones Industrial Average, or other indices (including, where appropriate, a blending of indices) that measure performance of a pertinent group of securities widely regarded by investors as representative of the securities markets in general; (b) other groups of investment companies tracked by Morningstar or Lipper Analytical Services, widely used independent research firms that rank mutual funds and other investment companies by overall performance, investment objectives, and assets, or tracked by other services, companies, publications, or persons who rank such investment companies on overall performance or other criteria; and (c) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Portfolio.

FINANCIAL STATEMENTS

The Portfolio’s annual and semi-annual shareholder reports, when available, will be available upon request and without charge by calling 1-800-992-0180.

 

72


APPENDIX A

 

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ING FUNDS

PROXY VOTING PROCEDURES AND GUIDELINES

Effective Date: July 29, 2003

Revision Date: March 13, 2008

 

I. INTRODUCTION

The following are the Proxy Voting Procedures and Guidelines (the “Procedures and Guidelines”) of the ING Funds set forth on Exhibit 1 attached hereto and each portfolio or series thereof (each a “Fund” and collectively, the “Funds”). The purpose of these Procedures and Guidelines is to set forth the process by which each Fund will vote proxies related to the equity assets in its investment portfolio (the “portfolio securities”). The Procedures and Guidelines have been approved by the Funds’ Boards of Trustees/Directors1 (each a “Board” and collectively, the “Boards”), including a majority of the independent Trustees/Directors2 of the Board. Only the Board may amend these Procedures and Guidelines. The Board shall review these Procedures and Guidelines at its discretion, and make any revisions thereto as deemed appropriate by the Board.

 

II. DELEGATION OF VOTING AUTHORITY

The Board hereby delegates to ING Investments, LLC (the “Adviser”) the authority and responsibility to vote all proxies with respect to all portfolio securities of the Fund, in accordance with the then-current Procedures and Guidelines approved by the Board. The Board may revoke such delegation with respect to any proxy or proposal, and assume the responsibility of voting any Fund proxy or proxies, as it deems appropriate. The President or Chief Financial Officer of a Fund may approve non-material amendments to the Procedures and Guidelines for immediate implementation, subject to ratification at the next regularly scheduled meeting of the Board.

When a Fund participates in the lending of its securities and the securities are on loan at record date, proxies related to such securities will not be forwarded to the Adviser by the Fund’s custodian and therefore will not be voted. However, the Adviser shall use best efforts to recall or restrict specific securities from loan for the purpose of facilitating a “material” vote as described in the Adviser’s proxy voting procedures (the “Adviser Procedures”).

 

1

Reference in these Procedures to one or more Funds shall, as applicable, mean those Funds that are under the jurisdiction of the particular Board at issue. No provision in these Procedures is intended to impose any duty upon the particular Board with respect to any other Fund.

 

2

The independent Trustees/Directors are those Board members who are not “interested persons” of the Funds within the meaning of Section 2(a)(19) of the Investment Company Act of 1940.

 

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Funds that are “funds-of-funds” will “echo” vote their interests in underlying mutual funds, which may include ING Funds (or portfolios or series thereof) other than those set forth on Exhibit 1 attached hereto. This means that, if the fund-of-funds must vote on a proposal with respect to an underlying investment company, the fund-of-funds will vote its interest in that underlying fund in the same proportion all other shareholders in the investment company voted their interests.

 

III. APPROVAL AND REVIEW OF PROCEDURES

The Adviser has adopted proxy voting procedures in connection with the voting of portfolio securities for the Funds as attached hereto in Exhibit 3. The Board hereby approves such procedures.

Any material changes to the Adviser Procedures must be approved by the Board prior to voting any Fund proxies in accordance with such amended procedures. The President or Chief Financial Officer of the Adviser may approve non-material amendments to the Procedures and Guidelines for immediate implementation, subject to ratification at the next regularly scheduled meeting of the Board of the Fund.

 

IV. VOTING PROCEDURES AND GUIDELINES

The Guidelines that are set forth in Exhibit 4 hereto specify the manner in which the Funds generally will vote with respect to the proposals discussed therein.

Unless otherwise noted, the defined terms used hereafter shall have the same meaning as defined in the Adviser Procedures.

 

  A. Routine Matters

The Agent shall be instructed to submit a vote in accordance with the Guidelines where such Guidelines provide a clear “For,” “Against,” “Withhold” or “Abstain” on a proposal. However, the Agent shall be directed to refer any proxy proposal to the Proxy Coordinator for instructions as if it were a matter requiring case-by-case consideration under circumstances where the application of the Guidelines is unclear, it appears to involve unusual or controversial issues, or an Investment Professional (as such term is defined for purposes of the Adviser Procedures) recommends a vote contrary to the Guidelines.

 

  B. Matters Requiring Case-by-Case Consideration

The Agent shall be directed to refer proxy proposals accompanied by its written analysis and voting recommendation to the Proxy Coordinator where the Guidelines have noted “case-by-case” consideration.

 

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Upon receipt of a referral from the Agent, the Proxy Coordinator may solicit additional research from the Agent, Investment Professional(s), as well as from any other source or service.

Except in cases in which the Proxy Group has previously provided the Proxy Coordinator with standing instructions to vote in accordance with the Agent’s recommendation, the Proxy Coordinator will forward the Agent’s analysis and recommendation and/or any research obtained from the Investment Professional(s), the Agent or any other source to the Proxy Group. The Proxy Group may consult with the Agent and/or Investment Professional(s), as it deems necessary.

The Proxy Coordinator shall use best efforts to convene the Proxy Group with respect to all matters requiring its consideration. In the event quorum requirements cannot be timely met in connection with a voting deadline, it shall be the policy of the Funds to vote in accordance with the Agent’s recommendation, unless the Agent’s recommendation is deemed to be conflicted as provided for under the Adviser Procedures, in which case no action shall be taken on such matter (i.e., a “Non-Vote”).

 

  1. Within-Guidelines Votes: Votes in Accordance with a Fund’s Guidelines and/or, where applicable, Agent Recommendation

In the event the Proxy Group, and where applicable, any Investment Professional participating in the voting process, recommend a vote Within Guidelines, the Proxy Group will instruct the Agent, through the Proxy Coordinator, to vote in this manner. Except as provided for herein, no Conflicts Report (as such term is defined for purposes of the Adviser Procedures) is required in connection with Within-Guidelines Votes.

 

  2. Non-Votes: Votes in Which No Action is Taken

The Proxy Group may recommend that a Fund refrain from voting under circumstances including, but not limited to, the following: (1) if the economic effect on shareholders’ interests or the value of the portfolio holding is indeterminable or insignificant, e.g., proxies in connection with fractional shares securities no longer held in the portfolio of an ING Fund or proxies being considered on behalf of a Fund that is no longer in existence; or (2) if the cost of voting a proxy outweighs the benefits, e.g., certain international proxies, particularly in cases in which share blocking practices may impose trading restrictions on the relevant portfolio security. In such instances, the Proxy Group may instruct the Agent, through the Proxy Coordinator, not to vote such proxy. The Proxy Group may provide the Proxy Coordinator with standing instructions on parameters that would dictate a Non-Vote without the Proxy Group’s review of a specific proxy. It is noted a Non-Vote determination would generally not be made in connection with voting rights received pursuant to class action participation; while a Fund may no longer hold the security, a continuing economic effect on shareholders’ interests is likely.

 

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Reasonable efforts shall be made to secure and vote all other proxies for the Funds, but, particularly in markets in which shareholders’ rights are limited, Non-Votes may also occur in connection with a Fund’s related inability to timely access ballots or other proxy information in connection with its portfolio securities.

Non-Votes may also result in certain cases in which the Agent’s recommendation has been deemed to be conflicted, as described in Section IV.B. above and Section V. below.

 

  3. Out-of-Guidelines Votes: Votes Contrary to Procedures and Guidelines, or Agent Recommendation, where applicable, Where No Recommendation is Provided by Agent, or Where Agent’s Recommendation is Conflicted

If the Proxy Group recommends that a Fund vote contrary to the Procedures and Guidelines, or the recommendation of the Agent, where applicable, if the Agent has made no recommendation on a matter requiring case-by-case consideration and the Procedures and Guidelines are silent, or the Agent’s recommendation on a matter requiring case-by-case consideration is deemed to be conflicted as provided for under the Adviser Procedures, the Proxy Coordinator will then request that all members of the Proxy Group, including any members not in attendance at the meeting at which the relevant proxy is being considered, and each Investment Professional participating in the voting process complete a Conflicts Report (as such term is defined for purposes of the Adviser Procedures), in substantially the form attached hereto as Exhibit 2. As provided for in the Adviser Procedures, the Proxy Coordinator shall be responsible for identifying to Counsel potential conflicts of interest with respect to the Agent.

If Counsel determines that a conflict of interest appears to exist with respect to the Agent, any member of the Proxy Group or the participating Investment Professional(s), the Proxy Coordinator will instruct the Agent to vote the proxy as directed by the Guidelines, or in accordance with the recommendation of the Agent, where applicable. Cases in which any member of the Proxy Group or a participating Investment Professional has failed to complete and return a Conflicts Report shall be treated as if a conflict of interest appears to exist, except that, upon Counsel’s finding that a conflict of interest exists with respect to one or more members of the Proxy Group or the Advisers generally, the remaining members of the Proxy Group shall not be required to complete a Conflicts Report in connection with the proxy.

If Counsel determines that each member of the Proxy Group has completed and returned a Conflicts Report and there does not appear to be a conflict of interest with respect to the Agent, any member of the Proxy Group or the participating Investment Professional(s), the Proxy Coordinator will instruct the Agent to vote the proxy as recommended by the Proxy Group.

 

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V. CONFLICTS OF INTEREST

In any case in which there appears to be a conflict of interest with respect to the Agent’s recommendation on a matter requiring case-by-case consideration, no action shall be taken on such matter (i.e., a “Non-Vote”). In any case in which a member of the Proxy Group has failed to complete and return a Conflicts Report when so required, or in which there appears to be a conflict of interest with respect to any member of the Proxy Group or any Investment Professional participating in the voting process, the Agent will be directed to vote Within Guidelines so that the Adviser shall have no opportunity to vote a Fund’s proxy in a situation in which the Adviser or certain other related parties may be deemed to have a conflict of interest.

 

VI. REPORTING AND RECORD RETENTION

 

  A. Reporting by the Funds

Annually in August, each Fund will post its proxy voting record or a link thereto for the prior one-year period ending on June 30th on the ING Funds website. The proxy voting record for each Fund will also be available in the EDGAR database on the SEC’s website.

 

  B. Reporting to the Boards

At each regularly scheduled meeting, the Board will receive a report from the Adviser’s Proxy Coordinator indicating each proxy proposal, or a summary of such proposals, (1) that was voted Out-of-Guidelines; and (2) for which the Proxy Group initially recommended a vote Out-of-Guidelines, but which was ultimately voted Within Guidelines in accordance with Section V hereof. Such report shall indicate the name of the issuer, the substance of the proposal, and the reasons for voting, or recommending, an Out-of-Guidelines Vote.

 

A-5


EXHIBIT 1

to the

ING Funds

Proxy Voting Procedures

ING VP BALANCED PORTFOLIO, INC.

ING STRATEGIC ALLOCATION PORTFOLIOS, INC.

ING GET FUNDS

ING VP BOND PORTFOLIO

ING VP MONEY MARKET PORTFOLIO

ING VARIABLE FUNDS

ING VARIABLE PORTFOLIOS, INC.

ING SERIES FUND, INC.

 

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EXHIBIT 2

to the

ING Funds

Proxy Voting Procedures

FORM OF CONFLICTS REPORT

 

A-7


FORM OF CONFLICT OF INTEREST REPORT – PROXY GROUP MEMBERS

PROXY VOTING OF THE ING FUNDS

 

Issuer:

  

Meeting Date:

  

1.

  

To your knowledge, do you, or anyone in your immediate household, have a personal relationship of any sort with the Issuer, its officers, directors, or employees, or might you, or anyone in your immediate household, be affected by the outcome of the proxy proposal? This does not include former business relationships with which you have had no communication for at least one year and have no expectation of future or ongoing communication.

Explanation:

           YES   NO

¨      ¨ 

2.

  

To your knowledge, (1) does any ING Entity have a Material Business Relationship with the Issuer or (2) is any ING Entity actively seeking to have a Material Business Relationship with the Issuer?

Explanation:

           YES  NO

¨      ¨ 

3.

  

Have you, or, to your knowledge, anyone else employed by an ING Entity, been contacted by any person or organization, including another ING employee or affiliate, with a recommendation or request that a proxy be voted for (or against) a particular proposal with respect to the Issuer? This includes communications from the Issuer or its Affiliates, from a shareholder, or from a commercial, union or any other special interest group, but would not include routine communications from proxy solicitors.

Explanation:

           YES  NO

¨      ¨ 

4.

  

Are you aware of any other information that might lead a reasonable person to conclude that an ING Entity appears to have a conflict of interest with respect to the proxy proposal?

Explanation:

           YES  NO

¨      ¨ 

Name:

   Date:   

Certification: As a member of the Proxy Group, I understand that I have a fiduciary duty to vote Fund proxies solely in the best interests of the Fund(s) and its (their) shareholders. I certify that my recommendation with respect to the vote on the proxy proposal relating to the Issuer noted above is based solely on this criterion.

Definitions:

Affiliate means (A) any company directly or indirectly owning, controlling, or holding with power to vote, 5% or more of the outstanding voting securities of the Issuer; (B) any company 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the issuer; (C) any company directly or indirectly controlling, controlled by, or under common control with, the Issuer; (D) any officer, director, partner, copartner, or employee of the Issuer; (E) if the Issuer is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (F) if the Issuer is an unincorporated investment company not having a board of directors, the depositor thereof.

ING Entity means all direct and indirect subsidiaries, joint ventures and business units of ING Groep N.V., including, but not limited to, ING Investments, LLC, ING Funds Distributor, LLC, ING Investment Management Co., ING Investment Management Americas, Directed Services, LLC and ING Financial Advisers, LLC.

Issuer includes the company with respect to which the proxy is solicited, and any other entity which you know to be affiliated therewith, such as a pension plan, joint venture, merger partner, subsidiary or parent, or company under common control, but does not include entities associated with the Issuer solely through the provision of consulting, advisory or other professional services.

Material Business Relationship means, but, subject to review by Counsel, may not be limited to, a relationship which you know to constitute (1) participation in a joint venture, (2) revenues to ING of $1 million or more per year, or (3) ownership by ING of more than 5% of the outstanding securities of the Issuer (“5% Issuer”) (except that an Issuer’s affiliation with a 5% Issuer shall not constitute a de facto conflict of interest for ING with the first Issuer).

** Please return to ING Funds Proxy Coordinator at 480-477-2786 or proxycoordinator@ingfunds.com **

 

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EXHIBIT 3

to the

ING Funds

Proxy Voting Procedures

ING INVESTMENTS, LLC,

ING INVESTMENT MANAGEMENT CO.

AND

DIRECTED SERVICES, LLC

PROXY VOTING PROCEDURES

 

I. INTRODUCTION

ING Investments, LLC, ING Investment Management Co. and Directed Services, LLC (each an “Adviser” and collectively, the “Advisers”) are the investment advisers for the registered investment companies and each series or portfolio thereof (each a “Fund” and collectively, the “Funds”) comprising the ING family of funds. As such, the Advisers have been delegated the authority to vote proxies with respect to securities for certain Funds over which they have day-to-day portfolio management responsibility.

The Advisers will abide by the proxy voting guidelines adopted by a Fund’s respective Board of Directors or Trustees (each a “Board” and collectively, the “Boards”) with regard to the voting of proxies unless otherwise provided in the proxy voting procedures adopted by a Fund’s Board.

In voting proxies, the Advisers are guided by general fiduciary principles. Each must act prudently, solely in the interest of the beneficial owners of the Funds it manages. The Advisers will not subordinate the interest of beneficial owners to unrelated objectives. Each Adviser will vote proxies in the manner that it believes will do the most to maximize shareholder value.

The following are the Proxy Voting Procedures of ING Investments, LLC, ING Investment Management Co. and Directed Services, LLC (the “Adviser Procedures”) with respect to the voting of proxies on behalf of their client Funds as approved by the respective Board of each Fund.

Unless otherwise noted, best efforts shall be used to vote proxies in all instances.

 

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II. ROLES AND RESPONSIBILITIES

 

  A. Proxy Coordinator

The Proxy Coordinator identified in Appendix 1 will assist in the coordination of the voting of each Fund’s proxies in accordance with the ING Funds Proxy Voting Procedures and Guidelines (the “Procedures” or “Guidelines” and collectively the “Procedures and Guidelines”). The Proxy Coordinator is authorized to direct the Agent to vote a Fund’s proxy in accordance with the Procedures and Guidelines unless the Proxy Coordinator receives a recommendation from an Investment Professional (as described below) to vote contrary to the Procedures and Guidelines. In such event, and in connection with proxy proposals requiring case-by-case consideration (except in cases in which the Proxy Group has previously provided the Proxy Coordinator with standing instructions to vote in accordance with the Agent’s recommendation), the Proxy Coordinator will call a meeting of the Proxy Group (as described below).

Responsibilities assigned herein to the Proxy Coordinator, or activities in support thereof, may be performed by such members of the Proxy Group or employees of the Advisers’ affiliates as are deemed appropriate by the Proxy Group.

Unless specified otherwise, information provided to the Proxy Coordinator in connection with duties of the parties described herein shall be deemed delivered to the Advisers.

 

  B. Agent

An independent proxy voting service (the “Agent”), as approved by the Board of each Fund, shall be engaged to assist in the voting of Fund proxies for publicly traded securities through the provision of vote analysis, implementation, recordkeeping and disclosure services. The Agent is ISS Governance Services, a unit of RiskMetrics Group, Inc. The Agent is responsible for coordinating with the Funds’ custodians to ensure that all proxy materials received by the custodians relating to the portfolio securities are processed in a timely fashion. To the extent applicable, the Agent is required to vote and/or refer all proxies in accordance with these Adviser Procedures. The Agent will retain a record of all proxy votes handled by the Agent. Such record must reflect all the information required to be disclosed in a Fund’s Form N-PX pursuant to Rule 30b1-4 under the Investment Company Act. In addition, the Agent is responsible for maintaining copies of all proxy statements received by issuers and to promptly provide such materials to the Adviser upon request.

The Agent shall be instructed to vote all proxies in accordance with a Fund’s Guidelines, except as otherwise instructed through the Proxy Coordinator by the Adviser’s Proxy Group, or a Fund’s Compliance Committee (“Committee”).

The Agent shall be instructed to obtain all proxies from the Funds’ custodians and to review each proxy proposal against the Guidelines. The Agent also shall be requested to call the Proxy Coordinator’s attention to specific proxy proposals that although governed by the Guidelines appear to involve unusual or controversial issues.

 

A-10


Subject to the oversight of the Advisers, the Agent shall establish and maintain adequate internal controls and policies in connection with the provision of proxy voting services voting to the Advisers, including methods to reasonably ensure that its analysis and recommendations are not influenced by conflict of interest, and shall disclose such controls and policies to the Advisers when and as provided for herein. Unless otherwise specified, references herein to recommendations of the Agent shall refer to those in which no conflict of interest has been identified.

 

  C. Proxy Group

The Adviser shall establish a Proxy Group (the “Group” or “Proxy Group”) which shall assist in the review of the Agent’s recommendations when a proxy voting issue is referred to the Group through the Proxy Coordinator. The members of the Proxy Group, which may include employees of the Advisers’ affiliates, are identified in Appendix 1, as may be amended from time at the Advisers’ discretion.

A minimum of four (4) members of the Proxy Group (or three (3) if one member of the quorum is either the Fund’s Chief Investment Risk Officer or Chief Financial Officer) shall constitute a quorum for purposes of taking action at any meeting of the Group. The vote of a simple majority of the members present and voting shall determine any matter submitted to a vote. Tie votes shall be broken by securing the vote of members not present at the meeting; provided, however, that the Proxy Coordinator shall ensure compliance with all applicable voting and conflict of interest procedures and shall use best efforts to secure votes from all or as many absent members as may reasonably be accomplished. The Proxy Group may meet in person or by telephone. The Proxy Group also may take action via electronic mail in lieu of a meeting, provided that each Group member has received a copy of any relevant electronic mail transmissions circulated by each other participating Group member prior to voting and provided that the Proxy Coordinator follows the directions of a majority of a quorum (as defined above) responding via electronic mail. For all votes taken in person or by telephone or teleconference, the vote shall be taken outside the presence of any person other than the members of the Proxy Group and such other persons whose attendance may be deemed appropriate by the Proxy Group from time to time in furtherance of its duties or the day-to-day administration of the Funds. In its discretion, the Proxy Group may provide the Proxy Coordinator with standing instructions to perform responsibilities assigned herein to the Proxy Group, or activities in support thereof, on its behalf, provided that such instructions do not contravene any requirements of these Adviser Procedures or a Fund’s Procedures and Guidelines.

A meeting of the Proxy Group will be held whenever (1) the Proxy Coordinator receives a recommendation from an Investment Professional to vote a Fund’s proxy contrary to the Procedures and Guidelines, or the recommendation of the Agent, where applicable, (2) the Agent has made no recommendation with respect to a vote on a proposal, or (3) a matter requires case-by-case consideration, including those in which the Agent’s recommendation is deemed to be conflicted as provided for under these Adviser Procedures, provided that, if the Proxy Group has previously provided the Proxy

 

A-11


Coordinator with standing instructions to vote in accordance with the Agent’s recommendation and no issue of conflict must be considered, the Proxy Coordinator may implement the instructions without calling a meeting of the Proxy Group.

For each proposal referred to the Proxy Group, it will review (1) the relevant Procedures and Guidelines, (2) the recommendation of the Agent, if any, (3) the recommendation of the Investment Professional(s), if any, and (4) any other resources that any member of the Proxy Group deems appropriate to aid in a determination of a recommendation.

If the Proxy Group recommends that a Fund vote in accordance with the Procedures and Guidelines, or the recommendation of the Agent, where applicable, it shall instruct the Proxy Coordinator to so advise the Agent.

If the Proxy Group recommends that a Fund vote contrary to the Procedures and Guidelines, or the recommendation of the Agent, where applicable, or if the Agent’s recommendation on a matter requiring case-by-case consideration is deemed to be conflicted, it shall follow the procedures for such voting as established by a Fund’s Board.

The Proxy Coordinator shall use best efforts to convene the Proxy Group with respect to all matters requiring its consideration. In the event quorum requirements cannot be timely met in connection with to a voting deadline, the Proxy Coordinator shall follow the procedures for such voting as established by a Fund’s Board.

 

  D. Investment Professionals

The Funds’ Advisers, sub-advisers and/or portfolio managers (each referred to herein as an “Investment Professional” and collectively, “Investment Professionals”) may submit, or be asked to submit, a recommendation to the Proxy Group regarding the voting of proxies related to the portfolio securities over which they have day-to-day portfolio management responsibility. The Investment Professionals may accompany their recommendation with any other research materials that they deem appropriate or with a request the vote be deemed “material” in the context of the portfolio(s) they manage, such that that lending activity on behalf of such portfolio(s) with respect to the relevant security should be reviewed by the Proxy Group and considered for recall and/or restriction. Input from the relevant sub-advisers and/or portfolio managers shall be given primary consideration in the Proxy Group’s determination of whether a given proxy vote is to be deemed material and the associated security accordingly restricted from lending. The determination that a vote is material in the context of a Fund’s portfolio shall not mean that such vote is considered material across all Funds voting that meeting. In order to recall or restrict shares timely for material voting purposes, the Proxy Group shall use best efforts to consider, and when deemed appropriate, to act upon, such requests timely, and requests to review lending activity in connection with a potentially material vote may be initiated by any relevant Investment Professional and submitted for the Proxy Group’s consideration at any time.

 

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III. VOTING PROCEDURES

 

  A. In all cases, the Adviser shall follow the voting procedures as set forth in the Procedures and Guidelines of the Fund on whose behalf the Adviser is exercising delegated authority to vote.

 

  B. Routine Matters

The Agent shall be instructed to submit a vote in accordance with the Guidelines where such Guidelines provide a clear “For”, “Against,” “Withhold” or “Abstain” on a proposal. However, the Agent shall be directed to refer any proxy proposal to the Proxy Coordinator for instructions as if it were a matter requiring case-by-case consideration under circumstances where the application of the Guidelines is unclear, it appears to involve unusual or controversial issues, or an Investment Professional recommends a vote contrary to the Guidelines.

 

  C. Matters Requiring Case-by-Case Consideration

The Agent shall be directed to refer proxy proposals accompanied by its written analysis and voting recommendation to the Proxy Coordinator where the Guidelines have noted “case-by-case” consideration.

Upon receipt of a referral from the Agent, the Proxy Coordinator may solicit additional research from the Agent, Investment Professional(s), as well as from any other source or service.

Except in cases in which the Proxy Group has previously provided the Proxy Coordinator with standing instructions to vote in accordance with the Agent’s recommendation, the Proxy Coordinator will forward the Agent’s analysis and recommendation and/or any research obtained from the Investment Professional(s), the Agent or any other source to the Proxy Group. The Proxy Group may consult with the Agent and/or Investment Professional(s), as it deems necessary.

 

  1. Within-Guidelines Votes: Votes in Accordance with a Fund’s Guidelines and/or, where applicable, Agent Recommendation

In the event the Proxy Group, and where applicable, any Investment Professional participating in the voting process, recommend a vote Within Guidelines, the Proxy Group will instruct the Agent, through the Proxy Coordinator, to vote in this manner. Except as provided for herein, no Conflicts Report (as such term is defined herein) is required in connection with Within-Guidelines Votes.

 

  2. Non-Votes: Votes in Which No Action is Taken

The Proxy Group may recommend that a Fund refrain from voting under circumstances including, but not limited to, the following: (1) if the economic effect on shareholders’ interests or the value of the portfolio holding is

 

A-13


indeterminable or insignificant, e.g., proxies in connection with fractional shares, securities no longer held in the portfolio of an ING Fund or proxies being considered on behalf of a Fund that is no longer in existence; or (2) if the cost of voting a proxy outweighs the benefits, e.g., certain international proxies, particularly in cases in which share blocking practices may impose trading restrictions on the relevant portfolio security. In such instances, the Proxy Group may instruct the Agent, through the Proxy Coordinator, not to vote such proxy. The Proxy Group may provide the Proxy Coordinator with standing instructions on parameters that would dictate a Non-Vote without the Proxy Group’s review of a specific proxy. It is noted a Non-Vote determination would generally not be made in connection with voting rights received pursuant to class action participation; while a Fund may no longer hold the security, a continuing economic effect on shareholders’ interests is likely.

Reasonable efforts shall be made to secure and vote all other proxies for the Funds, but, particularly in markets in which shareholders’ rights are limited, Non-Votes may also occur in connection with a Fund’s related inability to timely access ballots or other proxy information in connection with its portfolio securities.

Non-Votes may also result in certain cases in which the Agent’s recommendation has been deemed to be conflicted, as provided for in the Funds’ Procedures.

 

  3. Out-of-Guidelines Votes: Votes Contrary to Procedures and Guidelines, or Agent Recommendation, where applicable, Where No Recommendation is Provided by Agent, or Where Agent’s Recommendation is Conflicted

If the Proxy Group recommends that a Fund vote contrary to the Procedures and Guidelines, or the recommendation of the Agent, where applicable, if the Agent has made no recommendation on a matter requiring case-by-case consideration and the Procedures and Guidelines are silent, or the Agent’s recommendation on a matter requiring case-by-case consideration is deemed to be conflicted as provided for under these Adviser Procedures, the Proxy Coordinator will then implement the procedures for handling such votes as adopted by the Fund’s Board.

 

  4. The Proxy Coordinator will maintain a record of all proxy questions that have been referred to a Fund’s Compliance Committee, all applicable recommendations, analysis, research and Conflicts Reports.

 

IV. ASSESSMENT OF THE AGENT AND CONFLICTS OF INTEREST

In furtherance of the Advisers’ fiduciary duty to the Funds and their beneficial owners, the Advisers shall establish the following:

 

  A. Assessment of the Agent

 

A-14


The Advisers shall establish that the Agent (1) is independent from the Advisers, (2) has resources that indicate it can competently provide analysis of proxy issues and (3) can make recommendations in an impartial manner and in the best interests of the Funds and their beneficial owners. The Advisers shall utilize, and the Agent shall comply with, such methods for establishing the foregoing as the Advisers may deem reasonably appropriate and shall do not less than annually as well as prior to engaging the services of any new proxy service. The Agent shall also notify the Advisers in writing within fifteen (15) calendar days of any material change to information previously provided to an Adviser in connection with establishing the Agent’s independence, competence or impartiality.

Information provided in connection with assessment of the Agent shall be forwarded to a member of the mutual funds practice group of ING US Legal Services (“Counsel”) for review. Counsel shall review such information and advise the Proxy Coordinator as to whether a material concern exists and if so, determine the most appropriate course of action to eliminate such concern.

 

  B. Conflicts of Interest

The Advisers shall establish and maintain procedures to identify and address conflicts that may arise from time to time concerning the Agent. Upon the Advisers’ request, which shall be not less than annually, and within fifteen (15) calendar days of any material change to such information previously provided to an Adviser, the Agent shall provide the Advisers with such information as the Advisers deem reasonable and appropriate for use in determining material relationships of the Agent that may pose a conflict of interest with respect to the Agent’s proxy analysis or recommendations. The Proxy Coordinator shall forward all such information to Counsel for review. Counsel shall review such information and provide the Proxy Coordinator with a brief statement regarding whether or not a material conflict of interest is present. Matters as to which a material conflict of interest is deemed to be present shall be handled as provided in the Fund’s Procedures and Guidelines.

In connection with their participation in the voting process for portfolio securities, each member of the Proxy Group, and each Investment Professional participating in the voting process, must act solely in the best interests of the beneficial owners of the applicable Fund. The members of the Proxy Group may not subordinate the interests of the Fund’s beneficial owners to unrelated objectives, including taking steps to reasonably insulate the voting process from any conflict of interest that may exist in connection with the Agent’s services or utilization thereof.

For all matters for which the Proxy Group recommends an Out-of-Guidelines Vote, or for which a recommendation contrary to that of the Agent has been received from an Investment Professional and is to be utilized, the Proxy Coordinator will implement the procedures for handling such votes as adopted by the Fund’s Board, including completion of such Conflicts Reports as may be required under the Fund’s Procedures. Completed Conflicts Reports shall be provided to the Proxy Coordinator within two (2) business days. Such Conflicts Report should describe any known conflicts of either a business or personal nature, and set forth any contacts

 

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with respect to the referral item with non-investment personnel in its organization or with outside parties (except for routine communications from proxy solicitors). The Conflicts Report should also include written confirmation that any recommendation from an Investment Professional provided in connection with an Out-of-Guidelines Vote or under circumstances where a conflict of interest exists was made solely on the investment merits and without regard to any other consideration.

The Proxy Coordinator shall forward all Conflicts Reports to Counsel for review. Counsel shall review each report and provide the Proxy Coordinator with a brief statement regarding whether or not a material conflict of interest is present. Matters as to which a material conflict of interest is deemed to be present shall be handled as provided in the Fund’s Procedures and Guidelines.

 

V. REPORTING AND RECORD RETENTION

The Adviser shall maintain the records required by Rule 204-2(c)(2), as may be amended from time to time, including the following: (1) A copy of each proxy statement received regarding a Fund’s portfolio securities. Such proxy statements received from issuers are available either in the SEC’s EDGAR database or are kept by the Agent and are available upon request. (2) A record of each vote cast on behalf of a Fund. (3) A copy of any document created by the Adviser that was material to making a decision how to vote a proxy, or that memorializes the basis for that decision. (4) A copy of written requests for Fund proxy voting information and any written response thereto or to any oral request for information on how the Adviser voted proxies on behalf of a Fund. All proxy voting materials and supporting documentation will be retained for a minimum of six (6) years.

 

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APPENDIX 1

to the

Advisers’ Proxy Voting Procedures

Proxy Group for registered investment company clients of ING Investments, LLC, ING Investment Management Co. and Directed Services, LLC:

 

Name

 

Title or Affiliation

Stanley D. Vyner

  Chief Investment Risk Officer and Executive Vice President, ING Investments, LLC

Todd Modic

  Senior Vice President, ING Funds Services, LLC and ING Investments, LLC; and Chief Financial Officer of the ING Funds

Maria Anderson

  Vice President of Fund Compliance, ING Funds Services, LLC

Karla J. Bos

  Proxy Coordinator for the ING Funds and Assistant Vice President – Special Projects, ING Funds Services, LLC

Julius A. Drelick III, CFA

  Vice President, Platform Product Management and Project Management, ING Funds Services, LLC

Harley Eisner

  Vice President of Financial Analysis, ING Funds Services, LLC

Theresa K. Kelety, Esq.

  Counsel, ING Americas US Legal Services

Effective as of January 1, 2008

 

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EXHIBIT 4

to the

ING Funds

Proxy Voting Procedures

 

 

PROXY VOTING GUIDELINES OF THE ING FUNDS

 

 

 

 

I. INTRODUCTION

The following is a statement of the Proxy Voting Guidelines (“Guidelines”) that have been adopted by the respective Boards of Directors or Trustees of each Fund. Unless otherwise provided for herein, any defined term used herein shall have the meaning assigned to it in the Funds’ and Advisers’ Proxy Voting Procedures (the “Procedures”).

Proxies must be voted in the best interest of the Fund(s). The Guidelines summarize the Funds’ positions on various issues of concern to investors, and give a general indication of how Fund portfolio securities will be voted on proposals dealing with particular issues. The Guidelines are not exhaustive and do not include all potential voting issues.

The Adviser, in exercising its delegated authority, will abide by the Guidelines as outlined below with regard to the voting of proxies except as otherwise provided in the Procedures. In voting proxies, the Adviser is guided by general fiduciary principles. It must act prudently, solely in the interest of the beneficial owners of the Funds it manages. The Adviser will not subordinate the interest of beneficial owners to unrelated objectives. The Adviser will vote proxies in the manner that it believes will do the most to maximize shareholder value.

 

II. GUIDELINES

The following Guidelines are grouped according to the types of proposals generally presented to shareholders of U.S. issuers: Board of Directors, Proxy Contests, Auditors, Proxy Contest Defenses, Tender Offer Defenses, Miscellaneous, Capital Structure, Executive and Director Compensation, State of Incorporation, Mergers and Corporate Restructurings, Mutual Fund Proxies, and Social and Environmental Issues. An additional section addresses proposals most frequently found in global proxies.

General Policies

These Guidelines apply to securities of publicly traded companies and to those of privately held companies if publicly available disclosure permits such application. All matters for which such disclosure is not available shall be considered CASE-BY-CASE.

 

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It shall generally be the policy of the Funds to take no action on a proxy for which no Fund holds a position or otherwise maintains an economic interest in the relevant security at the time the vote is to be cast.

In all cases receiving CASE-BY-CASE consideration, including cases not specifically provided for under these Guidelines, unless otherwise provided for under these Guidelines, it shall generally be the policy of the Funds to vote in accordance with the recommendation provided by the Funds’ Agent, Institutional Shareholder Services, Inc.

Unless otherwise provided for herein, it shall generally be the policy of the Funds to vote in accordance with the Agent’s recommendation in cases in which such recommendation aligns with the recommendation of the relevant issuer’s management or management has made no recommendation. However, this policy shall not apply to CASE-BY-CASE proposals for which a contrary recommendation from the Investment Professional for the relevant Fund has been received and is to be utilized, provided that incorporation of any such recommendation shall be subject to the conflict of interest review process required under the Procedures.

Recommendations from the Investment Professionals, while not required under the Procedures, are likely to be considered with respect to proxies for private equity securities and/or proposals related to merger transactions/corporate restructurings, proxy contests, or unusual or controversial issues. Such input shall be given primary consideration with respect to CASE-BY-CASE proposals being considered on behalf of the relevant Fund.

Except as otherwise provided for herein, it shall generally be the policy of the Funds not to support proposals that would impose a negative impact on existing rights of the Funds to the extent that any positive impact would not be deemed sufficient to outweigh removal or diminution of such rights.

The foregoing policies may be overridden in any case as provided for in the Procedures. Similarly, the Procedures provide that proposals whose Guidelines prescribe a firm voting position may instead be considered on a CASE-BY-CASE basis in cases in which unusual or controversial circumstances so dictate.

Interpretation and application of these Guidelines is not intended to supersede any law, regulation, binding agreement or other legal requirement to which an issuer may be or become subject. No proposal shall be supported whose implementation would contravene such requirements.

 

PROPOSAL

  

Guidelines

THE BOARD OF DIRECTORS

  
Unless otherwise provided for herein, the Agent’s standards with respect to determining director independence shall apply. These standards generally provide that, to be considered completely independent, a director shall have no material connection to the company other than the board seat. Agreement with the Agent’s independence standards shall not dictate that a   

 

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PROPOSAL

  

Guidelines

Fund’s vote shall be cast according to the Agent’s corresponding recommendation. Where applicable and except as otherwise provided for herein, it shall be the policy of the Funds to lodge disagreement with an issuer’s policies or practices by withholding support from a proposal for the relevant policy or practice rather than the director nominee(s) to which the Agent assigns a correlation. Support shall be withheld from culpable nominees as appropriate, but if they are not standing for election (e.g., the board is classified), support shall generally not be withheld from others in their stead. Withholding support from a nominee shall be effected by withholding support from, or voting against, the candidate, pursuant to the applicable election standard.   
Voting on director nominees in uncontested elections not subject to specific policies described herein    Case-by-Case
Voting on independent outside director nominees if application of the policies described herein is likely to result in withholding support from the majority of independent outside directors sitting on a board, or removal of such directors would negatively impact majority board independence, unless the concerns identified are of such grave nature as to merit removal of the independent directors.    Do Not Withhold
Where applicable and except as otherwise provided for herein, support in connection with issues raised by the Agent if the nominee did not serve on the board or relevant committee during the majority of the time period relevant to the concerns cited by the Agent.    Do Not Withhold
Support from a nominee who, during both of the most recent two years, attended less than 75 percent of the board and committee meetings without a valid reason for the absences. Do not withhold support in connection with attendance issues for nominees who have served on the board for less than the two most recent years.    Withhold
Support from a nominee in connection with poison pill or anti-takeover considerations (e.g., furtherance of measures serving to disenfranchise shareholders or failure to remove restrictive pill features or ensure pill expiration or submission to shareholders for vote) in cases for which culpability for implementation or renewal of the pill in such form can be specifically attributed to the nominee    Withhold
Provided that a nominee served on the board during the relevant time period, support from a nominee who has failed to implement a shareholder proposal that was approved by (1) a majority of the issuer’s shares outstanding (most recent annual meeting) or (2) a majority of the votes cast for two consecutive years. However, in the case of shareholder proposals seeking shareholder ratification of a poison pill, generally do not withhold support from a nominee in such cases if the company has already implemented a policy that should reasonably prevent abusive use of the pill.    Withhold

 

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PROPOSAL

  

Guidelines

Voting on a nominee who has not acted upon negative votes (withhold or against, as applicable based on the issuer’s election standard) representing a majority of the votes cast at the previous annual meeting    Case-by-Case

•        Such nominees when (1) the issue relevant to the majority negative vote has been adequately addressed or cured or (2) the Funds’ Guidelines or voting record do not support the relevant issue.

   For
Support from inside directors or affiliated outside directors who sit on the audit committee    Withhold
Support from inside directors or affiliated outside directors who sit on the nominating or compensation committee, provided that such committee meets the applicable independence requirements of the relevant listing exchange.    Do Not Withhold
Support from inside directors or affiliated outside directors if the full board serves as the compensation or nominating committee OR has not created one or both committees, provided that the issuer is in compliance with all provisions of the listing exchange in connection with performance of relevant functions (e.g., performance of relevant functions by a majority of independent directors in lieu of the formation of a separate committee).    Do Not Withhold
Compensation Practices   
It shall generally be the policy of the Funds that matters of compensation are best determined by an independent board and compensation committee. Generally:   

(1)    Where applicable and except as otherwise provided for herein, support for nominees who did not serve on the compensation committee, or board, as applicable based on the Agent’s analysis, during the majority of the time period relevant to the concerns cited by the Agent.

   Do Not Withhold

(2)    In cases in which the Agent has identified a “pay for performance” disconnect or internal pay disparity, as such issues are defined by the Agent, support for director nominees.

   Do Not Withhold

(3)    If the Agent recommends withholding support from nominees in connection with executive compensation or perquisites related to retention or recruitment, including severance or termination arrangements, votes on such nominees if the issuer has provided adequate rationale and/or disclosure.

   For

(4)    If the Agent has raised issues of options backdating, consideration of members of the compensation committee, or board, as applicable, as well as company executives nominated as directors.

   Case-by-Case

(5)    Nominees if the Agent has raised other considerations regarding “poor compensation practices.

   Case-by-Case

 

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PROPOSAL

  

Guidelines

Accounting Practices   

(1)    Independent outside director nominees serving on the audit committee.

   For

(2)    Where applicable and except as otherwise provided for herein, support for nominees serving on the audit committee who did not serve on that committee during the majority of the time period relevant to the concerns cited by the Agent.

   Do Not Withhold

(3)    If the Agent has raised concerns regarding poor accounting practices, consideration of the company’s CEO and CFO, if nominated as directors, and nominees serving on the audit committee.

   Case-by-Case

(4)    If total non-audit fees exceed the total of audit fees, audit-related fees and tax compliance and preparation fees, the provisions under AUDITORS below shall apply.

  
Board Independence   
It shall generally be the policy of the Funds that a board should be majority independent. Inside director or affiliated outside director nominees in cases in which the full board is not majority independent.    Case-by-Case

(1)    Support from the fewest directors whose removal would achieve majority independence across the remaining board, except that support may be withheld from additional nominees whose relative level of independence cannot be differentiated.

   Withhold

(2)    Support from all non-independent nominees, including the founder, chairman or CEO, if the number required to achieve majority independence is equal to or greater than the number of non-independent nominees.

   Withhold

(3)    Except as provided above, support for non-independent nominees in the role of CEO, and when appropriate, founder or chairman. Determine support for other non-independent nominees based on the qualifications and contributions of the nominee as well as the Funds’ voting precedent for assessing relative independence to management, e.g., insiders holding senior executive positions are deemed less independent than affiliated outsiders with a transactional or advisory relationship to the company, and affiliated outsiders with a material transactional or advisory relationship are deemed less independent than those with lesser relationships.

   For

(4)    Non-voting directors (e.g., director emeritus or advisory director) shall be excluded from calculations with respect to majority board independence.

  

 

A-22


PROPOSAL

  

Guidelines

(5)    When conditions contributing to a lack of majority independence remain substantially similar to those in the previous year, it shall generally be the policy of the Funds to vote on nominees in a manner consistent with votes cast by the Fund(s) in the previous year.

  
Nominees without regard to “over-boarding” issues raised by the Agent, unless other concerns requiring case-by-case consideration have been raised    For
Consideration of nominees when the Agent recommends withholding support due to assessment that a nominee acted in bad faith or against shareholder interests in connection with a major transaction, such as a merger or acquisition, factoring in the merits of the nominee’s performance and rationale and disclosure provided    Case-by-Case
Performance Test for Directors   

•        Support on nominees failing the Agent’s performance test, which includes market-based and operating performance measures, provided that input from the Investment Professional(s) for a given Fund shall be given primary consideration with respect to such proposals.

   Case-by-Case
Proposals Regarding Board Composition or Board Service   

•        Except as otherwise provided for herein, shareholder proposals to impose new board structures or policies, including those requiring that the positions of Chairman and CEO be held separately, except support proposals in connection with a binding agreement or other legal requirement to which an issuer has or reasonably may expect to become subject, and consider such proposals on a case-by-case basis if the board is not majority independent or pervasive corporate governance concerns have been identified.

   Against

•        Management proposals to adopt or amend board structures or policies, except consider such proposals on a case-by-case basis if the board is not majority independent, pervasive corporate governance concerns have been identified, or the proposal may result in a material reduction in shareholders’ rights.

   For

•        Shareholder proposals seeking more than a simple majority of independent directors.

   Against

•        Shareholder proposals asking that board compensation and/or nominating committees be composed exclusively of independent directors.

   Against

•        Shareholder proposals to limit the number of public company boards on which a director may serve.

   Against

 

A-23


PROPOSAL

   Guidelines

•        Shareholder proposals that seek to redefine director independence or directors’ specific roles (e.g., responsibilities of the lead director)

   Against

•        Shareholder proposals requesting creation of additional board committees or offices, except as otherwise provided for herein

   Against

•        Shareholder proposals that seek creation of an audit, compensation or nominating committee of the board, unless the committee in question is already in existence or the issuer has availed itself of an applicable exemption of the listing exchange (e.g., performance of relevant functions by a majority of independent directors in lieu of the formation of a separate committee)

   For

•        Shareholder proposals to limit the tenure of outside directors

   Against

•        Shareholder proposals to impose a mandatory retirement age for outside directors unless the proposal seeks to relax existing standards, but generally do not vote against management proposals seeking to establish a retirement age for directors

   Against
Shareholder proposals requiring directors to own a minimum amount of company stock in order to qualify as a
director or to remain on the board
   Against
Director and Officer Indemnification and Liability Protection    Case-by-Case

•        Limit or eliminate entirely directors’ and officers’ liability for monetary damages for violating the duty of care

   Against

•        Proposals that would expand coverage beyond just legal expenses to acts, such as negligence, that are more serious violations of fiduciary obligation than mere carelessness

   Against

•        Proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if:

  

(1)    The director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company, and

 

(2)    Only if the director’s legal expenses would be covered

   For
PROXY CONTESTS     
Input from the Investment Professional(s) for a given Fund shall be given primary consideration with respect to proposals in connection with proxy contests being considered on behalf of that Fund.   
Voting for director nominees in contested elections    Case-by-Case
Reimburse proxy solicitation expenses    Case-by-Case

 

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PROPOSAL

  

Guidelines

AUDITORS     
Management proposals to ratify auditors, except in cases of poor accounting practices or high non-audit fees. Consider
management proposals to ratify auditors on a case-by-case basis if the Agent cites poor accounting practices.
   For
Non-Audit Services   

•        Approval of auditors when fees for non-audit services exceed 50 percent of total auditor fees as described below. Vote against management proposals to ratify auditors only in cases in which concerns exist that remuneration for the non-audit work is so lucrative as to taint the auditor’s independence. For purposes of this review, fees deemed to be reasonable, generally non-recurring, exceptions to the non-audit fee category (e.g., those related to an IPO) shall be excluded. If concerns exist or an issuer has a history of questionable accounting practices, also vote for shareholder proposals asking the issuer to present its auditor annually for ratification, but in other cases generally vote against.

   Case-by-Case
Auditor Independence   

•        Shareholder proposals asking companies to prohibit their auditors from engaging in non-audit services or capping the level of non-audit services

   Case-by-Case
Audit Firm Rotation   

•        Shareholder proposals asking for mandatory audit firm rotation

   Against
PROXY CONTEST DEFENSES   
Board Structure: Staggered vs. Annual Elections   

•        Proposals to classify or otherwise restrict shareholders’ ability to vote upon directors

   Against

•        Proposals to repeal classified boards and to elect all directors annually

   For
Shareholder Ability to Remove Directors   

•        Proposals that provide that directors may be removed only for cause

   Against

•        Proposals to restore shareholder ability to remove directors with or without cause

   For

•        Proposals that provide that only continuing directors may elect replacement to fill board vacancies

   Against

 

A-25


PROPOSAL

  

Guidelines

•        Proposals that permit shareholders to elect directors to fill board vacancies

   For
Cumulative Voting   

•        Management proposals to eliminate cumulative voting, when the company maintains a classified board of directors, except that such proposals may be supported irrespective of classification in furtherance of an issuer’s plan to adopt a majority voting standard

   Against

•        Shareholder proposals to restore or permit cumulative voting, in cases in which the company maintains a classified board of directors

   For
Time-Phased Voting   

•        Proposals to implement time-phased or other forms of voting that do not promote a one share, one vote standard

   Against

•        Proposals to eliminate such forms of voting

   For
Shareholder Ability to Call Special Meetings   

•        Proposals to restrict or prohibit shareholder ability to call special meetings

   Against

•        Proposals that remove restrictions on the right of shareholders to act independently of management

   For
Shareholder Ability to Act by Written Consent   

•        Proposals to restrict or prohibit shareholder ability to take action by written consent

   Against

•        Proposals to allow or make easier shareholder action by written consent

   For
Shareholder Ability to Alter the Size of the Board   

•        Proposals that seek to fix the size of the board or designate a range for its size

   For

•        Proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval

   Against
TENDER OFFER DEFENSES   
Poison Pills   

•        Proposals that ask a company to submit its poison pill for shareholder ratification, or to redeem its pill in lieu thereof, unless:

   For

(1)    shareholders have approved adoption of the plan,

 

(2)    a policy has already been implemented by the company that should reasonably prevent abusive use of the pill, or

   Against

 

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PROPOSAL

  

Guidelines

(3)    the board had determined that it was in the best interest of shareholders to adopt a pill without delay, provided that such plan would be put to shareholder vote within twelve months of adoption or expire, and if not approved by a majority of the votes cast, would immediately terminate

  

•        Shareholder proposals to redeem a company’s poison pill

   Case-by-Case

•        Management proposals to approve or ratify a poison pill or any plan that can reasonably be construed as an anti-takeover measure, with voting decisions generally based on the Agent’s approach to evaluating such proposals, considering factors such as rationale, trigger level and sunset provisions. Votes will generally be cast in a manner that seeks to preserve shareholder value and the right to consider a valid offer.

   Case-by-Case

•        Management proposals in connection with poison pills or anti-takeover activities that do not meet the Agent’s standards

   Against
Fair Price Provisions   

•        Proposals to adopt fair price provisions

   Case-by-Case

•        Fair price provisions with shareholder vote requirements greater than a majority of disinterested shares

   Against
Greenmail   

•        Proposals to adopt antigreenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments

   For

•        Antigreenmail proposals when they are bundled with other charter or bylaw amendments

   Case-by-Case
Pale Greenmail    Case-by-Case
Unequal Voting Rights   

•        Dual-class exchange offers

   Against

•        Dual-class recapitalizations

   Against
Supermajority Shareholder Vote Requirement to Amend the Charter or Bylaws   

•        Management proposals to require a supermajority shareholder to approve charter and bylaw amendments or other key proposals

   Against

•        Shareholder proposals to lower supermajority shareholder vote requirements for charter and bylaw amendments, unless the proposal also asks the issuer to mount a solicitation campaign or similar form of comprehensive commitment to obtain passage of the proposal

   For

 

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PROPOSAL

  

Guidelines

Supermajority Shareholder Vote Requirement to Approve Mergers     

•        Management proposals to require a supermajority shareholder vote to approve mergers and other significant business combinations

   Against

•        Shareholder proposals to lower supermajority shareholder vote requirements for mergers and other significant business combinations

   For
White Squire Replacements    For
MISCELLANEOUS     
Amendments to Corporate Documents   

•        Except to align with legislative or regulatory changes or when support is recommended by the Agent or Investment Professional (including, for example, as a condition to a major transaction such as a merger), proposals seeking to remove shareholder approval requirements or otherwise remove or diminish shareholder rights, e.g., by:

 

(1)    adding restrictive provisions,

 

(2)    removing article provisions or moving them to portions of the charter not requiring shareholder approval or

 

(3)    in corporate structures such as holding companies, removing provisions in an active subsidiary’s charter that provide voting rights to parent company shareholders. This policy would also generally apply to proposals seeking approval of corporate agreements or amendments to such agreements that the Agent recommends against because a similar reduction in shareholder rights is requested.

   Against

•        Proposals for charter amendments that may support board entrenchment or may be used as an anti-takeover device, particularly if the proposal is bundled or the board is classified

   Against

•        Proposals seeking charter or bylaw amendments to remove anti-takeover provisions

   For

•        Proposals seeking charter or bylaw amendments not addressed under these Guidelines

   Case-by-Case
Shareholder proposals to adopt confidential voting, use independent tabulators, and use independent inspectors of election    For
Management proposals to adopt confidential voting    For
Proxy Access   

•        Shareholder proposals seeking open access to management’s proxy material in order to nominate their own candidates to the board

   Case-by-Case

 

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PROPOSAL

  

Guidelines

Majority Voting Standard   
Except as otherwise provided for herein, it shall generally be the policy of the Funds to extend discretion to issuers to determine when it may be appropriate to adopt a majority voting standard.   

•        Management proposals, irrespective of whether the proposal contains a plurality carve-out for contested elections, and shareholder proposals also supported by management, seeking election of directors by the affirmative vote of the majority of votes cast in connection with a meeting of shareholders, including amendments to corporate documents or other actions in furtherance of such standard, and provided such standard when supported does not conflict with state law in which the company is incorporated

   For

•        Shareholder proposals not otherwise supported by management seeking adoption of the majority voting standard or related amendments or actions

   Against

•        Proposals seeking adoption of the majority voting standard for issuers with a history of board malfeasance or pervasive corporate governance concerns

   Case-by-Case
Bundled or “Conditioned” Proxy Proposals    Case-by-Case

•        Proposals containing one or more items not supported under these Guidelines if the Agent or an Investment Professional deems the negative impact, on balance, to outweigh any positive impact

   Against
Shareholder Advisory Committees    Case-by-Case
Reimburse Shareholder for Expenses Incurred   

•        Proposals to reimburse expenses incurred in connection with shareholder proposals, with voting decisions determined based on the Agent’s criteria, considering whether the related proposal received the requisite support for approval and was adopted for the benefit of the company and its shareholders

   Case-by-Case
Management proposals for Other Business, in connection with proxies of U.S. issuers, except in connection with a proxy contest in which a Fund is not voting in support of management    For
Proposals to lower quorum requirements for shareholder meetings below a majority of the shares outstanding    Case-by-Case
Advance Notice for Shareholder Proposals   

•        Management proposals related to advance notice period requirements, provided that the period requested is in accordance with applicable law and no material governance concerns have been identified in connection with the issuer

   For

 

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PROPOSAL

  

Guidelines

CAPITAL STRUCTURE     
Common Stock Authorization   

•        Proposals to increase the number of shares of common stock, taking into consideration whether intention exists to significantly dilute shareholders proportionate interest or to be unduly dilutive to shareholders’ proportionate interest. Except where otherwise indicated, the Agent’s proprietary approach, utilizing quantitative criteria (e.g., dilution, peer group comparison, company performance and history) to determine appropriate thresholds and, for requests marginally above such allowable threshold, a qualitative review (e.g., rationale and prudent historical usage), will generally be utilized in evaluating such proposals.

   Case-by-Case

•        Proposals to authorize capital increases within the Agent’s allowable thresholds or those in excess but meeting Agent’s qualitative standards. Consider on a case-by-case basis those requests failing the Agent’s review for proposals in connection with which a contrary recommendation from the Investment Professional(s) has been received and is to be utilized (e.g., in support of a merger or acquisition proposal).

   For

•        Proposals to authorize capital increases within the Agent’s allowable thresholds or those in excess but meeting Agent’s qualitative standards, unless the company states that the stock may be used as a takeover defense. In those cases, consider on a case-by-case basis if a contrary recommendation from the Investment Professional(s) has been received and is to be utilized.

   For

•        Proposals to authorize capital increases exceeding the Agent’s thresholds when a company’s shares are in danger of being delisted or if a company’s ability to continue to operate as a going concern is uncertain.

   For

•        Proposals to increase the number of authorized shares of a class of stock if the issuance which the increase is intended to service is not supported under these Guidelines.

   Against
Dual Class Capital Structures   

•        Proposals to increase the number of authorized shares of the class of stock that has superior voting rights in companies that have dual class capital structures, but consider case-by-case if (1) bundled with favorable proposal(s),(2) approval of such proposal(s) is a condition of such favorable proposal(s), or (3) part of a recapitalization for which support is recommended by the Agent or an Investment Professional

   Against

 

A-30


PROPOSAL

  

Guidelines

•        Management proposals to create or perpetuate dual class capital structures with unequal voting rights in cases in which the relevant Fund owns the class with inferior voting rights (except consider case-by-case if bundled with favorable proposal(s) or if approval of such proposal(s) is a condition of such favorable proposal(s)), but generally vote for such proposals if the relevant Fund owns the class with superior voting rights

   Against

•        Shareholder proposals to eliminate dual class capital structures with unequal voting rights in cases in which the relevant Fund owns the class with inferior voting rights, but generally vote against such proposals if the relevant Fund owns the class with superior voting rights, and consider case-by-case if (1) bundled with favorable proposal(s),(2) approval of such proposal(s) is a condition of such favorable proposal(s), or (3) part of a recapitalization for which support is recommended by the Agent or an Investment Professional

   For

•        Management proposals to eliminate dual class capital structures, generally voting with the Agent’s recommendation unless a contrary recommendation has been received from the Investment Professional for the relevant Fund and is to be utilized

   Case-by-Case
Stock Distributions: Splits and Dividends   

•        Management proposals to increase common share authorization for a stock split, provided that the increase in authorized shares falls within the Agent’s allowable thresholds, but consider on a case-by-case basis those proposals exceeding the Agent’s threshold for proposals in connection with which a contrary recommendation from the Investment Professional(s) has been received and is to be utilized

   For
Reverse Stock Splits   

•        Management proposals to implement a reverse stock split when the number of shares authorized for issue is proportionately reduced

   For

•        Proposals to implement a reverse stock split that do not proportionately reduce the number of shares of authorized for issue

   Case-by-Case

•        Requests that do not proportionately reduce the number of shares authorized and effectively exceed the Agent’s allowable threshold for capital increase if the Agent otherwise supports management’s rationale

   For

 

A-31


PROPOSAL

  

Guidelines

Preferred Stock   

•        Proposals authorizing the issuance of preferred stock or creation of new classes of preferred stock with unspecified voting, conversion, dividend distribution, and other rights (“blank check” preferred stock), but vote for if the Agent or an Investment Professional so recommends because the issuance is required to effect a merger or acquisition proposal

   Against

•        Proposals to issue or create blank check preferred stock in cases where the company expressly states that the stock will not be used as a takeover defense. Generally vote against in cases where the company expressly states that, or fails to disclose whether, the stock may be used as a takeover defense, but vote for if the Agent or an Investment Professional so recommends because the issuance is required to effect a merger or acquisition proposal

   For

•        Proposals to issue or authorize preferred stock in cases where the company specified the voting, dividend, conversion, and other rights of such stock and the terms of the preferred stock appear reasonable

   For

•        Proposals to increase the number of blank check preferred shares after analyzing the number of preferred shares available for issue given a company’s industry performance in terms of shareholder returns

   Case-by-Case
Shareholder proposals to have blank check preferred stock placements, other than those shares issued for the purpose of raising capital or making acquisitions in the normal course of business, submitted for shareholder ratification    For
Management Proposals to Reduce the Par Value of Common Stock    For
Shareholder Proposals that Seek Preemptive Rights or Management Proposals that Seek to Eliminate Them    Case-by-Case
Debt Restructuring    Case-by-Case
Share Repurchase Programs   

•        Proposals for open-market share repurchase plans in which all shareholders may participate on equal terms

   For

•        Proposals for programs with terms favoring selected, non-Fund parties

   Against

•        Proposals for share repurchase methods lacking adequate risk mitigation as assessed by the Agent

   Against
Management Proposals to Cancel Repurchased Shares    For

 

A-32


PROPOSAL

  

Guidelines

Tracking Stock    Case-by-Case
EXECUTIVE AND DIRECTOR COMPENSATION     
Votes with respect to compensation and employee benefit plans, except as otherwise provided for herein, with voting
decisions generally based on the Agent’s approach to evaluating such plans, which includes determination of costs and
comparison to an allowable cap.
   Case-by-Case

•        Generally vote in accordance with the Agent’s recommendations for equity-based plans with costs within such cap and against those with costs in excess of it, except that plans above the cap may be supported if so recommended by the Agent or Investment Professional as a condition to a major transaction such as a merger

  

•        Proposals seeking approval of plans for which the Agent suggests cost or dilution assessment may not be possible due to the method of disclosing shares allocated to the plan(s), except that such concerns arising in connection with evergreen provisions shall be considered case-by-case

   Against

•        Proposals for plans with costs within the cap if the primary considerations raised by the Agent pertain to matters that would not result in a negative vote under these Guidelines for the relevant board or committee member(s), or equity compensation burn rate or pay for performance as defined by the Agent

   For

•        Proposals for plans administered by potential grant recipients

   Against

•        Proposals to eliminate existing shareholder approval requirements for plan changes assessed as material by the Agent, unless the company has provided a reasonable rationale and/or adequate disclosure regarding the requested changes

   Against

•        Proposals for plans for which the Agent raises other considerations not otherwise provided for herein

   Case-by-Case
Restricted Stock or Stock Option Plans   

•        Proposals for restricted stock or stock option plans, or the issuance of shares in connection with such plans, considering factors such as level of disclosure and adequacy of vesting or performance requirements. Proposals for plans that do not meet the Agent’s criteria in this regard may be supported, but vote against if no disclosure is provided regarding either vesting or performance requirements.

   Case-by-Case
Management Proposals Seeking Approval to Reprice, Replace or Exchange Options, considering factors such as rationale, historic trading patterns, value-for-value exchange, vesting periods and replacement option terms    Case-by-Case

 

A-33


PROPOSAL

  

Guidelines

•        Proposals that meet the Agent’s criteria for acceptable repricing, replacement or exchange transactions, except that considerations raised by the Agent regarding burn rate or executive participation shall not be grounds for withholding support

   For

•        Management proposals seeking approval of compensation plans that:

 

(1)    permit or may permit (e.g., history of repricing and no express prohibition against future repricing) repricing of stock options, or any form or alternative to repricing, without shareholder approval,

 

(2)    include provisions that permit repricing, replacement or exchange transactions that do not meet the Agent’s criteria (except regarding burn rate or executive participation as noted above), or

 

(3)    give the board sole discretion to approve option repricing, replacement or exchange programs

   Against
Director Compensation, with voting decisions generally based on the Agent’s quantitative approach described above
as well as a review of qualitative features of the plan in cases in which costs exceed the Agent’s threshold. Do not
vote against
plans for which burn rate is the sole consideration raised by the Agent.
   Case-by-Case
Employee Stock Purchase Plans, and capital issuances in support of such plans, with voting decisions generally based
on the Agent’s approach to evaluating such plans, except that negative recommendations by the Agent due to
evergreen provisions will be reviewed case-by-case.
   Case-by-Case
OBRA-Related Compensation Proposals   
Votes on plans intended to qualify for favorable tax treatment under the provisions of Section 162(m) of OBRA should be evaluated irrespective of the Agent’s assessment of board independence, provided that the board meets the independence requirements of the relevant listing exchange.   

•        Amendments that Place a Cap on Annual Grants or Amend Administrative Features

   For

•        Amendments to Add Performance-Based Goals

   For

•        Amendments to Increase Shares and Retain Tax Deductions Under OBRA

   Case-by-Case

•        Approval of Cash or Cash-and-Stock Bonus Plan, with primary consideration given to management’s assessment that such plan meets the requirements for exemption of performance-based compensation

   For

 

A-34


PROPOSAL

  

Guidelines

Shareholder Proposals Regarding Executive and Director Pay

 

•        Regarding the remuneration of individuals other than senior executives and directors, proposals that seek to expand or restrict disclosure or require shareholder approval beyond regulatory requirements and market practice, or proposals seeking disclosure of executive and director compensation if providing it would be out of step with market practice and potentially disruptive to the business

   Against

•        Proposals that seek to impose new compensation structures or policies, such as “claw back” recoupments or advisory votes, unless evidence exists of abuse in historical compensation practices, and except as otherwise provided for herein

   Against
Severance and Termination Payments   

•        Shareholder proposals to have parachute arrangements submitted for shareholder ratification, (with “parachutes” defined as compensation arrangements related to termination that specify change-in-control events), and provided that the proposal does not include unduly restrictive or arbitrary provisions such as advance approval requirements

   For

•        Shareholder proposals to submit executive severance agreements for shareholder ratification, unless such proposals do not specify change-in-control events; Supplemental Executive Retirement Plans; or deferred executive compensation plans; or ratification is required by the listing exchange

   Against

•        All proposals to approve, ratify or cancel executive severance or termination arrangements, including those related to executive recruitment or retention, generally voting FOR such compensation arrangements if the issuer has provided adequate rationale and/or disclosure or support is recommended by the Agent or Investment Professional (e.g., as a condition to a major transaction such as a merger).

   Case-by-Case
Employee Stock Ownership Plans (ESOPs)    For
401(k) Employee Benefit Plans    For
Shareholder proposals requiring mandatory periods for officers and directors to hold company stock    Against
Advisory Votes on Executive Compensation   

•        Management proposals seeking ratification of the company’s compensation program, unless the program includes practices or features not supported under these Guidelines and the proposal receives a negative recommendation from the Agent

   For

 

A-35


PROPOSAL

  

Guidelines

•        Unless otherwise provided for herein, reports not receiving the Agent’s support due to concerns regarding severance/termination payments, incentive structures or vesting or performance criteria not otherwise supported by these Guidelines, generally voting for if the company has provided a reasonable rationale and/or adequate disclosure regarding the matter(s) under consideration

   Case-by-Case
STATE OF INCORPORATION     
Voting on State Takeover Statutes    Case-by-Case
Voting on Reincorporation Proposals, generally supporting management proposals not assessed by the Agent as a
potential takeover defense, but if so assessed, weighing management’s rationale for the change
   Case-by-Case

•        Management reincorporation proposals upon which another key proposal, such as a merger transaction, is contingent if the other key proposal is also supported

   For

•        Shareholder reincorporation proposals not also supported by the company

   Against

MERGERS AND CORPORATE RESTRUCTURINGS

  
Input from the Investment Professional(s) for a given Fund shall be given primary consideration with respect to proposals regarding business combinations, particularly those between otherwise unaffiliated parties, or other corporate restructurings being considered on behalf of that Fund.   
Proposals not typically supported under these Guidelines, if a key proposal, such as a merger transaction, is contingent upon its support and a vote for is accordingly recommended by the Agent or an Investment Professional    For
Mergers and Acquisitions    Case-by-Case
Corporate Restructuring, including demergers, minority squeezeouts, leveraged buyouts, spinoffs, liquidations, dispositions, divestitures and asset sales, with voting decisions generally based on the Agent’s approach to evaluating such proposals    Case-by-Case
Appraisal Rights    For
Changing Corporate Name    For
Adjournment of Meeting   

•        Proposals to adjourn a meeting when the primary proposal is also voted FOR

   For

 

A-36


PROPOSAL

   Guidelines
MUTUAL FUND PROXIES     
Election of Directors    Case-by-Case
Converting Closed-end Fund to Open-end Fund    Case-by-Case
Proxy Contests    Case-by-Case
Investment Advisory Agreements    Case-by-Case
Approving New Classes or Series of Shares    For
Preferred Stock Proposals    Case-by-Case
1940 Act Policies    Case-by-Case
Changing a Fundamental Restriction to Nonfundamental Restriction    Case-by-Case
Change Fundamental Investment Objective to Nonfundamental    Case-by-Case
Name Rule Proposals    Case-by-Case
Disposition of Assets/Termination/Liquidation    Case-by-Case
Changes to the Charter Document    Case-by-Case
Changing the Domicile of a Fund    Case-by-Case
Change in Fund’s Subclassification    Case-by-Case
Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder Approval    For
Distribution Agreements    Case-by-Case
Master-Feeder Structure    For
Mergers    Case-by-Case
Shareholder Proposals to Establish Director Ownership Requirement    Against
Reimburse Shareholder for Expenses Incurred    Case-by-Case
Terminate the Investment Advisor    Case-by-Case
SOCIAL AND ENVIRONMENTAL ISSUES     
Unless otherwise specified herein. While a wide variety of factors may go into each analysis, the overall principle guiding all vote recommendations focuses on how or whether the proposal will enhance the economic value of the company. Because a company’s board is likely to have access to relevant, non-public information regarding a company’s business, such proposals will generally be voted in a manner intended to give the board (rather than shareholders) latitude to set corporate policy and oversee management.    Case-by-Case

 

A-37


PROPOSAL

  

Guidelines

 

Shareholder proposals seeking to dictate corporate conduct, apply existing law, duplicate policies already substantially in place and/or addressed by the issuer or release information that would not help a shareholder evaluate an investment in the corporation as an economic matter, absent concurring support from the issuer, compelling evidence of abuse, significant public controversy or litigation, the issuer’s significant history of relevant violations; or activities not in step with market practice or regulatory requirements, or unless provided for otherwise herein.

 

•        Such proposals would generally include those seeking preparation of reports and/or implementation or additional disclosure of corporate policies related to issues such as:

 

•        consumer and public safety

 

•        environment and energy

 

•        labor standards and human rights

 

•        military business and political concerns

 

•        workplace diversity and non-discrimination

 

•        sustainability

 

•        social issues

 

•        vendor activities

 

•        economic risk, or

 

•        matters of science and engineering

   Against

 

A-38


PROPOSAL

   Guidelines

 

GLOBAL PROXIES

    

 

The foregoing Guidelines provided in connection with proxies of U.S. issuers shall also be applied to global proxies where applicable and not provided for otherwise herein. The following provide for differing regulatory and legal requirements, market practices and political and economic systems existing in various global markets.

 

  

Proposals in cases in which the Agent recommends voting against such proposal because relevant disclosure by the issuer, or the time provided for consideration of such disclosure, is inadequate, unless otherwise provided for herein. For purposes of these global Guidelines, “against” shall mean withholding of support for a proposal, resulting in submission of a vote of against or abstain, as appropriate for the given market and level of concern raised by the Agent regarding the issue or lack of disclosure or time provided.

 

   Against

Proposals for which the Agent recommends support of practices described herein as associated with a firm against vote:

 

(1)    as the issuer or market transitions to better practices (e.g., having committed to new regulations or governance codes) or

 

(2)    as the more favorable choice in cases in which shareholders must choose between alternate proposals

 

   Case-by-Case

Routine Management Proposals

 

   For

•        The opening of the shareholder meeting

 

   For

•        That the meeting has been convened under local regulatory requirements

 

   For

•        The presence of quorum

 

   For

•        The agenda for the shareholder meeting

 

   For

•        The election of the chair of the meeting

 

   For

•        The appointment of shareholders to co-sign the minutes of the meeting

 

   For

•        Regulatory filings (e.g., to effect approved share issuances)

 

   For

•        The designation of inspector or shareholder representative(s) of minutes of meeting

 

   For

•        The designation of two shareholders to approve and sign minutes of meeting

 

   For

•        The allowance of questions

 

   For

•        The publication of minutes

   For

 

A-39


PROPOSAL

   Guidelines

•        The closing of the shareholder meeting

   For

•        Other similar routine management proposals

   For

Discharge of Management/Supervisory Board Members

 

  

•        Management proposals seeking the discharge of management and supervisory board members, unless the Agent recommends against due to concern about the past actions of the company’s auditors or directors or legal action is being taken against the board by other shareholders, including when the proposal is bundled

   For

Director Elections

 

  

•        Votes on director nominees in uncontested elections not otherwise subject to policies described herein. Unless otherwise provided for herein, the Agent’s standards with respect to determining director independence shall apply. These standards generally provide that, to be considered completely independent, a director shall have no material connection to the company other than the board seat. Agreement with the Agent’s independence standards shall not dictate that a Fund’s vote shall be cast according to the Agent’s corresponding recommendation. Further, unless otherwise provided for herein, the application of Guidelines in connection with such standards shall apply only in cases in which the nominee’s level of independence can be ascertained based on available disclosure.

 

   Case-by-Case

•        Votes in contested elections, with primary consideration given to input from the Investment Professional(s) for a given Fund

 

   Case-by-Case

•        For issuers domiciled in Canada, Finland, France, Ireland, the Netherlands, Sweden or tax haven markets, non-independent directors in cases in which the full board serves as the audit committee, or the company does not have an audit committee

 

   Against

•        For issuers in all markets, including those in tax haven markets and those in Japan that have adopted the U.S.-style board-with-committees structure, non-independent nominees to the audit committee, or, if the slate of nominees is bundled, the slate. However, if the slate is bundled and audit committee membership is unclear or proposed as a separate agenda item, vote for if the Agent otherwise recommends support. For Canadian issuers, the Funds’ U.S. Guidelines with respect to audit committees shall apply.

 

   Against

•        In tax haven markets, non-independent directors in cases in which the full board serves as the compensation committee, or the company does not have a compensation committee

 

   Do Not Vote
Against

•        Non-independent directors who sit on the compensation or nominating committees, provided that such committees meet the applicable independence requirements of the relevant listing exchange

   Do Not Vote
Against

 

A-40


PROPOSAL

   Guidelines

•        In cases in which committee membership is unclear, non-independent director nominees if no other issues have been raised in connection with his/her nomination

   Case-by-Case

•        Individuals nominated as outside/non-executive directors who do not meet the Agent’s standard for independence, unless the slate of nominees is bundled, in which case the proposal(s) to elect board members shall be considered on a case-by-case basis

   Against

•        For issuers in tax haven markets, votes on bundled slates of nominees if the board is non-majority independent. For issuers in Canada and other global markets, generally follow the Agent’s standards for withholding support from bundled slates or non-independent directors (typically excluding the CEO), as applicable, if the board does not meet the Agent’s independence standards or the board’s independence cannot be ascertained due to inadequate disclosure.

   Against

•        Nominees or slates of nominees presented in a manner not aligned with market practice and/or legislation, including:

 

•        Bundled slates of nominees (e.g., France, Hong Kong or Spain);

 

•        Simultaneous reappointment of retiring directors (e.g., South Africa);

 

•        In markets with term lengths capped by legislation or market practice, nominees whose terms exceed the caps or are not disclosed (except that bundled slates with such lack of disclosure shall be considered on a case-by-case basis); or

 

•        Nominees whose names are not disclosed in advance of the meeting (e.g., Austria, Philippines, Hong Kong or South Africa) or far enough in advance relative to voting deadlines (e.g., Italy) to make an informed voting decision

 

•        Such criteria will not generally provide grounds for withholding support in countries in which they may be identified as best practice but such legislation or market practice is not yet applicable, unless specific governance shortfalls identified by the Agent dictate that less latitude should be extended to the issuer.

   Against

•        Nominees in connection with which a recommendation has been made that the position of chairman should be separate from that of CEO or otherwise required to be independent, unless other concerns requiring CASE-BY-CASE consideration have been raised

   For

•        In cases in which cumulative or net voting applies, generally vote with Agent’s recommendation to support nominees asserted by the issuer to be independent, even if independence disclosure or criteria fall short of Agent’s standards.

  

 

A-41


PROPOSAL

   Guidelines

•        Nominees for whom the Agent has raised concerns regarding scandals or internal controls

 

   Case-by-Case

•        Nominees or slates of nominees when (1) the scandal or shortfall in controls took place at the company, or an affiliate, for which the nominee is being considered; (2) culpability can be attributed to the nominee (e.g., nominee manages or audits relevant function), and (3) the nominee has been directly implicated, with resulting arrest and criminal charge or regulatory sanction.

 

   Against

•        For markets such as the tax havens, Australia, Canada, Hong Kong, Japan, Malaysia and South Africa (and for outside directors in South Korea) in which nominees’ attendance records are adequately disclosed, the Funds’ U.S. Guidelines with respect to director attendance shall apply. The same policy shall be applied regarding attendance by statutory auditors of Japanese companies.

 

  

•        Self-nominated director candidates, with voting decisions generally based on the Agent’s approach to evaluating such candidates

 

   Case-by-Case

•        Nominees for whom “over-boarding” issues have been raised by the Agent, unless other concerns require case-by-case consideration

 

   For

•        For companies incorporated in tax haven markets but which trade exclusively in the U.S., the Funds’ U.S. Guidelines with respect to director elections shall apply.

 

  
Board Structure   

•        Proposals to fix board size, but also support proposals seeking a board range if the range is reasonable in the context of market practice and anti-takeover considerations

 

   For

•        Proposed article amendments in this regard, with voting decisions generally based on the Agent’s approach to evaluating such proposals

 

   Case-by-Case

Director and Officer Indemnification and Liability Protection, voting in accordance with the Agent’s standards

 

   Case-by-Case

•        Proposals seeking approval of overly broad provisions

 

   Against

Independent Statutory Auditors

 

  

•        With respect to Japanese companies that have not adopted the U.S.-style board-with-committees structure, any nominee to the position of “independent statutory auditor” whom the Agent considers affiliated, e.g., if the nominee has worked a significant portion of his

   Against

 

A-42


PROPOSAL

   Guidelines

career for the company, its main bank or one of its top shareholders. Where shareholders are forced to vote on multiple nominees in a single resolution, vote against all nominees. In cases in which multiple slates of statutory auditors are presented, generally vote with the Agent’s recommendation, typically to support nominees deemed to be more independent and/or aligned with interests of minority shareholders.

 

  

•        Incumbent nominees at companies implicated in scandals or exhibiting poor internal controls

 

   Against
Key Committees   

•        Proposals that permit non-board members to serve on the audit, compensation or nominating committee, provided that bundled slates may be supported if no slate nominee serves on the relevant committee(s)

 

   Against

Director and Statutory Auditor Remuneration, with voting decisions generally based on the Agent’s approach to evaluating such proposals, while also factoring in the merits of the rationale and disclosure provided

 

   Case-by-Case

•        Proposals to approve the remuneration of directors and auditors as long as the amount is not excessive (e.g., significant increases should be supported by adequate rationale and disclosure) and there is no evidence of abuse. For Toronto Stock Exchange (TSX) issuers, the Agent’s limits with respect to equity awards to non-employee directors shall apply.

 

   For

Bonus Payments

 

  
With respect to Japanese companies:   

•        Retirement bonus proposals if all payments are for directors and auditors who have served as executives of the company

 

   For

•        Proposals if one or more payments are for non-executive, affiliated directors or statutory auditors; when one or more of the individuals to whom the grants are being proposed (1) has not served in an executive capacity for the company for at least three years or (2) has been designated by the company as an independent statutory auditor, regardless of the length of time he/she has served

 

   Against

•        In all markets, if issues have been raised regarding a scandal or internal controls, bonus proposals for retiring directors or continuing directors or auditors when culpability can be attributed to the nominee (e.g., if a Fund is also voting against the nominee under criteria herein regarding issues of scandal or internal controls), unless bundled with bonuses for a majority of retirees a Fund is voting for

   Against

 

A-43


PROPOSAL

   Guidelines

Stock Option Plans for Independent Internal Statutory Auditors

 

  

•        With respect to Japanese companies, proposals regarding option grants to independent internal statutory auditors, following the Agent’s guidelines

 

   Against

Compensation Plans

 

  

•        Votes with respect to compensation plans, and awards thereunder or capital issuances in support thereof, unless otherwise provided for herein, with voting decisions generally based on the Agent’s approach to evaluating such plans, considering quantitative or qualitative factors as appropriate for the market

 

   Case-by-Case

Amendment Procedures for Equity Compensation Plans and ESPPs

 

  

•        For TSX issuers, votes with respect to amendment procedures for security-based compensation arrangements and employee share purchase plans shall generally be cast in a manner designed to preserve shareholder approval rights, with voting decisions generally based on the Agent’s recommendation.

 

  

Shares Reserved for Equity Compensation Plans

 

  

•        Unless otherwise provided for herein, voting decisions shall generally be based on the Agent’s methodology, including classification of a company’s stage of development as growth or mature and the corresponding determination as to reasonability of the share requests.

 

  

•        Equity compensation plans (e.g., option, warrant, restricted stock or employee share purchase plans or participation in company offerings such as IPOs or private placements), the issuance of shares in connection with such plans, or related management proposals (e.g., article amendments) that:

 

   Against

•        Exceed the Agent’s recommended dilution limits, including cases in which the Agent suggests dilution cannot be fully assessed (e.g., due to inadequate disclosure);

 

•        Provide deep or near-term discounts to executives or directors, unless discounts to executives are deemed by the Agent to be adequately mitigated by other vesting requirements (e.g., Japan) or broad-based employee participation otherwise meeting Agent’s standards (e.g., France);

 

•        Are administered with discretion by potential grant recipients;

 

•        Provide for retirement benefits or equity incentive awards to outside directors if not in line with market practice (e.g., Australia, Belgium, The Netherlands);

  

 

A-44


PROPOSAL

   Guidelines

•        Permit financial assistance in the form of non-recourse (or essentially non-recourse) loans in connection with executive’s participation;

 

•        For matching share plans, do not meet the Agent’s standards, considering holding period, discounts, dilution, participation, purchase price and performance criteria;

 

•        Provide for vesting upon change in control if deemed by the Agent to evidence a conflict of interest or anti-takeover device;

 

•        Provide no disclosure regarding vesting or performance criteria (provided that proposals providing disclosure in one or both areas, without regard to Agent’s criteria for such disclosure, shall be supported provided they otherwise satisfy these Guidelines);

 

•        Permit post-employment vesting if deemed inappropriate by the Agent;

 

•        Allow plan administrators to make material amendments without shareholder approval unless adequate prior disclosure has been provided, with such voting decisions generally based on the Agent’s approach to evaluating such plans; or

 

•        Provide for retesting in connection with achievement of performance hurdles unless the Agent’s analysis indicates that:

 

(1)    Performance targets are adequately increased in proportion to the additional time available,

 

(2)    Retesting is de minimis as a percentage of overall compensation or is acceptable relative to market practice, or

 

(3)    The issuer has committed to cease retesting within a reasonable period of time.

 

  

•        Such plans/awards or the related issuance of shares that:

 

(1)    Do not suffer from the defects noted above; or

 

(2)    Otherwise meet the Agent’s tests if the considerations raised by the Agent pertain primarily to performance hurdles, contract or notice periods, discretionary bonuses, recruitment awards, retention incentives, non-compete payments or vesting upon change in control (other than addressed above), if the company has provided adequate disclosure and/or a reasonable rationale in support of the relevant plan/award, practice or participation. Unless otherwise provided for herein, market practice of the primary country in which a company does business, or in which an employee is serving, as applicable, shall supersede that of the issuer’s domicile.

   For

 

A-45


PROPOSAL

   Guidelines

•        Proposals in connection with such plans or the related issuance of shares in other instances

 

   Case-by-Case

Remuneration Reports

 

  

•        Reports that include compensation plans permitting:

 

(1)    Practices or features not supported under these Guidelines, including financial assistance under the conditions described above;

 

(2)    Retesting deemed by the Agent to be excessive relative to market practice (irrespective of the Agent’s support for the report as a whole);

 

(3)    Equity award valuation triggering a negative recommendation from the Agent; or

 

(4)    Provisions for retirement benefits or equity incentive awards to outside directors if not in line with market practice, except that reports will generally be voted for if contractual components are reasonably aligned with market practices on a going-forward basis (e.g., existing obligations related to retirement benefits or terms contrary to evolving standards would not preclude support for the report)

 

   Against

•        Reports receiving the Agent’s support and not triggering the concerns cited above

 

   For

•        Unless otherwise provided for herein, reports not receiving the Agent’s support due to concerns regarding severance/ termination payments, “leaver” status, incentive structures and vesting or performance criteria not otherwise supported by these Guidelines, generally voted for if the company has provided a reasonable rationale and/or adequate disclosure regarding the matter(s) under consideration. Reports with typically unsupported features may be voted for in cases in which the Agent recommends their initial support as the issuer or market transitions to better practices (e.g., having committed to new regulations or governance codes).

 

   Case-by-Case

Shareholder Proposals Regarding Executive and Director Pay

 

  

•        The Funds’ U.S. Guidelines with respect to such shareholder proposals shall apply.

 

  

General Share Issuances

 

  

•        Unless otherwise provided for herein, voting decisions shall generally be based on the Agent’s practice to determine support for general issuance requests (with or without preemptive rights), or related requests to repurchase and reissue shares, based on their

   For

 

A-46


PROPOSAL

   Guidelines

amount relative to currently issued capital as well as market-specific considerations (e.g., priority right protections in France, reasonable levels of dilution and discount in Hong Kong). Requests to reissue repurchased shares will not be supported unless a related general issuance request is also supported.

  

•        Specific issuance requests, based on the proposed use and the company’s rationale

 

   Case-by-Case

•        Proposals to issue shares (with or without preemptive rights), convertible bonds or warrants, to grant rights to acquire shares, or to amend the corporate charter relative to such issuances or grants in cases in which concerns have been identified by the Agent with respect to inadequate disclosure, inadequate restrictions on discounts, failure to meet the Agent’s standards for general issuance requests, or authority to refresh share issuance amounts without prior shareholder approval

 

   Against

Increases in Authorized Capital

 

  

•        Unless otherwise provided for herein, voting decisions should generally be based on the Agent’s approach.

  

•        Nonspecific proposals, including bundled proposals, to increase authorized capital up to 100 percent over the current authorization unless the increase would leave the company with less than 30 percent of its new authorization outstanding

 

   For

•        Specific proposals to increase authorized capital, unless:

 

   For

•        The specific purpose of the increase (such as a share-based acquisition or merger) does not meet these Guidelines for the purpose being proposed; or

 

•        The increase would leave the company with less than 30 percent of its new authorization outstanding after adjusting for all proposed issuances

 

   Against

•        Proposals to adopt unlimited capital authorizations

 

   Against

•        The Agent’s market-specific exceptions to the above parameters (e.g., The Netherlands, due to hybrid market controls) shall be applied.

 

  

Preferred Stock

 

  

•        Unless otherwise provided for herein, voting decisions should generally be based on the Agent’s approach.

 

  

•        Creation of a new class of preferred stock or issuances of preferred stock up to 50 percent of issued capital unless the terms of the preferred stock would adversely affect the rights of existing shareholders

   For

 

A-47


PROPOSAL

   Guidelines

•        Creation/issuance of convertible preferred stock as long as the maximum number of common shares that could be issued upon conversion meets the Agent’s guidelines on equity issuance requests

 

   For

•        Creation of (1) a new class of preference shares that would carry superior voting rights to the common shares or (2) blank check preferred stock unless the board states that the authorization will not be used to thwart a takeover bid

 

   Against

Poison Pills/Protective Preference Shares

 

  

•        Management proposals in connection with poison pills or anti-takeover activities (e.g., disclosure requirements or issuances, transfers or repurchases) that do not meet the Agent’s standards. Generally vote in accordance with Agent’s recommendation to withhold support from a nominee in connection with poison pill or anti-takeover considerations when culpability for the actions can be specifically attributed to the nominee.

 

   Against

•        Director remuneration in connection with poison pill considerations raised by the Agent.

 

   Do Not Vote

Against

Approval of Financial Statements and Director and Auditor Reports

 

  

•        Management proposals seeking approval of financial accounts and reports, unless there is concern about the company’s financial accounts and reporting, which, in the case of related party transactions, would include concerns raised by the Agent regarding consulting agreements with non-executive directors

 

   For

•        Unless otherwise provided for herein, reports not receiving the Agent’s support due to concerns regarding severance/termination payments not otherwise supported by these Guidelines, factoring in the merits of the rationale and disclosure provided

 

   Case-by-Case

•        Board-issued reports receiving a negative recommendation from the Agent due to concerns regarding independence of the board or the presence of non-independent directors on the audit committee

 

   Against

•        Such proposals in connection with remuneration practices otherwise supported under these Guidelines or as a means of expressing disapproval of broader practices of the issuer or its board

 

   Do Not Vote
Against

Remuneration of Auditors

 

  

•        Proposals to authorize the board to determine the remuneration of auditors, unless there is evidence of excessive compensation relative to the size and nature of the company

   For

 

A-48


PROPOSAL

   Guidelines

Indemnification of Auditors

 

   Against

Ratification of Auditors and Approval of Auditors’ Fees, generally following the Agent’s standards for proposals seeking auditor ratification or approval of auditors’ fees, except that for Canadian issuers, the Funds’ U.S. Guidelines with respect to auditors and auditor fees shall apply.

 

  

•        Such proposals for companies in the MSCI EAFE index, provided the level of audit fee disclosure meets the Agent’s standards

 

   For

•        In other cases, such proposals unless there are material concerns raised by the Agent about the auditor’s practices or independence

   For
Allocation of Income and Dividends   

•        Management proposals concerning allocation of income and the distribution of dividends, including adjustments to reserves to make capital available for such purposes. In the event management offers multiple dividend proposals on the same agenda, primary consideration shall be given to input from the relevant Investment Professional(s).

 

   For
Stock (Scrip) Dividend Alternatives    For

•        Stock (scrip) dividend proposals that do not allow for a cash option unless management demonstrates that the cash option is harmful to shareholder value

 

   Against
Debt Instruments   

•        Proposals authorizing excessive discretion, as assessed by the Agent, to a board to issue or set terms for debt instruments (e.g., commercial paper)

 

   Against

Debt Issuance Requests

 

When evaluating a debt issuance request, the issuing company’s present financial situation is examined. The main factor for analysis is the company’s current debt-to-equity ratio, or gearing level. A high gearing level may incline markets and financial analysts to downgrade the company’s bond rating, increasing its investment risk factor in the process. A gearing level up to 100 percent is considered acceptable.

   Case-by-Case

•        Debt issuances for companies when the gearing level is between zero and 100 percent

 

   For

•        Proposals where the issuance of debt will result in the gearing level being greater than 100 percent, or for which inadequate disclosure precludes calculation of the gearing level, comparing any such proposed debt issuance to industry and market standards, and with voting decisions generally based on the Agent’s approach to evaluating such requests

   Case-by-Case

 

A-49


PROPOSAL

   Guidelines

Financing Plans

 

  

•        Adoption of financing plans if they are in the best economic interests of shareholders

 

   For

Related Party Transactions

 

   Case-by-Case

•        Approval of such transactions unless the agreement requests a strategic move outside the company’s charter or contains unfavorable or high risk terms (e.g., deposits without security interest or guaranty)

 

   For

Approval of Donations

 

  

•        Proposals for which adequate, prior disclosure of amounts is not provided

 

   Against

•        Proposals seeking single- or multi-year authorities for which adequate, prior disclosure of amounts is provided

 

   For

Capitalization of Reserves

 

  

•        Proposals to capitalize the company’s reserves for bonus issues of shares or to increase the par value of shares

 

   For
Investment of Company Reserves, with primary consideration for such proposals given to input from the Investment Professional(s) for a given Fund    Case-by-Case
Amendments to Articles of Association    Case-by-Case

•        That are editorial in nature

 

   For

•        Where shareholder rights are protected

 

   For

•        Where there is negligible or positive impact on shareholder value

 

   For

•        For which management provides adequate reasons for the amendments or the Agent otherwise supports management’s position

 

   For

•        That seek to discontinue and/or delist a form of the issuer’s securities in cases in which the relevant Fund does not hold the affected security type

 

   For

•        Which the company is required to do so by law (if applicable)

 

   For

•        That remove or lower quorum requirements for board or shareholder meetings below levels recommended by the Agent

 

   Against

•        That reduce relevant disclosure to shareholders

   Against

 

A-50


PROPOSAL

   Guidelines

•        That seek to align the articles with provisions of another proposal not supported by these Guidelines

 

   Against

•        That are not supported under these Guidelines, are presented within a bundled proposal, and for which the Agent deems the negative impact, on balance, to outweigh any positive impact

 

   Against

•        That impose a negative impact on existing shareholder rights, including rights of the Funds, to the extent that any positive impact would not be deemed by the Agent to be sufficient to outweigh removal or diminution of such rights

 

   Against

•        With respect to article amendments for Japanese companies:

 

  

•        Management proposals to amend a company’s articles to expand its business lines

 

   For

•        Management proposals to amend a company’s articles to provide for an expansion or reduction in the size of the board, unless the expansion/ reduction is clearly disproportionate to the growth/decrease in the scale of the business or raises anti-takeover concerns

 

   For

•        If anti-takeover concerns exist, management proposals, including bundled proposals, to amend a company’s articles to authorize the Board to vary the annual meeting record date or to otherwise align them with provisions of a takeover defense

 

   Against

•        Management proposals regarding amendments to authorize share repurchases at the board’s discretion, unless there is little to no likelihood of a “creeping takeover” (major shareholder owns nearly enough shares to reach a critical control threshold) or constraints on liquidity (free float of shares is low), and where the company is trading at below book value or is facing a real likelihood of substantial share sales; or where this amendment is bundled with other amendments which are clearly in shareholders’ interest (generally following the Agent’s guidelines)

 

   Against

Other Business

 

  

•        Management proposals for Other Business in connection with global proxies, voting in accordance with the Agent’s market-specific recommendations

   Against

 

A-51


ING Variable Portfolios, Inc.

PART C: OTHER INFORMATION

 

ITEM 23. EXHIBITS

 

(a)    (1) Articles of Amendment and Restatement dated May 1, 2002 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (2) Articles Supplementary dated August 12, 2002 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (3) Articles Supplementary effective April 29, 2005 (Issuance of Class ADV shares) – Filed as an Exhibit to Post-Effective Amendment No. 25 to the Registrant’s Form N-1A Registration Statement on April 28, 2005 and incorporated herein by reference.

 

  (4) Articles of Amendment dated February 17, 2004 (name change from ING VP Technology Portfolio to ING VP Global Science and Technology Portfolio) – Filed as an Exhibit to Post-Effective Amendment No. 24 to the Registrant’s Registration Statement filed on Form N-1A on February 11, 2005 and incorporated herein by reference.

 

  (5) Articles of Amendment dated April 30, 2004 (redesignation of Class R shares to Class I shares) – Filed as an Exhibit to Post-Effective Amendment No. 23 to the Registrant’s Registration Statement filed on Form N-1A on February 11, 2005 and incorporated herein by reference.

 

  (6) Articles of Amendment dated November 29, 2007 (dissolve ING VP International Equity Portfolio) - Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

  (7) Articles Supplementary dated November 30, 2007 (establishment of new series - ING WisdomTreeSM Global High-Yielding Equity Index Portfolio) - Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

 

(8)

Articles Supplementary dated February 15, 2008 (establishment of new series – ING International Index Portfolio, ING Lehman Brother Aggregate Bond Index® Portfolio, ING MorningTMStar U.S. Growth Index Portfolio, ING RussellTM Large Cap Index Portfolio, ING RussellTM Mid Cap Index Portfolio, ING RussellTM Small Cap Index Portfolio) – Filed as an Exhibit to Post-Effective Amendment No. 37 to the Registrant’s Registration Statement filed on Form N-1A on February 29, 2008 and incorporated herein by reference.

 

  (9) Articles of Amendment dated March 7, 2008 (name change from ING Lehman Brothers Aggregate Bond Index Portfolio to ING Lehman Brothers U.S. Aggregate Bond Index Portfolio – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

C-1


(b) Second Amended and Restated Bylaws - Filed as an Exhibit to the Post –Effective Amendment No. 27 to the Registrant’s Registration Statement filed on Form N-1A on April 27, 2006 and incorporated herein by reference.

 

(c) Instruments Defining Rights of Holders - Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Registrant’s Form N-1A Registration Statement on June 4, 1996 and incorporated herein by reference.

 

(d)    (1) Amended Investment Management Agreement between the ING Investments, LLC and ING Variable Portfolios, Inc. dated April 1, 2004 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (i) Amended Schedule A dated January 16, 2008 to the Amended Investment Management Agreement between ING Variable Portfolios, Inc. and ING Investments, LLC - Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

  (ii) Amendment to the Amended Investment Management Agreement, dated April 1, 2004 between ING Investments, LLC and ING Variable Portfolios, Inc. effective January 1, 2007 – Filed as an Exhibit to Post Effective Amendment No. 29 to the Registrant’s Form N-1A Registration Statement on April 27, 2007 and incorporated herein by reference.

 

  (2) Sub-Advisory Agreement between ING Investments, LLC and Aeltus Investment Management, Inc. dated March 1, 2002 - Filed as an Exhibit to Post-Effective Amendment No. 18 to the Registrant’s Form N-1A Registration Statement on April 19, 2002 and incorporated herein by reference.

 

  (i) First Amendment to the Sub-Advisory Agreement between ING Investments, LLC and Aeltus Investment Management, Inc. effective as of July 29, 2003 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (ii) Second Amendment to Sub-Advisory Agreement, dated March 1, 2002 between ING Investments, LLC and ING Investment Management Co. (formerly Aeltus Investment Management, Inc.), effective January 1, 2007 – Filed as an Exhibit to Post Effective Amendment No. 29 to the Registrant’s Form N-1A Registration Statement on April 27, 2007 and incorporated herein by reference.

 

  (iii) Third Amendment to Sub-Advisory Agreement, dated March 1, 2002 between ING Investments, LLC and ING Investment Management Co., effective October 1, 2007 – Filed as an Exhibit to Post-Effective Amendment No. 37 to the Registrant’s Registration Statement filed on Form N-1A on February 29, 2008 and incorporated herein by reference.

 

C-2


  (iv) Amended Schedule A dated January 16, 2008 to the Sub-Advisory Agreement between ING Investments, LLC and ING Investment Management Co. (formerly Aeltus Investment Management, Inc.) – Filed as an Exhibit to Post-Effective Amendment No. 37 to the Registrant’s Registration Statement filed on Form N-1A on February 29, 2008 and incorporated herein by reference.

 

  (3) Sub-Advisory Agreement between ING Investments, LLC and BlackRock Advisors, LLC., dated February 2, 2007 – Filed as an Exhibit to Post Effective Amendment No. 29 to the Registrant’s Form N-1A Registration Statement on April 27, 2007 and incorporated herein by reference.

 

  (i) Amended Schedule A dated April 26, 2008 to the Sub-Advisory Agreement between ING Investments, LLC and BlackRock Advisors, LLC – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

  (4) Amended and Restated Expense Limitation Agreement between ING Investments, LLC and ING Variable Portfolios, Inc. dated April 1, 2005 – Filed as an Exhibit to Post-Effective Amendment No. 29 to the Registrant’s Registration Statement filed on Form N-1A on February 7, 2007 and incorporated herein by reference.

 

  (i) Amended Schedule A dated to the Amended and Restated Expense Limitation Agreement between ING Investments, LLC and ING Variable Portfolios, Inc. dated April 1, 2005—Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

(e) Distribution Agreement between Aetna Variable Portfolios, Inc. and ING Pilgrim Securities, Inc. dated January 1, 2002—Filed as an Exhibit to Post-Effective Amendment No. 18 to the Registrant’s Form N-1A Registration Statement on April 19, 2002 and incorporated herein by reference.

 

  (i) Amended Schedule of Approvals dated January 16, 2008 to the Distribution Agreement between ING Variable Portfolios, Inc. and ING Funds Distributor, LLC – Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

  (ii) Substitution Agreement to Distribution Agreement between Aetna Variable Portfolios, Inc. and ING Pilgrim Securities, Inc. dated October 8, 2002 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

(f) Directors’ Deferred Compensation Plan effective September 24, 1997—Filed as an Exhibit to Post-Effective Amendment No. 3 to the Registrant’s Form N-1A Registration Statement on February 26, 1998 and incorporated herein by reference.

 

(g)    (1) Custody Agreement with The Bank of New York dated January 6, 2003 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

C-3


  (i) Amended Exhibit A effective April 28, 2008 to the Custody Agreement with The Bank of New York Mellon Corporation – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

  (2) Foreign Custody Manager Agreement with the Bank of New York dated January 6, 2003—Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (i) Amended Exhibit A effective April 28, 2008 to the Foreign Custody Manager Agreement with The Bank of New York Mellon Corporation – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

  (ii) Amended Schedule 2 effective March 27, 2008 to the Foreign Custody Manager Agreement with the Bank of New York Mellon Corporation – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

  (3) Securities Lending Agreement and Guaranty with The Bank of New York dated August 7, 2003 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (i) Amended Exhibit A effective April 28, 2008 to the Securities Lending Agreement and Guaranty with The Bank of New York Mellon Corporation – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

(h)    (1) Administration Agreement between ING Funds Services, LLC and Aetna Variable Portfolios, Inc. dated April 1, 2002 - Filed as an Exhibit to Post-Effective Amendment No. 18 to the Registrant’s Form N-1A Registration Statement on April 19, 2002 and incorporated herein by reference.

 

  (i) Amended Schedule A dated January 16, 2008 to the Administration Agreement between ING Variable Portfolios, Inc. and ING Funds Services, LLC – Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

  (2) License Agreement between Aetna Services, Inc. and Aetna Variable Portfolios, Inc. dated June 19, 1996—Filed as an Exhibit to Post-Effective Amendment No. 1 to the Registrant’s Form N-1A Registration Statement on March 7, 1997 and incorporated herein by reference.

 

  (3) Fund Accounting Agreement with The Bank of New York dated January 6, 2003 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

C-4


  (i) Amended Exhibit A effective April 28, 2008 to the Fund Accounting Agreement with The Bank of New York Mellon Corporation – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

  (4) Allocation Agreement (Investment Company Blanket Bond) dated September 24, 2003 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (i) Amended Schedule A to the Allocation Agreement, dated December 2005 – Filed as an Exhibit to Post Effective Amendment No. 29 to the Registrant’s Form N-1A Registration Statement on April 27, 2007 and incorporated herein by reference.

 

  (5) Allocation Agreement (Directors and Officers Liability) dated September 26, 2002 – Filed as an Exhibit to Post Effective Amendment No. 29 to the Registrant’s Form N-1A Registration Statement on April 27, 2007 and incorporated herein by reference.

 

  (i) Amended Schedule A to the Allocation Agreement (Directors and Officers Liability) dated April 2007 – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

  (6) Agency Agreement with DST Systems, Inc. dated July 7, 2001 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

 

(i)

Amended Exhibit A effective January 16, 2008, (ING WisdomTreeSM Global High-Yielding Equity Index Portfolio); March 4, 2008, (ING International Index Portfolio, ING Lehman Brothers Aggregate Bond Index® Portfolio, ING Russell Large Cap Index Portfolio, ING Russell Mid Cap Index Portfolio and ING Russell Small Cap Index Portfolio) and April 28, 2008, (ING Morningstar U.S. Growth Index Portfolio), to the Agency Agreement with DST Systems, Inc. dated July 7, 2001—Filed as an Exhibit to Post-Effective Amendment No. 37 to the Registrant’s Registration Statement filed on Form N-1A on February 29, 2008. as an Exhibit to Post-Effective Amendment No. 37 to the Registrant’s Registration Statement filed on Form N-1A on February 29, 2008 and incorporated herein by reference.

 

  (7) Participation Agreement between ING Variable Portfolios, Inc., Connecticut General Life Insurance Company and ING Funds Distributor, Inc. dated August 15, 2002 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (8) Participation Agreement between ING Variable Portfolios, Inc., ReliaStar Life Insurance Company and ING Funds Distributor, Inc. dated May 1, 2002 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (i)

Amendment to Participation Agreement between ING Variable Portfolios, Inc., ReliaStar Life Insurance Company and ING Funds Distributor, Inc. executed

 

C-5


 

October 15, 2002 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (ii) Amendment to Participation Agreement between ING Variable Portfolios, Inc., ReliaStar Life Insurance Company and ING Funds Distributor, Inc. executed September 22, 2003 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (9) Participation Agreement between ING Variable Portfolios, Inc., ReliaStar Life Insurance Company of New York and ING Funds Distributor, Inc. dated May 1, 2002 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (10) Participation Agreement between ING Variable Portfolios, Inc., Security Life of Denver Insurance Company and ING Funds Distributor, Inc. dated May 1, 2001 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (11) Participation Agreement between ING Variable Portfolios, Inc., Southland Life Insurance Company and ING Funds Distributor, Inc. dated May 1, 2001 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (12) Fund Participation Agreement between Aetna Insurance Company of America, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. dated May 1, 1998 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (i) Amendment No. 1 to Fund Participation Agreement between Aetna Insurance Company of America, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed May 1, 2000 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (ii) Amendment No. 2 to Fund Participation Agreement between Aetna Insurance Company of America, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed June 26, 2001 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (13)

Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable

 

C-6


 

Portfolios, Inc. and Aeltus Investment Management, Inc. dated May 1, 1998 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (i) Amendment to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed November 9, 1998 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (ii) Amendment to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed June 1, 1999 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (iii) Second Amendment to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed December 31, 1999 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (iv) Third Amendment to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed February 11, 2000 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (v) Fourth Amendment to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed May 1, 2000 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (vi) Fifth Amendment to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed February 27, 2001 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

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  (vii) Sixth Amendment to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. executed June 19, 2001 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (14) Fund Participation Agreement between Golden American Life Insurance Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Aeltus Investment Management, Inc. dated July 16, 2001 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

(i)    (1) Opinion and consent of counsel regarding the legality of the securities being registered with regard to Adviser Class shares – Filed as an Exhibit to Post-Effective Amendment No. 25 to the Registrant’s Form N-1A Registration Statement on April 28, 2005 and incorporated herein by reference.

 

 

(2)

Opinion and consent of counsel regarding the legality of the securities being registered with regard to WisdomTreesm Global High-Yielding Equity Index Portfolio – Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

 

(3)

Opinion of counsel regarding the legality of the securities being registered with regard to ING International Index Portfolio, ING Lehman Brothers Aggregate Bond Index® Portfolio, ING Russell Large Cap Index Portfolio, ING Russell Mid Cap Index Portfolio and ING Russell Small Cap Index Portfolio—Filed as an Exhibit to Post-Effective Amendment No. 37 to the Registrant’s Registration Statement filed on Form N-1A on February 29, 2008 and incorporated herein by reference.

 

 

(4)

Opinion of Counsel regarding the legality of the securities being registered with regard to ING Morningstar® U.S. GrowthSM Index Portfolio – Filed as an Exhibit to Post-Effective Amendment No. 40 to the Registrant’s Registration Statement filed on Form N-1A on April 28, 2008 and incorporated herein by reference.

 

 

(5)

Opinion of Counsel regarding the legality of the securities being registered with regard to ING Global Equity Option Portfolio and ING RussellTM Global Large Cap Index 85% Portfolio – to be filed by Post-Effective Amendment.

 

(j)    (1) Consent of Goodwin Procter LLP – to be filed by Post-Effective Amendment.

 

  (2) Consent of the Independent Registered Public Accounting Firm – to be filed by Post-Effective Amendment.

 

(k) N/A

 

(l) Agreement re: Initial Contribution to Working Capital for Value VP, Growth VP, Large Cap VP, MidCap VP, SmallCap VP and International VP and Small Company VP - Filed as an Exhibit to Post-Effective Amendment No. 1 to the Registrant’s Form N-1A Registration Statement on March 7, 1997 and incorporated herein by reference.

 

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(m)    (1) Amended and Restated Shareholder Services and Distribution Plan for Class S shares effective January 1, 2008 - Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

 

(i)

Waiver of Fee Payable under the Amended and Restated Shareholder Services and Distribution Plan for the Class S Shares — ING WisdomTreeSM Global High-Yielding Equity Index Portfolio – Filed as an Exhibit to Post-Effective Amendment No. 39 to the Registrant’s Registration Statement filed on Form N-1A on April 25, 2008 and incorporated herein by reference.

 

  (2) Shareholder Service and Distribution Plan for Class A shares effective April 29, 2005 – Filed as an exhibit to Post-Effective Amendment No. 25 to the Registrant’s Registration Statement filed on Form N-1A on April 28, 2005 and incorporated herein by reference.

 

  (i) Amended Schedule A dated December 19, 2007 to the Shareholder Service and Distribution Plan for Class A shares effective April 29, 2005 - Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant’s Registration Statement filed on Form N-1A on January 25, 2008 and incorporated herein by reference.

 

(n) Amended and restated Multi-Class Plan pursuant to Rule 18f-3 for ING Variable Portfolios, Inc., effective January 8, 2008 – Filed as an Exhibit to Post Effective Amendment No. 34 to the Registrant’s Form N-1A Registration Statement on January 25, 2008 and incorporated herein by reference.

 

  (i) Amended Schedule A to the Amended and Restated Multi-Class Plan pursuant to Rule 18f-3 for ING Variable Portfolios, Inc. effective January 1, 2008 - Filed as an Exhibit to Post-Effective Amendment No. 37 to the Registrant’s Registration Statement filed on Form N-1A on February 29, 2008 and incorporated herein by reference.

 

(o) N/A

 

(p)    (1) ING Funds and Advisers Code of Ethics effective May 1, 2004 – Filed as an Exhibit to Post Effective Amendment No. 22 to the Registrant’s Form N-1A Registration Statement on April 30, 2004 and incorporated herein by reference.

 

  (2) ING Investment Management (US) Code of Ethics dated August 2006 – Filed as an Exhibit to Post-Effective Amendment No. 28 to the Registrant’s Registration Statement filed on Form N-1A on February 7, 2007 and incorporated herein by reference.

 

  (3) BlackRock Advisors, Inc. (“BlackRock”) Code of Ethics dated February 1, 2005– Filed as an exhibit to Post-Effective Amendment No. 25 to the Registrant’s Registration Statement filed on Form N-1A on April 28, 2005 and incorporated herein by reference.

 

  (4) The Asset Management Group of Lehman Brothers Investment Management Division Code of Ethics dated January, 2008 – Filed as an Exhibit to Post-Effective Amendment No. 37 to the Registrant’s Registration Statement filed on Form N-1A on February 29, 2008 and incorporated herein by reference.

 

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ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

ING Variable Portfolios, Inc. is a Maryland corporation for which separate financial statements are filed. As of April 14, 2008, no affiliated insurance companies owned more then 25% of the Registrant’s outstanding voting securities of ING Variable Portfolios other than as listed below:

ILIAC

 

Portfolio

   % of Portfolio  

ING Opportunistic Large Cap Growth Portfolio

   87.22 %

ING VP Small Company Portfolio

   54.31 %

ING Opportunistic Large Cap Value Portfolio

   82.70 %

ING BlackRock Global Science and Technology Portfolio

   97.67 %

ING VP Index Plus LargeCap Portfolio

   42.68 %

ING VP Index Plus MidCap Portfolio

   56.10 %

ING VP Index Plus SmallCap Portfolio

   35.98 %

ILIAC is an indirect wholly-owned subsidiaries of ING Groep N.V.

As ING Global Equity Option Portfolio and ING RussellTM Global Large Cap Index 85% Portfolio had not commenced operations as of June 2, 2008, no affiliated insurance companies owned more then 25% of the Registrant’s outstanding voting securities of the Portfolios.

A list of all persons directly or indirectly under common control with ING Variable Portfolios, Inc. is incorporated herein by reference to Item 26 of the Post-Effective Amendment No. 18 to the Registration Statement on Form N-4 (File No. 33-81216), as filed with the Securities and Exchange Commission on April 9, 2001.

 

ITEM 25. INDEMNIFICATION

Article 10, Section (iv) of ING Variable Portfolios, Inc.’s Articles of Incorporation, as amended, provides the following:

 

(iv) The Corporation shall indemnify its officers, Directors, employees and agents, and any person who serves at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise as follows:

 

  (a) Every person who is or has been a Director, officer, employee or agent of the Corporation, and persons who serve at the Corporation’s request as director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any debt, claim, action, demand, suit, proceeding, judgment, decree, liability or obligation of any kind in which he becomes involved as a party or otherwise by virtue of his being or having been a Director, officer, employee or agent of the Corporation or of another corporation, partnership, joint venture, trust or other enterprise at the request of the Corporation, and against amounts paid or incurred by him in the settlement thereof.

 

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  (b) The words “claim,” “action,” “suit” or “proceeding” shall apply to all claims, actions, suits or proceedings (civil, criminal, administrative, legislative, investigative or other, including appeals), actual or threatened, and the words “liability” and “expenses” shall include, without limitation, attorneys’ fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.

 

  (c) No indemnification shall be provided hereunder to a Director, officer, employee or agent against any liability to the Corporation or its shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office.

 

  (d) The rights of indemnification provided herein may be insured against by policies maintained by the Corporation, shall be several, shall not affect any other rights to which any Director, officer, employee or agent may now or hereafter be entitled, shall continue as to a person who has ceased to be such Director, officer, employee, or agent, and shall inure to the benefit of the heirs, executors and administrators of such a person.

 

  (e) In the absence of a final decision on the merits by a court or other body before which such proceeding was brought, an indemnification payment will not be made, except as provided in subparagraph (f) of this paragraph (iv), unless in the absence of such a decision, a reasonable determination based upon a factual review has been made:

 

  (1) By a majority vote of a quorum of non-party Directors who are “not interested persons” of the Corporation (as defined in the 1940 Act); or

 

  (2) By independent legal counsel in a written opinion that the indemnitee was not liable for an act of willful misfeasance, bad faith, gross negligence, or reckless disregard of duties.

 

  (f) The Corporation further undertakes that advancement of expenses incurred in the defense of a proceeding (upon undertaking for repayment unless it is ultimately determined that indemnification is appropriate) against an officer, Director or controlling person of the Corporation will not be made absent the fulfillment of at least one of the following conditions:

 

  (1) The indemnity provides security for his undertaking;

 

  (2) The Corporation is insured against losses arising by reason of any lawful advances; or

 

  (3) A majority of a quorum of non-party Directors who are “not interested” persons or independent legal counsel in a written opinion makes a factual determination that there is a reason to believe the indemnity will be entitled to indemnification.

 

  (g) Neither the amendment nor repeal of this paragraph (iv) of Article 9, nor the adoption of any amendment of any other provision of the Charter or Bylaws of the Corporation inconsistent with this paragraph (iv) of Article 10 shall apply to or affect in any respect the applicability of the preceding provisions with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.

 

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In addition, ING Variable Portfolios, Inc.’s officers and Directors are currently covered under a directors and officers errors and omissions liability insurance policy issued by ICI Mutual Insurance Company, which expires October 1, 2009.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “1933 Act”) may be permitted to Directors, officers and controlling persons of ING Variable Portfolios, Inc. pursuant to the foregoing provisions or otherwise, ING Variable Portfolios, Inc. has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by ING Variable Portfolios, Inc. of expenses incurred or paid by a Trustee, officer or controlling person of ING Variable Portfolios, Inc. in connection with the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person in connection with the shares being registered, ING Variable Portfolios, Inc. 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 be governed by final adjudication of such issue.

 

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE ADVISER

Information as to the Trustees and officers of the Adviser, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers of the Adviser in the last two years, is included in its application for registration as an investment adviser on Form ADV (File No. 801-48282) filed under the Investment Advisers Act of 1940, as amended (“Advisers Act”), and is incorporated herein by reference thereto.

Information as to the directors and officers of the sub-advisers, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers of the sub-advisers in the last two years, are included in their application for registration as investment advisers on Forms ADV for Lehman Brothers Asset Management LLC (File No. 801-61757) and BlackRock Advisors, LLC (File No. 801-47710).

 

ITEM 27. PRINCIPAL UNDERWRITERS

(a) ING Funds Distributor, LLC is the principal underwriter for ING Mutual Funds; ING Mayflower Trust; ING Funds Trust; ING Equity Trust; ING Prime Rate Trust; ING Senior Income Fund; ING Separate Portfolios Trust, ING Series Fund, Inc.; ING Variable Products Trust; ING Variable Insurance Trust; ING VP Balanced Portfolio, Inc.; ING Variable Portfolios, Inc.; ING Variable Funds; ING VP Intermediate Bond Portfolio; ING VP Money Market Portfolio; ING Strategic Allocation Portfolios, Inc. and ING GET Fund.

(b) Information as to the directors and officers of the Distributor, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers of the Distributor in the last two years, is included in its application for registration as a broker-dealer on Form BD (File No. 8-48020) filed under the Securities Exchange Act of 1934 and is incorporated herein by reference thereto.

(c) Not applicable.

 

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ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder are maintained at the offices of (a) ING Variable Portfolios, Inc., (b) the Investment Adviser, (c) the Distributor, (d) the Custodian, (e) the Transfer Agent, and (f) each Sub-Adviser. The address of each is as follows:

 

(a) ING Variable Portfolios, Inc.

7337 East Doubletree Ranch Rd.

Scottsdale, AZ 85258

 

(b) ING Investments, LLC

7337 East Doubletree Ranch Rd.

Scottsdale, AZ 85258

 

(c) ING Funds Distributor, LLC

7337 East Doubletree Ranch Rd.

Scottsdale, AZ 85258

 

(d) The Bank of New York Mellon Corporation

100 Church Street, 10th Floor

New York, NY 10286

 

(e) DST Systems, Inc.

P.O. Box 419386

Kansas City, MO 64141

 

(f)    (1) ING Investment Management Co.

230 Park Avenue

New York, New York 10169

 

  (2) BlackRock Advisors, Inc.

100 Bellevue Parkway

Wilmington, DE 19809

 

  (3) Lehman Brothers Asset Management LLC

190 South La Salle Street

Suite 2400,

Chicago, IL 60606

 

ITEM 29. MANAGEMENT SERVICES

Not Applicable.

 

ITEM 30. UNDERTAKINGS

Not Applicable.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended (the “1933 Act”), and the Investment Company Act of 1940, as amended, the Registrant certifies that it has duly caused this Post-Effective Amendment No. 41 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Scottsdale and the State of Arizona on the 6th day of June, 2008.

 

ING VARIABLE PORTFOLIOS, INC.
By:   /s/ Theresa K. Kelety
  Theresa K. Kelety
  Secretary

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.

 

SIGNATURE

  

TITLE

   DATE

 

Todd Modic*

  

Senior Vice President and

Chief/Principal Financial Officer

   June 6, 2008

 

Albert E. DePrince Jr.*

   Director    June 6, 2008

 

Maria T. Fighetti*

   Director    June 6, 2008

 

Russell Jones*

   Director    June 6, 2008

 

Sidney Koch*

   Director    June 6, 2008

 

Shaun P. Mathews *

  

Interested Director, President and

Chief Executive Officer

   June 6, 2008

 

Frederic Nelson III*

   Interested Director    June 6, 2008

 

Corine T. Norgaard*

   Director    June 6, 2008

 

Joseph E. Obermeyer*

   Director    June 6, 2008

 

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*By:   /s/ Theresa K. Kelety
  Theresa K. Kelety
  Attorney-in-Fact**

 

** Powers of attorney for Todd Modic and each Director were filed as an exhibit to Post-Effective Amendment No. 31 to the Registrant’s Registration Statement on Form N-1A filed on December 20, 2007 and are incorporated herein by reference.

 

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EXHIBIT INDEX

ING Variable Portfolios, Inc.

 

Exhibit Number

  

Exhibit Description

None   

 

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