-----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, GOdxRzemOcR3eGTxL7Cg6sPUcqbHHH2obGXK3LUmFwbvhmYWAkzHfh7r+wne73ek 0YDxHd620sB73lF4dmOaow== /in/edgar/work/20000823/0000950147-00-001305/0000950147-00-001305.txt : 20000922 0000950147-00-001305.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950147-00-001305 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20000823 EFFECTIVENESS DATE: 20000823 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVISORS SERIES TRUST CENTRAL INDEX KEY: 0001027596 STANDARD INDUSTRIAL CLASSIFICATION: [ ] STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 333-17391 FILM NUMBER: 708018 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-07959 FILM NUMBER: 708019 BUSINESS ADDRESS: STREET 1: 2020 E FINANCIAL WAY SUITE 100 CITY: GLENDORA STATE: CA ZIP: 91741 BUSINESS PHONE: 8188521033 MAIL ADDRESS: STREET 1: 2020 E FINANCIAL WAY STREET 2: SUITE 100 CITY: GLENDORA STATE: CA ZIP: 91741 485BPOS 1 0001.txt POST-EFFECTIVE AMENDMENT NO. 66 TO FORM N-1A As Filed with the Securities and Exchange Commission on August 23, 2000 File Nos. 333-17391 811-07959 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-effective Amendment No. Post-effective Amendment No. 66 [X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 68 [X] ADVISORS SERIES TRUST (Exact name of registrant as specified in charter) 4455 E. Camelback Road, Suite 261E Phoenix, Az 85018 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number (Including Area Code): (602) 952-1100 Robert H. Wadsworth Advisors Series Trust 4455 E. Camelback Road, Suite 261E Phoenix, Az 85018 (Name and address of agent for service of process) APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the effective date of the registration statement. It is proposed that this filing will become effective (check appropriate box) [ ] upon filing pursuant to paragraph (b) [X] on August 28, 2000 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(i) [ ] on (date) pursuant to paragraph (a)(i) [ ] 75 days after filing pursuant to paragraph (a)(ii) [ ] on (date) pursuant to paragraph (a)(ii) of Rule 485 If appropriate, check the following box [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. ================================================================================ SEGALL BRYANT & HAMILL MID CAP FUND PROSPECTUS AUGUST 28, 2000 THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SEGALL BRYANT & HAMILL MID CAP FUND 10 SOUTH WACKER DRIVE, SUITE 2150 CHICAGO, ILLINOIS 60606 WWW.SBHIC.COM INVESTMENT ADVISOR: (312) 474-4122 SHAREHOLDER SERVICES: (TOLL-FREE) 829-8413 TABLE OF CONTENTS Overview ................................................................... 2 Performance of the Fund .................................................... 3 Fees and Expenses of the Fund .............................................. 3 Management of the Fund ..................................................... 4 Account Information ........................................................ 4 How to Invest .............................................................. 5 Earnings and Taxes ......................................................... 9 Financial Highlights ....................................................... 9 For More Information ....................................................... 11 More detailed information on all subjects covered in this prospectus is contained in the Fund's STATEMENT OF ADDITIONAL INFORMATION ("SAI"). Investors seeking more in-depth explanations of the contents of this prospectus should request the SAI and review it before purchasing shares. OVERVIEW INVESTMENT OBJECTIVES The Fund seeks as its primary investment objective the growth of capital by investing in MEDIUM- CAPITALIZATION ("mid-cap") companies. Its secondary objective is to provide current income. The objectives of the Fund may be changed only with shareholder approval. PRINCIPAL INVESTMENT STRATEGIES The Fund invests at least 65% of its assets in the common stocks of domestic companies whose shares have a stock market value ("market capitalization") of between $1 billion and $15 billion on a cost basis. The Advisor uses "bottom up" fundamental research to identify attractively-priced companies with strong or improving return on investment whose profitability is reasonably expected to lead to an increase in the company's security price. In addition, the Advisor purchases securities of companies that it considers to be under-valued and that are attractive long-term prospects. The Advisor looks for companies that are dominant in their industry, have a high return on capital, a growth record that is 50% greater than projected earnings of the Russell Midcap Index and a sustainable operating advantage over their competition. PRINCIPAL RISKS OF INVESTING You may lose money by investing in the Fund. Other principal risks you should consider include: MARKET DECLINE - A company's stock price or the overall stock market may experience a sudden decline. MARKET FLUCTUATION - Because mid-cap stocks trade less frequently and in more limited volume, mid-cap stock prices may fluctuate more than large-cap stocks. DEFENSIVE INVESTMENTS - At the discretion of the Advisor, the Fund may invest up to 100% of its assets in cash, cash equivalents, and high quality, short-term debt securities and money market instruments for temporary defensive purposes. During such a period, the Fund may not reach its investment objectives. For example, should the market advance during this period, the Fund may not participate as much as it would have if it had been more fully invested. WHO MAY WANT TO INVEST The Fund is intended for investors who: * Are willing to hold their shares for a long period of time (e.g. in preparation for retirement); * Are diversifying their investment portfolio by investing in a mutual fund that concentrates in mid-cap companies; and/or * Are willing to accept higher short-term risk in exchange for a higher potential for a long- term total return. 2 PERFORMANCE OF THE FUND Because the Fund has been in operation for less than a full calendar year, its total return bar chart and performance table have not been included. FEES AND EXPENSES OF THE FUND This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (fees paid directly from your investment) None TOTAL ANNUAL FUND OPERATING EXPENSES (expenses are deducted from Fund assets) Investment Advisory Fees 0.75% Distribution (12b-1) Fees 0.25% Other Expenses 1.51% ----- TOTAL ANNUAL FUND OPERATING EXPENSES 2.51% Advisory Fee Waiver and/or Fund Expense Absorption* (1.11)% ----- NET EXPENSES 1.40% ===== - ---------- * The Advisor has contractually agreed to waive its fees and/or absorb expenses of the Fund to ensure that Total Annual Operating Expenses do not exceed 1.40%. This contract's term is indefinite and may be terminated only by the Board of Trustees of the Fund. If the Advisor waives any of its fees or pays Fund expenses, the Fund may reimburse the Advisor in future years. EXAMPLE This Example is intended to help you compare the costs of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund 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 dividends and distributions are reinvested and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 year 3 years 5 years 10 years ------ ------- ------- -------- $142 $442 $764 $1,674 3 MANAGEMENT OF THE FUND THE INVESTMENT ADVISOR The registered investment advisor of the Fund is Segall Bryant & Hamill, 10 South Wacker Drive, Suite 2150, Chicago, Illinois 60606. The Advisor has provided asset management services to individual and institutional investors since 1994. As of June 30, 2000, the Advisor managed approximately $216 million in assets. The Advisor provides the Fund with advice on buying and selling securities, manages the investments of the Fund, furnishes the Fund with office space and certain administrative services, and provides most of the personnel needed by the Fund. For the fiscal year ended April 30, 2000, the Advisor waived all advisory fees due from the Fund. THE PORTFOLIO MANAGER Mr. David Kalis is principally responsible for the portfolio management of the Fund. Mr. Kalis has served as portfolio manager of the Fund since April 1, 1999, the Fund's inception date. Prior to becoming portfolio manager of the Fund, Mr. Kalis managed the mid-cap accounts used in the Advisor's composites since 1996. Prior to joining the Advisor in 1996, Mr. Kalis served as an analyst and portfolio manager at Cole Taylor Investment Management since 1994. ACCOUNT INFORMATION HOW THE FUND'S SHARES ARE PRICED Shares are priced at net asset value ("NAV"). The NAV is calculated by adding the values of all securities and other assets of the Fund, subtracting the liabilities and dividing the net amount by the number of outstanding shares. In calculating the NAV, the Fund's securities are valued using current market values, if available. Securities for which market quotations are not readily available are valued at their fair market value determined in good faith by or under the supervision of the Board of Trustees of the Advisors Series Trust. WHEN THE FUND'S SHARES ARE PRICED The NAV is calculated after the close of trading on the NYSE, every day that the NYSE is open. The NAV is not calculated on days that the NYSE is closed for trading. If the Fund receives your order by the close of trading on the NYSE, 4 you can purchase shares at the price calculated for that day. The NYSE usually closes at 4 p.m., Eastern time, on weekdays, except for holidays. If your order and payment are received after the NYSE has closed, your shares will be priced at the next NAV calculated after receipt of your order. For further information, please see the section, "HOW TO INVEST" and the SAI. DISTRIBUTION PLAN The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Distribution Plan permits the Fund to pay for the sale and distribution of its shares at an annual rate of 0.25% of the Fund's average annual net assets. Because these fees are paid out of the Fund's assets on an on-going basis, over time these fees will increase the cost of your investment in the Fund and may cost you more than paying other types of sales charges. HOW TO INVEST OPENING A NEW ACCOUNT You may purchase shares of the Fund by mail, by wire or through your investment broker. An Account Application accompanies this Prospectus. Please use the Account Application when purchasing by mail or wire. If you have any questions or need further information about how to purchase shares, you may call an account representative of the Fund toll-free at (877) 829-8413. A Fund Prospectus and Account Application are also available on the Internet at www.SBHIC.com. PURCHASING SHARES BY MAIL Please complete the attached Account Application and mail it with a personal check payable to the SEGALL BRYANT & HAMILL MID CAP FUND to the Fund's Shareholder Servicing Agent, American Data Services, Inc. at the following address: Segall Bryant & Hamill Mid Cap Fund c/o American Data Services, Inc. P.O. Box 5536 Hauppauge, NY 11788-0132 You may not send Account Applications via overnight delivery to a United States Postal Services post office box. If you wish to use an overnight delivery service, send your Account Application and check to the Fund's custodian at the following address: Segall Bryant & Hamill Mid Cap Fund c/o Firstar Bank, N.A. Mutual Fund Custody Department 425 Walnut Street, M.L. 6118, Sixth Floor Cincinnati, Ohio 45202 5 PURCHASING SHARES BY WIRE To purchase shares by wire, you must have a wire account number. Please call the Fund toll-free at (877) 829-8413 between 9:00 a.m. and 5:00 p.m. Eastern time, on a day when the New York Stock Exchange ("NYSE") is open for trading, in order to receive this account number. If you send your purchase by wire without the account number, your order will be delayed. You will be asked to fax your Application Form. Once you have the account number, your bank or other financial institution may send the wire to the Fund's Custodian with the following instructions: Firstar Bank, N.A. Cinti/Trust ABA # 0420-0001-3 For credit to: Segall Bryant & Hamill Mid Cap Fund DDA # 488921321 For further credit to [your name and account number] Your bank or financial institution may charge a fee for sending the wire to the Fund. PURCHASING THROUGH AN INVESTMENT BROKER Your may buy and sell shares through the Fund's approved brokers and their agents (together "Brokers"). An order placed with a Broker is treated as if it were placed directly with the Fund, and will be executed at the next share price calculated by the Fund. Your Broker will hold your shares in a pooled account in the Broker's name. The Fund may pay the Broker to maintain your individual ownership information, for maintaining other required records, and for providing other shareholder services. The Broker may charge you a fee to handle your order. The Broker is responsible for processing your order correctly and promptly, keeping you advised of the status of your account, confirming your transactions and ensuring that you receive copies of the Fund's prospectus. Please contact your Broker to see if they are an approved broker of the Fund and for additional information. MINIMUM INVESTMENTS Your initial purchase must be at least $1,000. However, if you are purchasing shares through an Individual Retirement Account ("IRA"), or you are starting an Automatic Investing Plan, as described below, your initial purchase must be at least $250. Exceptions may be mat the Fund's discretion. 6 ADDITIONAL INVESTMENTS Additional purchases may be made for $100 or more. Exceptions may be made at the Fund's discretion. You may purchase additional shares of the Fund by sending a check, with the stub from your account statement, to the Fund at the addresses listed above. Please ensure that you include your account number on the check. If you do not have the stub from your account statement, include your name, address and account number on a separate statement. You may also make additional purchases by wire or through a Broker. Please follow the procedures described above under the headings, "PURCHASING SHARES BY WIRE" or "PURCHASING SHARES THROUGH AN INVESTMENT BROKER." MINIMUM ACCOUNT BALANCE Due to the relatively high cost of managing small accounts, if the value of your account falls below $500, the Fund may redeem your shares. However, the Fund will give you 30 days' written notice to give you time to add to your account and avoid involuntary redemption of your shares. The Board of Trustees of the Fund believes this policy to be in the best interest of all shareholders. SELLING YOUR SHARES You may sell some or all of your Fund shares on days that the NYSE is open for trading. Your redemption may result in realized gain or loss for tax purposes. Your shares will be sold at the next net asset value calculated for the Fund after receiving your order. You may sell your shares by mail, wire or through a Broker. SELLING YOUR SHARES BY MAIL You may redeem your shares by sending a written request to the Fund. You must give your account number and state the number of shares you wish to sell. You must sign the written request. If the account is in the name of more than one person, each shareholder must sign the written request. Send your written request to the Fund at: Segall Bryant & Hamill Mid Cap Fund c/o American Data Services, Inc. P.O. Box 5536 Hauppauge, NY 11788-0132 If the dollar amount of your redemption exceeds $100,000, you must obtain a signature guarantee (NOT A NOTARIZATION), available from many commercial banks, savings associations, stock brokers and other NASD member firms. In unusual 7 circumstances, the Fund may temporarily suspend the processing of sell requests, or postpone payments of proceeds for up to seven days as permitted by federal securities laws. SELLING YOUR SHARES BY TELEPHONE If you completed the "Redemption by Telephone" section of the Fund's Account Application, you may sell your shares by calling the Shareholder Servicing Agent toll-free at (877) 829-8 Your redemption will be mailed or wired according to your instructions, on the next business day to the bank account you designated on your Account Application. The minimum wire amount is $1,000. Your bank or financial institution may charge a fee for receiving the wire from the Fund. Telephone redemptions may not be made for IRA accounts. The Fund will take steps to confirm that a telephone redemption is authentic. This may include tape recording the telephone instructions, or requiring a form of personal identification before acting on those instructions. The Fund reserves the right to refuse telephone instructions if it cannot reasonably confirm the telephone instructions. The Fund may be liable for losses from unauthorized or fraudulent telephone transactions only if these reasonable procedures are not followed. You may request telephone redemption privileges after your account is opened. However, the authorization form requires a separate signature guarantee (NOT A NOTARIZATION). The Fund may modify or terminate your telephone privileges after giving you 60 days notice. Please be aware that you may experience delays in redeeming your shares by telephone during periods of abnormal market activity. In addition, the Fund may postpone payment of proceeds for up to seven days, as permitted by federal securities laws. AUTOMATIC INVESTMENT PLAN You may make regular monthly investments in the Fund using the Automatic Investment Plan. You may arrange for your bank or financial institution to transfer a predetermined amount (but not less than $100). When the Fund receives the transfer, the Fund will invest the amount in additional shares of the Fund at the next calculated net asset value. You may request an Application for the Automatic Investment Plan by calling the Fund toll-free at (877) 829-8413. The Fund may modify or terminate this Plan at any time. You may terminate your participation in this Plan by calling the Fund. AUTOMATIC WITHDRAWAL PLAN You may request that a predetermined amount be sent to you each month or quarter. Your account must have a value of at least $10,000 for you to be eligible to participate in the Automatic Withdrawal Plan. The minimum withdrawal amount is $50. You may request an Application for the Automatic Withdrawal Plan by calling the Fund toll-free at (877) 829-8413. The Fund may modify or terminate this Plan at any time. You may terminate your participation in this Plan by calling the Fund. 8 OTHER POLICIES The Fund may waive the minimum investment requirements for purchases by certain groups or retirement plans. All investments must be made in U.S. funds, and checks must be drawn on U.S. banks. Third party checks are not accepted. The Fund may charge you if your check is returned for insufficient funds. The Fund reserves the right to reject any investment, in whole or in part. The IRS requires that you provide the Fund or your Broker with a taxpayer identification number and other information upon opening an account. You must specify whether you are subject to backup withholding. Otherwise, you may be subject to backup withholding at a rate of 31%. EARNINGS AND TAXES DIVIDENDS AND DISTRIBUTIONS Income dividends and capital gain distributions are normally declared and paid by the Fund to its shareholders in December of each year. The Fund may also make periodic dividend payments and distributions at other times in its discretion. Unless you invest through a tax-advantaged account, you will owe taxes on the dividends and distributions. Dividends and distributions are automatically reinvested in additional shares of the Fund unless you make a written request to the Fund that you would like to receive dividends and distributions made in cash. TAXES The Fund is required by Internal Revenue Service rules to distribute substantially all of its net investment income, and capital gains, if any, to shareholders. Capital gains may be taxable at different rates depending upon the length of time a Fund holds its assets. You will be notified at least annually about the tax consequences of distributions made each year. The Fund's dividends and distributions, whether received in cash or reinvested, may be taxable. Any redemption of a Fund's shares will be treated as a sale and any gain on the transaction may be taxable. Additional information about tax issues relating to the Fund may be found in the SAI. Please consult your tax advisor about the potential tax consequences of investing in the Fund. FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the Fund's financial performance during the past periods shown. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers, LLP for the year ended April 30, 2000, and by other independent accountants for the period ended April 30, 1999. PricewaterhouseCoopers, LLP's report and the Fund's financial statements are included in the Fund's annual report which is available upon request. 9 FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD - -------------------------------------------------------------------------------- Year April 1, 1999* ended through April 30, 2000 April 30, 1999 -------------- -------------- Net asset value, beginning of period $ 13.14 $12.49 ------- ------ INCOME FROM INVESTMENT OPERATIONS: Net investment loss (0.11) -- Net realized and unrealized gain on investments 1.99 0.65 ------- ------ Total from investment operations 1.88 0.65 ------- ------ LESS DISTRIBUTIONS: Dividends from net realized gain (0.65) -- ------- ------ Net asset value, end of period $ 14.37 $13.14 ======= ====== Total return 14.93% 5.20%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $10,190 $8,433 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before expense reimbursement 2.51% 7.35%+ After expense reimbursement 1.40% 1.34%+ RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS: After expense reimbursement (0.78%) (0.23%)+ Portfolio turnover rate 114.39% 18.02% - ---------- * Commencement of operations. + Annualized. ++ Not Annualized. 10 SEGALL BRYANT & HAMILL MID CAP FUND A SERIES OF ADVISORS SERIES TRUST For More Information SHAREHOLDER SERVICES: (TOLL-FREE) (877-829-8413 www.sbhic.com The Statement of Additional Information (SAI) for the Fund includes additional information about the Fund and is incorporated by reference into this Prospectus. The Fund's annual and semi-annual reports to shareholders contain additional information about the Fund's investments. The annual report includes a discussion of the market conditions and the investment strategies which significantly affected the Fund's performance during its last fiscal year. The SAI and shareholder reports are available free upon request. To request them or other information, or to ask questions, please call toll-free (877)-829-8413 or write to the Fund: Segall Bryant & Hamill Mid Cap Fund c/o American Data Services, Inc. P.O. Box 5536 Hauppauge, NY 11788 The SAI and other Fund information may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Call 1-202-942-8090 for information about the Room's operations. Reports and other Fund information are also available on the SEC's Internet site at www.sec.gov. Copies of this information may be obtained, for duplicating fees, by writing to the SEC's Public Reference Room, Washington, DC 10549-0102 or by electronic request to the following e-mail address: publicinfo@sec.gov. The Fund's SEC File No. is 911-07959 SEGALL BRYANT & HAMILL MID CAP FUND STATEMENT OF ADDITIONAL INFORMATION Dated August 28, 2000 This Statement of Additional Information ("SAI") is not a prospectus, and it should be read in conjunction with the prospectus dated August 28, 2000, as may be revised from time to time, of the Segall Bryant & Hamill Mid Cap Fund (the "Fund"), a series of Advisors Series Trust (the "Trust"). Segall Bryant & Hamill (the "Advisor") is the Advisor to the Fund. A copy of the prospectus may be obtained from the Fund c/o American Data Services, Inc., P.O. Box 5536, Hauppauge, NY 11788-0132 or by calling toll free at 877-829-8413. TABLE OF CONTENTS The Trust ................................................................. B-2 Investment Objectives and Policies ........................................ B-2 Management ................................................................ B-15 Distribution Plan ......................................................... B-18 Portfolio Transactions and Brokerage ...................................... B-19 Portfolio Turnover ........................................................ B-20 Purchase and Redemption of Fund Shares .................................... B-20 Net Asset Value ........................................................... B-22 Taxation .................................................................. B-23 Dividends and Distributions ............................................... B-26 Performance Information ................................................... B-26 General Information ....................................................... B-27 Appendix .................................................................. B-30 B-1 THE TRUST Advisors Series Trust (the "Trust") is an open-end management investment company organized as a Massachusetts business trust. The trust consists of various series which represent separate investment portfolios. This SAI relates only to the Fund. The Trust is registered with the SEC as a management investment company. Such a registration does not involve supervision of the management or policies of the Fund. The Prospectus of the Fund and this SAI omit certain information contained in the Registration Statement filed with the SEC. Copies of such information may be obtained from the SEC upon payment of the prescribed fee. INVESTMENT OBJECTIVES AND POLICIES The investment objective of the Fund is to seek growth of capital with income as a secondary objective. The Fund is diversified, which under applicable federal law means that as to 75% of its total assets, no more than 5% may be invested in the securities of a single issuer and that it may hold no more than 10% of the voting securities of a single issuer. The following discussion supplements the discussion of the Fund's investment objective and policies set forth in the Prospectus. There is no assurance that the Fund will achieve its objective. Prior to April 1, 1999, the Fund was called the Segall Bryant & Hamill Growth & Income Fund. PREFERRED STOCK The Fund may invest in preferred stocks. A preferred stock is a blend of the characteristics of a bond and common stock. It can offer the higher yield of a bond and has priority over common stock in equity ownership, but does not have the seniority of a bond and, unlike common stock, its participation in the issuer's growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any residual assets after payment to creditors should the issuer be dissolved. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. CONVERTIBLE SECURITIES AND WARRANTS The Fund may invest in convertible securities and warrants. A convertible security is a fixed-income security (a debt instrument or a preferred stock) which may be converted at a stated price within a specified period of time into a certain quantity of the common stock of the same or a different issuer. Convertible securities are senior to common stocks in an issuer's capital structure, but are usually subordinated to similar non-convertible securities. While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar nonconvertible security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security's underlying common stock. 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 Fund's entire investment therein). DEBT SECURITIES Because the market value of debt obligations ("bonds") can be expected to vary inversely to changes in interest rates, investing in bonds may provide an opportunity for capital growth when interest rates are expected to decline. The success of such a strategy depends on the Advisor's ability to accurately B-2 forecast changes in interest rates. The market value of bonds may be expected to vary depending upon, among other factors, interest rates, the ability of the issuer to repay principal and interest, any change in investment rating and general economic conditions. The Fund may invest in bonds rated at least Baa by Moody's Investors Service, Inc. ("Moody's) or BBB by ___________, or, if unrated, are deemed to be of comparable quality by the Advisor. Bonds in these rating categories, although considered investment grade, are more likely to have a reduced ability to make principal and interest payments than is the case with higher grade bonds. If a change in credit quality after purchase by the Fund causes the bond to no longer be investment grade, the Fund will sell the security, if necessary, to keep its holdings of below investment grade securities to 5% or less of the Fund's net assets. Corporate bond ratings are described in the Appendix. RISKS OF INVESTING IN DEBT SECURITIES There are a number of risks generally associated with an investment in debt securities (including convertible securities). Yields on short-, intermediate-, and long-term securities depend on a variety of factors, including the general condition of the money and bond markets, the size of a particular offering, the maturity of the obligation, and the rating of the issue. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with short maturities and lower yields. The market prices of debt securities usually vary, depending upon available yields. An increase in interest rates will generally reduce the value of such portfolio investments, and a decline in interest rates will generally increase the value of such portfolio investments. SHORT-TERM INVESTMENTS The Fund may invest in any of the following securities and instruments: CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The Fund may acquire certificates of deposit, bankers' acceptances and 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 Fund will be dollar- denominated obligations of domestic or foreign banks, savings and loan associations 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. If the Fund holds instruments of foreign banks or financial institutions, it 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. See "Foreign Investments" below. Such risks include future political and economic developments, the possible imposition of withholding taxes by the particular country in which the issuer is located on interest income payable on the securities, the possible seizure or nationalization of foreign deposits, the possible establishment of exchange controls, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on these securities. 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. B-3 As a result of federal and state laws and regulations, domestic banks are, among other things, required to maintain specified levels of reserves, limited in the amount which they can loan to a single borrower, and subject to other regulations designed to promote financial soundness. However, such laws and regulations do not necessarily apply to foreign bank obligations that the Fund may acquire. 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 prospectus, the 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. COMMERCIAL PAPER AND SHORT-TERM NOTES. The Fund may invest a portion of its assets in commercial paper and short-term notes. Commercial paper consists of unsecured promissory notes issued by corporations. Issues of commercial paper and short-term notes will normally have maturities of less than nine months and fixed rates of return, although such instruments may have maturities of up to one year. Commercial paper and short-term notes will consist of issues rated at the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's, or similarly rated by another nationally recognized statistical rating organization or, if unrated, will be determined by the Advisor to be of comparable quality. These rating symbols are described in the Appendix. INVESTMENT COMPANIES. The Fund may invest in shares of other investment companies. The Fund may invest in money market mutual funds in connection with its management of daily cash positions. In addition to the advisory and operational fees a Fund bears directly in connection with its own operation, the Fund would also bear its pro rata portions of each other investment company's advisory and operational expenses. GOVERNMENT OBLIGATIONS. The Fund may make short-term investments in U.S. Government obligations. Such obligations include Treasury bills, certificates of indebtedness, notes and bonds, and issues of such entities as the Government National Mortgage Association ("GNMA"), Export-Import Bank of the United States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration, Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student Loan Marketing Association. Some of these obligations, such as those of the GNMA, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Export-Import Bank of United States, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the FNMA, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. The Fund may invest in sovereign debt obligations of foreign countries. A sovereign debtor's willingness or ability to repay principal and interest in a timely manner may be affected by a number of factors, including its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward principal international lenders and the political constraints to which it may be subject. Emerging market governments could default on their sovereign debt. Such sovereign debtors also may be dependent on expected disbursements from foreign governments, multilateral agencies and other entities abroad to reduce principal and interest arrearages on their debt. The commitments on the part of these governments, agencies and others to make such disbursements may be conditioned on a sovereign debtor's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to meet B-4 such conditions could result in the cancellation of such third parties' commitments to lend funds to the sovereign debtor, which may further impair such debtor's ability or willingness to service its debt in a timely manner. FOREIGN INVESTMENTS AND CURRENCIES The Fund may invest up to 20% of its TOTAL NET ASSETS in securities of foreign issuers that are not publicly traded in the United States. The Fund may also invest in depositary receipts, purchase and sell foreign currency on a spot or cash basis and enter into forward currency contracts (see "Forward Currency Contracts," below). DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are receipts typically issued in connection with a U.S. or foreign bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities involve certain inherent risks, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may differ favorably or unfavorably from the US economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in foreign currencies. Accordingly, a change in the value of any such currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of the Fund's assets denominated in that currency. Such changes will also affect the Fund's income. The value of the Fund's assets may also be affected significantly by currency restrictions and exchange control regulations enacted from time to time. MARKET CHARACTERISTICS. The Advisor expects that many foreign securities in which the Fund invest will be purchased in over-the-counter markets or on exchanges located in the countries in which the principal offices of the issuers of the various securities are located, if that is the best available market. Foreign exchanges and markets may be more volatile than those in the United States. While growing in volume, they usually have substantially less volume than U.S. markets, and the Fund's foreign securities may be less liquid and more volatile than U.S. securities. Moreover, settlement practices for transactions in foreign markets may differ from those in United States markets, and may include delays beyond periods customary in the United States. Foreign security trading practices, including those involving securities settlement where Fund assets may be released prior to receipt of payment or securities, may expose the Fund to increased risk in the event of a failed trade or the insolvency of a foreign broker-dealer. LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less supervision of securities markets, brokers and issuers of securities, and less financial information available to issuers, than is available in the United States. TAXES. The interest and dividends payable on certain of the Fund's foreign portfolio securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Fund's shareholders. B-5 COSTS. To the extent that the Fund invests in foreign securities, its expense ratio is likely to be higher than those of investment companies investing only in domestic securities, since the cost of maintaining the custody of foreign securities is higher. EMERGING MARKETS. Some of the securities in which the Fund may invest may be located in developing or emerging markets, which entail additional risks, including less social, political and economic stability; smaller securities markets and lower trading volume, which may result in less liquidity and greater price volatility; national policies that may restrict the Fund's investment opportunities, including restrictions on investment in issuers or industries, or expropriation or confiscation of assets or property; and less developed legal structures governing private or foreign investment. In considering whether to invest in the securities of a foreign company, the Advisor considers such factors as the characteristics of the particular company, differences between economic trends and the performance of securities markets within the U.S. 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 Fund will be invested in foreign companies and countries and depository receipts will fluctuate from time to time within the limitations described in the prospectus, depending on the Advisor's assessment of prevailing market, economic and other conditions. OPTIONS AND FUTURES STRATEGIES The Fund may purchase put and call options and engage in the writing of covered call options and secured put options, and employ a variety of other investment techniques. Specifically, the Fund may engage in the purchase and sale of stock index future contracts, interest rate futures contracts, and options on such futures, all as described more fully below. Such investment policies and techniques may involve a greater degree of risk than those inherent in more conservative investment approaches. OPTIONS ON SECURITIES. To hedge against adverse market shifts, the Fund may purchase put and call options on securities held in its portfolio. In addition, the Fund may seek to increase its income in an amount designed to meet operating expenses or may hedge a portion of its portfolio investments through writing (that is, selling) "covered" put and call options. A put option provides its purchaser with the right to compel the writer of the option to purchase from the option holder an underlying security at a specified price at any time during or at the end of the option period. In contrast, a call option gives the purchaser the right to buy the underlying security covered by the option from the writer of the option at the stated exercise price. A covered call option contemplates that, for so long as the Fund is obligated as the writer of the option, it will own (1) the underlying securities subject to the option or (2) securities convertible into, or exchangeable without the payment of any consideration for, the securities subject to the option. The value of the underlying securities on which covered call options will be written at any one time by the Fund will not exceed 25% of the Fund's net assets. The Fund will be considered "covered" with respect to a put option it writes if, so long as it is obligated as the writer of a put option, it segregates cash or liquid high-grade debt obligations that are acceptable to the appropriate regulatory authority. The Fund may purchase options on securities that are listed on securities exchanges or that are traded over-the-counter ("OTC"). As the holder of a put option, the Fund has the right to sell the securities underlying the option and as the holder of a call option, the Fund has the right to purchase the securities underlying the option, in each case at the option's exercise price at any time prior to, or on, the option's expiration date. The Fund may choose to exercise the options it holds, permit them to expire or terminate them prior to their expiration by entering into closing sale transactions. In entering into a closing sale transaction, the Fund would sell an option of the same series as the one it has purchased. The Fund receives a premium when it writes call options, which increases the Fund's return on the underlying security in the event the option expires unexercised or is closed out at a profit. By writing a call, the Fund limits its opportunity to profit from an increase in the market value of the underlying B-6 security above the exercise price of the option for as long as the Fund's obligation as writer of the option continues. The Fund receives a premium when it writes put options, which increases the Fund's return on the underlying security in the event the option expires unexercised or is closed out at a profit. By writing a put, the Fund limits its opportunity to profit from an increase in the market value of the underlying security above the exercise price of the option for as long as the Fund's obligation as writer of the option continues. Thus, in some periods, the Fund will receive less total return and in other periods greater total return from its hedged positions than it would have received from its underlying securities if unhedged. In purchasing a put option, the Fund seeks to benefit from a decline in the market price of the underlying security, whereas in purchasing a call option, the Fund seeks to benefit from an increase in the market price of the underlying security. If an option purchased is not sold or exercised when it has remaining value, or if the market price of the underlying security remains equal to or greater than the exercise price, in the case of a put, or remains equal to or below the exercise price, in the case of a call, during the life of the option, the Fund will lose its investment in the option. For the purchase of an option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price, in the case of a put, and must increase sufficiently above the exercise price, in the case of a call, to cover the premium and transaction costs. Because option premiums paid by the Fund are small in relation to the market value of the investments underlying the options, buying options can result in large amounts of leverage. The leverage offered by trading in options could cause the Fund's net asset value to be subject to more frequent and wider fluctuations than would be the case if the Fund did not invest in options. OTC OPTIONS. OTC options differ from exchange-traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and there is a risk of non-performance by the dealer. However, the premium is paid in advance by the dealer. OTC options are available for a greater variety of securities and foreign currencies, and in a wider range of expiration dates and exercise prices than exchange-traded options. Since there is no exchange, pricing is normally done by reference to information from a market maker, which information is carefully monitored or caused to be monitored by the Adviser and verified in appropriate cases. A writer or purchaser of a put or call option can terminate it voluntarily only by entering into a closing transaction. In the case of OTC options, there can be no assurance that a continuous liquid secondary market will exist for any particular option at any specific time. Consequently, the Fund may be able to realize the value of an OTC option it has purchased only by exercising it or entering into a closing sale transaction with the dealer that issued it. Similarly, when the Fund writes an OTC option, it generally can close out that option prior to its expiration only by entering into a closing purchase transaction with the dealer to which it originally wrote the option. If a covered call option writer cannot effect a closing transaction, it cannot sell the underlying security or foreign currency until the option expires or the option is exercised. Therefore, the writer of a covered OTC call option may not be able to sell an underlying security even though it might otherwise be advantageous to do so. Likewise, the writer of a covered OTC put option may be unable to sell the securities pledged to secure the put for other investment purposes while it is obligated as a put writer. Similarly, a purchaser of an OTC put or call option might also find it difficult to terminate its position on a timely basis in the absence of a secondary market. The Fund may purchase and write OTC put and call options in negotiated transactions. The staff of the Securities and Exchange Commission has previously taken the position that the value of purchased OTC options and the assets used as "cover" for written OTC options are illiquid securities and, as such, are to be included in the calculation of the Fund's 15% limitation on illiquid securities. However, the staff has eased its position somewhat in certain limited circumstances. The Fund will attempt to enter into contracts with certain dealers with which it writes OTC options. Each such contract will provide that the Fund has the absolute right to repurchase the options 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 which in no event will exceed a price determined pursuant to a formula contained in the contract. Although the specific details of such formula may vary among B-7 contracts, the formula will generally be based upon a multiple of the premium received by the Fund for writing the option, plus the amount, if any, of the option's intrinsic value. 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 such a contract is entered into, the Fund will count as illiquid only the initial formula price minus the option's intrinsic value. The Fund will enter into such contracts only with primary U.S. Government securities dealers recognized by the Federal Reserve Bank of New York. Moreover, such primary dealers will be subject to the same standards as are imposed upon dealers with which the Fund enters into repurchase agreements. SECURITIES INDEX OPTIONS. In seeking to hedge all or a portion of its investment, the Fund may purchase and write put and call options on securities indices listed on securities exchanges, which indices include securities held in the Fund's portfolio. A securities index measures the movement of a certain group of stocks or debt securities by assigning relative values to the securities included in the index. Options on securities indexes are generally similar to options on specific securities. Unlike options on specific securities, however, options on securities indexes do not involve the delivery of an underlying security; the option in the case of an option on a stock index represents the holder's right to obtain from the writer in cash a fixed multiple of the amount by which the exercise price exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying stock index on the exercise date. When the Fund writes an option on a securities index, it will segregate assets in an amount equal to the market value of the option, and will maintain while the option is open. Securities index options are subject to position and exercise limits and other regulations imposed by the exchange on which they are traded. If the Fund writes a securities index option, it may terminate its obligation by effecting a closing purchase transaction, which is accomplished by purchasing an option of the same series as the option previously written. The ability of the Fund to engage in closing purchase transactions with respect to securities index options depends on the existence of a liquid secondary market. Although the Fund generally purchases or writes securities index options only if a liquid secondary market for the options purchased or sold appears to exist, no such secondary market may exist, or the market may cease to exist at some future date, for some options. No assurance can be given that a closing purchase transaction can be effected when the Fund desires to engage in such a transaction. RISKS RELATING TO PURCHASE AND SALE OF OPTIONS ON STOCK INDICES. Purchase and sale of options on stock indices by the Fund are subject to certain risks that are not present with options on securities. Because the effectiveness of purchasing or writing stock index options as a hedging technique depends upon the extent to which price movements in the Fund's portfolio correlate with price movements in the level of the index rather than the price of a particular stock, whether the Fund will realize a gain or loss on the purchase or writing of an option on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indices, in an industry or market segment, rather than movements in the price of a particular stock. Accordingly, successful use by the Fund of options on indexes will be subject to the ability of the Adviser to correctly predict movements in the direction of the stock market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual stocks. In the event the Advisor is unsuccessful in predicting the movements of an index, the Fund could be in a worse position than had no hedge been attempted. Index prices may be distorted if trading of certain stocks included in the index is interrupted. Trading in index options also may be interrupted in certain circumstances, such as if trading were halted in a substantial number of stocks included in the index. If this occurred, the Fund would not be able to close out options which it had purchased or written and, if restrictions on exercise were imposed, might be unable to exercise an option it holds, which could result in substantial losses to the Fund. However, it will be the Fund's policy to purchase or write options only on indices which include a sufficient number of stocks so that the likelihood of a trading halt in the index is minimized. B-8 FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and sell stock index futures contracts. The purpose of the acquisition or sale of a futures contract by the Fund is to hedge against fluctuations in the value of its portfolio without actually buying or selling securities. The futures contracts in which the Fund may invest have been developed by and are traded on national commodity exchanges. Stock index futures contracts may be based upon broad-based stock indices such as the S&P 500 or upon narrow-based stock indices. A buyer entering into a stock index futures contract will, on a specified future date, pay or receive a final cash payment equal to the difference between the actual value of the stock index on the last day of the contract and the value of the stock index established by the contract. The Fund may assume both "long" and "short" positions with respect to futures contracts. A long position involves entering into a futures contract to buy a commodity, whereas a short position involves entering into a futures contract to sell a commodity. The purpose of trading futures contracts is to protect the Fund from fluctuations in value of its investment securities without necessarily buying or selling the securities. Because the value of the Fund's investment securities will exceed the value of the futures contracts sold by the Fund, an increase in the value of the futures contracts could only mitigate, but not totally offset, the decline in the value of the Fund's assets. No consideration is paid or received by the Fund upon trading a futures contract. Upon trading a futures contract, the Fund will be required to segregate an amount of cash, short-term Government Securities or other U.S. dollar-denominated, high-grade, short-term money market instruments equal to approximately 1% to 10% of the contract amount (this amount is subject to change by the exchange on which the contract is traded and brokers may charge a higher amount). This amount is known as "initial margin" and is in the nature of a performance bond or good faith deposit on the contract that is returned to the Fund upon termination of the futures contract, assuming that all contractual obligations have been satisfied; the broker will have access to amounts in the margin account if the Fund fails to meet its contractual obligations. Subsequent payments, known as "variation margin," to and from the broker, will be made daily as the price of the currency or securities underlying the futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as "marking-to-market." At any time prior to the expiration of a futures contract, the Fund may elect to close a position by taking an opposite position, which will operate to terminate the Fund's existing position in the contract. Each short position in a futures or options contract entered into by the Fund is secured by the Fund's ownership of underlying securities. The Fund does not use leverage when it enters into long futures or options contracts; the Fund segregates, with respect to each of its long positions, cash or money market instruments having a value equal to the underlying commodity value of the contract. The Fund may trade stock index futures contracts to the extent permitted under rules and interpretations adopted by the Commodity Futures Trading Commission (the "CFTC"). U.S. futures contracts have been designed by exchanges that have been designated as "contract markets" by the CFTC, and must be executed through a futures commission merchant, or brokerage firm, that is a member of the relevant contract market. Futures contracts trade on a number of contract markets, and, through their clearing corporations, the exchanges guarantee performance of the contracts as between the clearing members of the exchange. The Fund intends to comply with CFTC regulations and avoid "commodity pool operator" status. These regulations require that the Fund use futures and options positions (a) for "bona fide hedging purposes" (as defined in the regulations) or (b) for other purposes so long as aggregate initial margins and premiums required in connection with non-hedging positions do not exceed 5% of the liquidation value of the Fund's portfolio. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. There are several risks in using stock index futures contracts as hedging devices. First, all participants in the futures market are subject to initial margin and variation margin requirements. Rather than making additional variation margin payments, investors may close the contracts through offsetting B-9 transactions which could distort the normal relationship between the index or security and the futures market. Second, the margin requirements in the futures market are lower than margin requirements in the securities market, and as a result the futures market may attract more speculators than does the securities market. Increased participation by speculators in the futures market may also cause temporary price distortions. Because of possible price distortion in the futures market and because of imperfect correlation between movements in stock indices or securities and movements in the prices of futures contracts, even a correct forecast of general market trends may not result in a successful hedging transaction over a very short period. Another risk arises because of imperfect correlation between movements in the value of the futures contracts and movements in the value of securities subject to the hedge. With respect to stock index futures contracts, the risk of imperfect correlation increases as the composition of the Fund's portfolio diverges from the securities included in the applicable stock index. It is possible that the Fund might sell stock index futures contracts to hedge its portfolio against a decline in the market, only to have the market advance and the value of securities held in the Fund's portfolio decline. If this occurred, the Fund would lose money on the contracts and also experience a decline in the value of its portfolio securities. While this could occur, the Advisor believes that over time the value of the Fund's portfolio will tend to move in the same direction as the market indices and will attempt to reduce this risk, to the extent possible, by entering into futures contracts on indices whose movements they believe will have a significant correlation with movements in the value of the Fund's portfolio securities sought to be hedged. Successful use of futures contracts by the Fund is subject to the ability of the Advisor to predict correctly movements in the direction of interest rates or the market. If the Fund has hedged against the possibility of a decline in the value of the stocks held in its portfolio or an increase in interest rates adversely affecting the value of fixed-income securities held in its portfolio and stock prices increase or interest rates decrease instead, the Fund would lose part or all of the benefit of the increased value of its security which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market or decline in interest rates. The Fund may have to sell securities at a time when it may be disadvantageous to do so. LIQUIDITY OF FUTURES CONTRACTS. The Fund may elect to close some or all of its contracts prior to expiration. The purpose of making such a move would be to reduce or eliminate the hedge position held by the Fund. The Fund may close its positions by taking opposite positions. Final determinations of variation margin are then made, additional cash as required is paid by or to the Fund, and the Fund realizes a loss or a gain. Positions in futures contracts may be closed only on an exchange or board of trade providing a secondary market for such futures contracts. Although the Fund intends to enter into futures contracts only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market will exist for any particular contract at any particular time. In addition, most domestic futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular contract, no trades may be made 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. It is possible that futures contract prices could move to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. In such event, it will not be possible to close a futures position and, in the event of adverse price movements, the Fund would be required to make daily cash payments of variation margin. In such circumstances, an increase in the value of the portion of the portfolio being hedged, if any, may partially or completely offset losses on the futures contract. However, as described above, there is no guarantee that the price of the securities being hedged will, in fact, correlate with the price movements in the futures contract and thus provide an offset to losses on a futures contract. B-10 RISKS AND SPECIAL CONSIDERATIONS OF OPTIONS ON FUTURES CONTRACTS. The use of options on interest rate and stock index futures contracts also involves additional risk. Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to the Fund because the maximum amount at risk is the premium paid for the options (plus transactions costs). The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the Fund's portfolio assets. By writing a call option, the Fund becomes obligated to sell a futures contract, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium, but the Fund becomes obligated to purchase a futures contract, which may have a value lower than the exercise price. Thus, the loss incurred by the Fund in writing options on futures contracts may exceed the amount of the premium received. The effective use of options strategies is dependent, among other things, on the Fund's ability to terminate options positions at a time when the Advisor deems it desirable to do so. Although the Fund will enter into an option position only if the Advisor believes that a liquid secondary market exists for such option, there is no assurance that the Fund will be able to effect closing transactions at any particular time or at an acceptable price. The Fund's transactions involving options on futures contracts will be conducted only on recognized exchanges. The Fund's purchase or sale of put or call options on futures contracts will be based upon predictions as to anticipated interest rates or market trends by the Advisor, which could prove to be inaccurate. Even if the expectations of the Advisor are correct, there may be an imperfect correlation between the change in the value of the options and of the Fund's portfolio securities. Investments in futures contracts and related options by their nature tend to be more short-term than other equity investments made by the Fund. The Fund's ability to make such investments, therefore, may result in an increase in the Fund's portfolio activity and thereby may result in the payment of additional transaction costs. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in anticipation of changes in currency exchange rates. A forward currency contract is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. For example, the Fund might purchase a particular currency or enter into a forward currency contract to preserve the U.S. dollar price of securities it intends to or has contracted to purchase. Alternatively, it might sell a particular currency on either a spot or forward basis to hedge against an anticipated decline in the dollar value of securities it intends to or has contracted to sell. Although this strategy could minimize the risk of loss due to a decline in the value of the hedged currency, it could also limit any potential gain from an increase in the value of the currency. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with respect to its portfolio securities. Pursuant to such agreements, the Fund acquires securities from financial institutions such as banks and broker-dealers as are deemed to be creditworthy by the Advisor, subject to the seller's agreement to repurchase and the Fund's agreement to resell such securities at a mutually agreed upon date and price. The repurchase price generally equals the price paid by the 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). 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. The seller under a repurchase agreement will be required to maintain the value of the underlying securities at not less than 102% of the repurchase price under the agreement. If the seller defaults on its repurchase obligation, the Fund will suffer a loss to the extent that the proceeds from a sale of the underlying B-11 securities are less than the repurchase price under the agreement. Bankruptcy or insolvency of such a defaulting seller may cause the Fund's rights with respect to such securities to be delayed or limited. Repurchase agreements are considered to be loans under the Investment Company Act (the "1940 Act"). WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS The Fund may purchase securities on a "when-issued," forward commitment or delayed settlement basis. In this event, the Custodian will designate liquid assets equal to the amount of the commitment. In such a case, the Fund may be required subsequently to designate additional assets in order to assure that the value of the account remains equal to the amount of the Fund's commitment. It may be expected that the Fund's net assets will fluctuate to a greater degree when it sets aside portfolio securities to cover such purchase commitments than when it sets aside cash. The Fund does not intend to engage in these transactions for speculative purposes but only in furtherance of its investment objectives. Because the Fund will designate assets to satisfy its purchase commitments in the manner described, the Fund's liquidity and the ability of the Advisor to manage it may be affected in the event the Fund's forward commitments, commitments to purchase when-issued securities and delayed settlements ever exceeded 15% of the value of its net assets. The Fund will purchase securities on a when-issued, forward commitment or delayed settlement basis only with the intention of completing the transaction. If deemed advisable as a matter of investment strategy, however, the Fund may dispose of or renegotiate a commitment after it is entered into, and may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a taxable capital gain or loss. When the Fund engages in when-issued, forward commitment and delayed settlement transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Fund incurring a loss or missing an opportunity to obtain an advantageous price. The market value of the securities underlying a when-issued purchase, a forward commitment to purchase securities, or a delayed settlement and any subsequent fluctuations in their market value is taken into account when determining the market value of the Fund starting on the day the Fund agrees to purchase the securities. The Fund does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date. BORROWING The Fund is authorized to borrow money from time to time for temporary, extraordinary or emergency purposes or for clearance of transactions in amounts not to exceed 33-1/3% of the value of its total assets at the time of such borrowings. The use of borrowing by the Fund involves special risk considerations that may not be associated with other funds having similar objectives and policies. Since substantially all of the Fund's assets fluctuate in value, while the interest obligation resulting from a borrowing will be fixed by the terms of the Fund's agreement with its lender, the net asset value per share of the Fund will tend to increase more when its portfolio securities increase in value and to decrease more when its portfolio assets decrease in value than would otherwise be the case if the Fund did not borrow funds. In addition, 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, the 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. The Fund is required to designate specific liquid assets with its custodian equal to the amount it has borrowed. LENDING PORTFOLIO SECURITIES The Fund may lend its portfolio securities in an amount not exceeding 33% of its total assets to financial institutions such as banks and brokers if the loan is collateralized in accordance with applicable regulations. Under the present regulatory requirements which govern loans of portfolio securities, the loan collateral must, on each business day, at least equal the value of the loaned securities and must consist of cash, letters of credit of domestic banks or domestic branches of foreign banks, or securities of the U.S. Government or its agencies. To be acceptable as collateral, letters of credit must obligate a B-12 bank to pay amounts demanded by the Fund if the demand meets the terms of the letter. Such terms and the issuing bank would have to be satisfactory to the Fund. Any loan might be secured by any one or more of the three types of collateral. The terms of the Fund's loans must permit the Fund to reacquire loaned securities on five days' notice or in time to vote on any serious matter and must meet certain tests under the Internal Revenue Code (the "Code"). SHORT SALES The Fund is authorized to make short sales of securities. In a short sale, the 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, the Fund must borrow the security (generally from the broker through which the short sale is made) in order to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The Fund is said to have a "short position" in the securities sold until it delivers them to the broker. The period during which the Fund has a short position can range from as little as one day to more than a year. Until the security is replaced, the proceeds of the short sale are retained by the broker, and the Fund is required to 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 Fund is also required to deposit with the broker additional cash or securities so that the total deposit with the broker is maintained daily at 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 90 days without restriction other than the payment of money). Short sales by the Fund create opportunities to increase the Fund's return but, at the same time, involve specific risk considerations and may be considered a speculative technique. Since the 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, the Fund's net asset value per share will tend 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 Fund may be required to pay in connection with the short sale. Furthermore, under adverse market conditions the 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. ILLIQUID SECURITIES The Fund may not invest more than 15% of the value of its net assets in securities that at the time of purchase have legal or contractual restrictions on resale or are otherwise illiquid. The Advisor will monitor the amount of illiquid securities in the Fund's portfolio, under the supervision of the Trust's Board of Trustees, to ensure compliance with the Fund's investment restrictions. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933 (the "Securities Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the Securities Act are referred to as private placement or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and the Fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemption requests within seven days. The Fund might also have to register such restricted securities in order to dispose of them, resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. B-13 In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments. If such securities are subject to purchase by institutional bin accordance with Rule 144A promulgated by the SEC under the Securities Act, the Trust's Board of Trustees may determine that such securities are not illiquid securities notwithstanding their legal or contractual restrictions on resale. In all other cases, however, securities subject to restrictions on resale will be deemed illiquid. INVESTMENT RESTRICTIONS The Trust (on behalf of the Fund) has adopted the following restrictions as fundamental policies, which may not be changed without the favorable vote of the holders of a "majority," as defined in the 1940 Act, of the outstanding voting securities of the Fund. Under the 1940 Act, the "vote of the holders of a majority of the outstanding voting securities" means the vote of the holders of the lesser of (i) 67% of the shares of the Fund represented at a meeting at which the holders of more than 50% of its outstanding shares are represented or (ii) more than 50% of the outstanding shares of the Fund. Except with respect to borrowing, and illiquid securities, changes in values of the Fund's assets will not cause a violation of the following investment restrictions so long as percentage requirements are observed by the Fund at the time it purchases any security. As a matter of fundamental policy, the Fund's investment objectives are fundamental. In addition, the Fund may not: 1. Issue senior securities, borrow money or pledge its assets, except that (i) the Fund may borrow on an unsecured basis from banks for temporary or emergency purposes or for the clearance of transactions in amounts not exceeding 33-1/3% of its total assets (including the amount borrowed), provided that it will not make investments while borrowings in excess of 5% of the value of its total assets are outstanding; and (ii) this restriction shall not prohibit the Fund from engaging in options or futures transactions or short sales; 2. Invest 25% or more of its total assets, calculated at the time of purchase and taken at market value, in any one industry (other than U.S. Government securities); 3. Make loans of money (except for purchases of debt securities consistent with the investment policies of the Fund and except for repurchase agreements); 4. The Fund will invest no more than 20% of the value of its total assets in securities issued by foreign companies. 5. Purchase or sell real estate or interests in real estate or real estate limited partnerships (although the Fund may purchase and sell securities which are secured by real estate and securities of companies which invest or deal in real estate); 6. The Fund will not purchase or sell commodities or commodity contracts, except futures contracts and related options and other similar contracts. 7. Act as underwriter (except to the extent the Fund may be deemed to be an underwriter in connection with the sale of securities in its investment portfolio); The Fund has adopted the following operating (i.e. non-fundamental) investment policies and restrictions which may be changed by the Board of Directors without shareholder approval: 1. The Fund will not invest in the securities of other investment companies or purchase any other investment company's voting securities or make any other investment in other investment companies except to the extent permitted by federal law; or B-14 2. The Fund will not participate on a joint or joint-and-several basis in any securities trading account. 3. The Fund will not invest in warrants if, as a result, the investments (valued at the lower of cost or market) would exceed 5% of the value of the Fund's total assets. 4. Purchase securities on margin, except such short-term credits as may be necessary for the clearance of transactions; 5. The Fund will not invest more than 15% of its net assets in securities which are restricted as to disposition or otherwise are illiquid or have no readily available market (except for securities which are determined by the Board of Trustees to be liquid). Except for the Fund's policies regarding borrowing and illiquid securities, any investment restriction described in the prospectus and this SAI which involves a maximum percentage of securities or assets shall not be considered to be violated unless an excess over the applicable percentage occurs immediately after an acquisition of securities or utilization of assets and such excess results therefrom. MANAGEMENT The overall management of the business and affairs of the Trust is vested with its Board of Trustees. The Board approves all significant agreements between the Trust and persons or companies furnishing services to it, including the agreements with the Advisor, Administrator, Custodian and Transfer Agent. The day to day operations of the Trust are delegated to its officers, subject to the Fund's investment objectives and policies and to general supervision by the Board of Trustees. The Trustees and officers of the Trust, their birth dates and positions with the Trust, their business addresses and principal occupations during the past five years are: WALTER E. AUCH, SR. (born 1921) Trustee 6001 N. 62nd Place, Paradise Valley, AZ 85153. Business Consultant and Director, Nicholas-Applegate Institutional Mutual Funds, Salomon Smith Barney Trak Funds and Concert Series, Pimco Advisors L.P., Banyan Strategic Realty Trust, Legend Properties and Senele Group. ERIC M. BANHAZL* (born 1957) Trustee, President and Treasurer 2020 E. Financial Way, Glendora, CA 91741. Executive Vice President, Investment Company Administration, LLC; Vice President, First Fund Distributors, Inc.; Treasurer, Guinness Flight Investment Funds, Inc. DONALD E. O'CONNOR (born 1936) Trustee 1700 Taylor Avenue, Fort Washington, MD 20744. Retired; formerly Executive Vice President and Chief Operating Officer of ICI Mutual Insurance Company (until January, 1997); Vice President, Operations, Investment Company Institute (until June, 1993); Independent Director, The Parnassus Fund, The Parnassus Income Fund, and Allegiance Investment Trust. GEORGE T. WOFFORD III (born 1939) Trustee 305 Glendora Circle, Danville, CA 94526. Senior Vice President, Information Services, Federal Home Loan Bank of San Francisco. STEVEN J. PAGGIOLI (born 1950) Vice President 915 Broadway, Suite 1605, New York, NY 10010. Executive Vice President, Investment Company Administration, LLC; Vice President, First Fund Distributors, Inc.; President and Trustee, Professionally Managed Portfolios; Trustee, Managers Funds Trust. ROBERT H. WADSWORTH (born 1940) Vice President 4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. President, Robert H. Wadsworth & Associates, Inc., Investment Company Administration, LLC and First Fund Distributors, Inc.; Vice President, Professionally Managed Portfolios; President, Guinness Flight Investment Funds, Inc.; Director, Germany Fund, Inc., New Germany Fund, Inc., Central European Equity Fund, Inc. and Deutsche Funds, Inc. B-15 THOMAS W. MARSCHEL (born 1970) Vice President 4455 E. Camelback Rd., Suite 261-E, Phoenix, AZ 85018. Vice President, Investment Company Administration, LLC; Assistant Vice President, Investment Company Administration, LLC from October 1995 to January 2000; Fund Accounting Supervisor with SEI Fund Resources from January 1994 to October 1995. CHRIS O. MOSER (born 1949) Secretary 4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. Employed by Investment Company Administration, LLC (since July 1996); Formerly employed by Bank One, N.A. (From August 1995 until July 1996; O'Connor, Cavanagh, Anderson, Killingsworth and Beshears (law firm) (until August 1995). - ---------- * denotes Trustee who is an "interested person" of the Trust under the 1940 Act. NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST - ----------------- ------------------------------------- Walter E. Auch, Sr., Trustee $12,000 Donald E. O'Connor, Trustee $12,000 George T. Wofford III, Trustee $12,000 Compensation indicated is for the calendar-year ended December 31, 1999. Currently, each Independent Trustee receives an annual retainer of $12,000 plus $1,500 for each meeting attended. THE ADVISOR The Advisor is a Minnesota partnership which is 45% owned by an affiliated company, Voyageur Advisory Services LLC ("Voyageur"), and 45% owned by SBGP Holdings, Inc. ("Holdings"). Voyageur is owned by Dougherty Financial Group LLC. Holdings is 50% owned by Ralph M. Segall and 50% by C. Alfred Bryant, Managing Partners of Segall Bryant & Hamill. The remaining 10% of the Advisor is owned by other employees of the firm. Subject to the supervision of the Board of Trustees, investment management and related services are provided by the Advisor, pursuant to an Investment Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, the Advisor agrees to invest the assets of the Fund in accordance with the investment objectives, policies and restrictions of the Fund as set forth in the Fund's and Trust's governing documents, including, without limitation, the Trust's Agreement and Declaration of Trust and By-Laws; the Fund's prospectus, SAI, and undertakings; and such other limitations, policies and procedures as the Trustees of the Trust may impose from time to time in writing to the Advisor. In providing such services, the Advisor shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Code, and other applicable law. Without limiting the generality of the foregoing, the Advisor has agreed to (i) furnish the Fund with advice and recommendations with respect to the investment of the Fund's assets, (ii) effect the purchase and sale of portfolio securities; (iii) manage and oversee the investments of the Fund, subject to the ultimate supervision and direction of the Trust's Board of Trustees; (iv) vote proxies and take other actions with respect to the Fund's securities; (v) maintain the books and records required to be maintained with respect to the securities in the Fund's portfolio; (vi) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Fund's assets which the Trustees or the officers of the Trust may reasonably request; and (vii) render to the Trust's Board of Trustees such periodic and special reports as the Board may reasonably request. The Advisor has also agreed, at its own expense, to maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under the B-16 Advisory Agreement. Personnel of the Advisor may serve as officers of the Trust provided they do so without compensation from the Trust. Without limiting the generality of the foregoing, the staff and personnel of the Advisor shall be deemed to include persons employed or retained by the Advisor to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Advisor or the Trust's Board of Trustees may desire and reasonably request. With respect to the operation of the Fund, the Advisor has agreed to be responsible for the expenses of printing and distributing extra copies of the Fund's prospectus, SAI, and sales and advertising materials (but not the legal, auditing or accounting fees attendant thereto) to prospective investors (but not to existing shareholders); and the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Advisor. As compensation for the Advisor's services, the Fund pays it an advisory fee at the rate specified in the prospectus. In addition to the fees payable to the Advisor and the Administrator, the Fund is responsible for its operating expenses, including: fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Trust for the benefit of the Fund including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the 1940 Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Fund's shareholders and the Trust's Board of Trustees that are properly payable by the Fund; salaries and expenses of officers and fees and expenses of members of the Trust's Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Advisor or Administrator; insurance premiums on property or personnel of the Fund which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and SAIs of the Fund or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Fund, if any; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as otherwise prescribed in the Advisory Agreement. The Fund is responsible for its own operating expenses, however, the Advisor has contractually agreed to reduce fees payable to it by the Fund and to pay Fund operating expenses to the extent necessary to limit the Fund's aggregate annual operating expenses (excluding interest and tax expenses) to the limit set forth in the Expense Table (the "expense cap"). Any such reductions made by the Advisor in its fees or payment of expenses which are the Fund's obligation are subject to reimbursement by the Fund to the Advisor, if so requested by the Advisor, in subsequent fiscal years if the aggregate amount actually paid by the Fund toward the operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the applicable limitation on Fund expenses. The Advisor is permitted to be reimbursed only for fee reductions and expense payments made in the previous three fiscal years, but is permitted to look back five years and four years, respectively, during the initial six years and seventh year of the Fund's operations. Any such reimbursement is also contingent upon Board of Trustees' subsequent review and ratification of the reimbursed amounts. Such reimbursement may not be paid prior to the Fund's payment of current ordinary operating expenses. For the fiscal year ended April 30, 2000, the Fund incurred $72,047 in advisory fees, all of which were waived by the Advisor. During the same period the Advisor reimbursed the Fund an additional $34,032 in expenses. For the period April 1, 1999 (commencement of operations) through April 30, 1999, the Fund incurred $4,765 in advisory fees, all of which were waived by the Advisor. During the same period, the Advisor reimbursed the Fund an additional $33,617 in expenses. B-17 Under the Advisory Agreement, the Advisor will not be liable to the Trust or the Fund or any shareholder for any act or omission in the course of, or connected with, rendering services or for any loss sustained by the Trust except in the case of a breach of fiduciary duty with respect to the receipt of compensation for services (in which case any award of damages will be limited as provided in the 1940 Act) or of willful misfeasance, bad faith or gross negligence, or reckless disregard of its obligations and duties under the Advisory Agreement. The Advisory Agreement will remain in effect for a period not to exceed two years. Thereafter, if not terminated, the Advisory Agreement will continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually (i) by a majority vote of the Independent Trustees cast in person at a meeting called for the purpose of voting on such approval, and (ii) by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund. The Advisory Agreement is terminable by vote of the Board of Trustees or by the holders of a majority of the outstanding voting securities of the Fund at any time without penalty, on 60 days written notice to the Advisor. The Advisory Agreement also may be terminated by the Advisor on 60 days written notice to the Trust. The Advisory Agreement terminates automatically upon its assignment (as defined in the 1940 Act). THE ADMINISTRATOR. The Administrator has agreed to be responsible for providing such services as the Trustees may reasonably request, including but not limited to (i) maintaining the Trust's books and records (other than financial or accounting books and records maintained by any custodian, transfer agent or accounting services agent); (ii) overseeing the Trust's insurance relationships; (iii) preparing for the Trust (or assisting counsel and/or auditors in the preparation of) all required tax returns, proxy statements and reports to the Trust's shareholders and Trustees and reports to and other filings with the SEC and any other governmental agency (the Trust agreeing to supply or cause to be supplied to the Administrator all necessary financial and other information in connection with the foregoing); (iv) preparing such applications and reports as may be necessary to permit the offer and sale of the shares of the Trust under the securities or "blue sky" laws of the various states selected by the Trust (the Trust agreeing to pay all filing fees or other similar fees in connection therewith); (v) responding to all inquiries or other communications of shareholders, if any, which are directed to the Administrator, or if any such inquiry or communication is more properly to be responded to by the Trust's custodian, transfer agent or accounting services agent, overseeing their response thereto; (vi) overseeing all relationships between the Trust and any custodian(s), transfer agent(s) and accounting services agent(s), including the negotiation of agreements and the supervision of the performance of such agreements; and (vii) authorizing and directing any of the Administrator's directors, officers and employees who may be elected as Trustees or officers of the Trust to serve in the capacities in which they are elected. All services to be furnished by the Administrator under this Agreement may be furnished through the medium of any such directors, officers or employees of the Administrator. For its services, the Administrator receives a fee monthly at the following annual rate, subject to a $30,000 minimum: FUND ASSET LEVEL FEE RATE - ---------------- -------- First $50 million 0.20% of average daily net assets Next $50 million 0.15% of average daily net assets Next $50 million 0.10% of average daily net assets Next $50 million, and thereafter 0.05% of average daily net assets For the fiscal year ended April 30, 2000, the Fund paid the Administrator $30,082 in fees. DISTRIBUTION PLAN Pursuant to a plan of distribution adopted by the Trust, on behalf of the Fund, pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Fund may pay distribution and related expenses up to 0.25% of its average net assets to the B-18 Advisor as distribution coordinator. Expenses permitted to be paid include preparation, printing and mailing of prospectuses, shareholder reports such as semi-annual and annual reports, performance reports and newsletters, sales literature and other promotional material to prospective investors, direct mail solicitations, advertising, public relations, compensation of sales personnel, advisors or other third parties for their assistance with respect to the distribution of the Fund's shares, payments to financial intermediaries for shareholder support, administrative and accounting services with respect to shareholders of the Fund and such other expenses as may be approved from time to time by the Board of Trustees of the Trust. The Plan allows excess distribution expenses to be carried forward by the Advisor, as distribution coordinator, and resubmitted in a subsequent fiscal year, provided that (i) distribution expenses cannot be carried forward for more than three years following initial submission; (ii) the Trustees have made a determination at the time of initial submission that the distribution expenses are appropriate to be carried forward and (iii) the Trustees make a further determination, at the time any distribution expenses which have been carried forward are submitted for payment, that payment at the time is appropriate, consistent with the objectives of the Plan and in the current best interests of shareholders. Under the Plan, the Trustees will be furnished quarterly with information detailing the amount of expenses paid under the Plan and the purposes for which payments were made. The Plan may be terminated at any time by vote of a majority of the Trustees of the Trust who are not interested persons. Continuation of the Plan is considered by such Trustees no less frequently than annually. During the fiscal year ended April 30, 2000, the Fund paid $24,016 in distribution fees, of which $21,829 was paid out as compensation to dealers, $531 was for reimbursement of printing expenses and $1,656 was for reimbursement of advertising expenses. PORTFOLIO TRANSACTIONS AND BROKERAGE The Advisory Agreement states that the Advisor shall be responsible for broker-dealer selection and for negotiation of brokerage commission rates, provided that the Advisor shall not direct orders to an affiliated person of the Advisor without general prior authorization to use such affiliated broker or dealer by the Trust's Board of Trustees. The Advisor's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Advisor may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker- the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Fund on a continuing basis. The price to the Fund in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Advisor and the Board of Trustees of the Trust may determine, the Advisor shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Fund to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Advisor an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Advisor determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Advisor's overall responsibilities with respect to the Fund. The Advisor is further authorized to allocate the orders placed by it on behalf of the Fund to such brokers or dealers who also provide research or statistical material, or other services, to the Trust, the Advisor, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Advisor shall determine, and the Advisor shall report on such allocations regularly to the Advisor and the Trust, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Advisor is also authorized to consider sales of shares of the Fund as a factor in the selection B-19 of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Advisor deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients of the Advisor, the Advisor, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Advisor in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other clients. For the fiscal year ended April 30, 2000 and the period April 1 through April 30, 1999, the Fund paid $113,700 and $3,951, respectively, in brokerage commission.. PORTFOLIO TURNOVER Although the Fund generally will not invest for short-term trading purposes, portfolio securities may be sold without regard to the length of time they have been held when, in the opinion of the Advisor, investing considerations warrant such action. Portfolio turnover rate is calculated by dividing (1) the lesser of purchases or sales of portfolio securities for the fiscal year by (2) the monthly average of the value of portfolio securities owned during the fiscal year. A 100% portfolio turnover rate would occur if all the securities in the Fund's portfolio, with the exception of securities whose maturities at the time of acquisition were one year or less, were sold and either repurchased or replaced within one year. A high rate of portfolio turnover (100% or more) generally leads to transaction costs and may result in a greater number of taxable transactions. See "Portfolio Transactions and Brokerage." For the fiscal period April 1, 1999 through April 30, 1999 and for the fiscal year ended April 30, 2000, the Fund had a portfolio turnover rate of 114.39% and 18.02%, respectively. PURCHASE AND REDEMPTION OF FUND SHARES The information provided below supplements the information contained in the Fund's Prospectus regarding the purchase and redemption of Fund shares. HOW TO BUY SHARES You may purchase shares of the Fund from selected securities brokers, dealers or financial intermediaries. Investors should contact these agents directly for appropriate instructions, as well as information pertaining to accounts and any service or transaction fees that may be charged by those agents. Purchase orders through securities brokers, dealers and other financial intermediaries are effected at the next-determined net asset value after receipt of the order by such agent before the Fund's daily cutoff time. Orders received after that time will be purchased at the next-determined net asset value. The public offering price of Fund shares is the net asset value. The Fund receives the net asset value. Shares are purchased at the public offering price next determined after the Transfer Agent receives your order in proper form. In most cases, in order to receive that day's public offering price, the Transfer Agent must receive your order in proper form before the close of regular trading on the New York Stock Exchange ("NYSE"). If you buy shares through your investment representative, the representative must receive your order before the close of regular trading on the NYSE to receive that day's public offering price. Orders are in proper form only after funds are converted to U.S. funds. Orders paid by check and received by 2:00 p.m., Eastern Time, will generally be available for the purchase of shares the following business day. If you are considering redeeming or transferring shares to another person shortly after purchase, you should pay for those shares with a certified check to avoid any delay in redemption or transfer. Otherwise the Fund may delay payment until the purchase price of those shares has been collected or, if you B-20 redeem by telephone, until 15 calendar days after the purchase date. To eliminate the need for safekeeping, the Fund will not issue certificates for your shares unless you request them. The Trust reserves the right in its sole discretion (i) to suspend the continued offering of the Fund's shares, (ii) to reject purchase orders in whole or in part when in the judgment of the Advisor or the Distributor such rejection is in the best interest of the Fund, and (iii) to reduce or waive the minimum for initial and subsequent investments for certain fiduciary accounts or under circumstances where certain economies can be achieved in sales of the Fund's shares. HOW TO SELL SHARES You can sell your Fund shares any day the NYSE is open for regular trading, either directly to the Fund or through your investment representative. The Fund will forward redemption proceeds or redeem shares for which it has collected payment of the purchase price. Payments to shareholders for shares of the Fund redeemed directly from the Fund will be made as promptly as possible but no later than seven days after receipt by the Fund's Transfer Agent of the written request in proper form, with the appropriate documentation as stated in the Prospectus, except that the Fund may suspend the right of redemption or postpone the date of payment during any period when (a) trading on the NYSE is restricted as determined by the SEC or the NYSE is closed for other than weekends and holidays; (b) an emergency exists as determined by the SEC making disposal of portfolio securities or valuation of net assets of the Fund not reasonably practicable; or (c) for such other period as the SEC may permit for the protection of the Fund's shareholders. At various times, the Fund may be requested to redeem shares for which it has not yet received confirmation of good payment; in this circumstance, the Fund may delay the redemption until payment for the purchase of such shares has been collected and confirmed to the Fund. Send a signed letter of instruction to the Transfer Agent, along with any certificates that represent shares you want to sell. The price you will receive is the next net asset value calculated after the Fund receives your request in proper form. In order to receive that day's net asset value, the Transfer Agent must receive your request before the close of regular trading on the NYSE. Your investment representative must receive your request before the close of regular trading on the NYSE to receive that day's net asset value. Your investment representative will be responsible for furnishing all necessary documentation to the Transfer Agent, and may charge you for its services. If you sell shares having a net asset value of $100,000 a signature guarantee is required. If you want your redemption proceeds sent to an address other than your address as it appears on the Transfer Agent's records, a signature guarantee is required. The Fund may require additional documentation for the sale of shares by a corporation, partnership, agent or fiduciary, or a surviving joint owner. Contact the Transfer Agent for details. Upon receipt of any instructions or inquiries by telephone from a shareholder or, if held in a joint account, from either party, or from any person claiming to be the shareholder, the Fund or its agent is authorized, without notifying the shareholder or joint account parties, to carry out the instructions or to respond to the inquiries, consistent with the service options chosen by the shareholder or joint shareholders in his or their latest Account Application or other written request for services, including purchasing or redeeming shares of the Fund and depositing and withdrawing monies from the bank account specified in the Bank Account Registration section of the shareholder's latest Account Application or as otherwise properly specified to the Fund in writing. During periods of unusual market changes and shareholder activity, you may experience delays in contacting the Transfer Agent by telephone. In this event, you may wish to submit a written redemption request, as described in the Prospectus, or contact your investment representative. The Telephone Redemption B-21 Privilege is not available if you were issued certificates for shares that remain outstanding. The Telephone Redemption Privilege may be modified or terminated without notice. Subject to compliance with applicable regulations, the Fund has reserved the right to pay the redemption price of its shares, either totally or partially, by a distribution in kind of readily marketable portfolio securities (instead of cash). The securities so distributed would be valued at the same amount as that assigned to them in calculating the net asset value for the shares being sold. If a shareholder received a distribution in kind, the shareholder could incur brokerage or other charges in converting the securities to cash. The Trust has filed an election under Rule 18f-1 committing to pay in cash all redemptions by a shareholder of record up to amounts specified by the rule (approximately $250,000). NET ASSET VALUE The net asset value of the Fund's shares will fluctuate and is determined as of the close of trading on the New York Stock Exchange (the "NYSE") (generally 4:00 p.m. Eastern time) each business day. The NYSE annually announces the days on which it will not be open for trading. The most recent announcement indicates that it will not be open for the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, the NYSE may close on days not included in that announcement. The net asset value per share is computed by dividing the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares in the Fund outstanding at such time. Generally, trading in and valuation of foreign securities is substantially completed each day at various times prior to the close of the NYSE. In addition, trading in and valuation of foreign securities may not take place on every day in which the NYSE is open for trading. In that case, the price used to determine the Fund's net asset value on the last day on which such exchange was open will be used, unless the Trust's Board of Trustees determines that a different price should be used. Furthermore, trading takes place in various foreign markets on days in which the NYSE is not open for trading and on which the Fund's net asset value is not calculated. Occasionally, events affecting the values of such securities in U.S. dollars on a day on which the Fund calculates its net asset value may occur between the times when such securities are valued and the close of the NYSE that will not be reflected in the computation of the Fund's net asset value unless the Board or its delegates deem that such events would materially affect the net asset value, in which case an adjustment would be made. Generally, the Fund's investments are valued at market value or, in the absence of a market value, at fair value as determined in good faith by the Advisor and the Trust's Valuation Committee pursuant to procedures approved by or under the direction of the Board. The Fund's securities, including ADRs, EDRs and GDRs, which are traded on securities exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any reported sales, at the mean between the last available bid and asked price. Securities that are traded on more than one exchange are valued on the exchange determined by the Advisor to be the primary market. Securities primarily traded in the NASDAQ National Market System for which market quotations are readily available shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices. Over-the-counter ("OTC") securities which are not traded in the NASDAQ National Market System shall be valued at the most recent trade price. Securities and assets for which market quotations are not readily available (including restricted securities which are subject to limitations as to their sale) are valued at fair value as determined in good faith by or under the direction of the Board. B-22 Short-term debt obligations with remaining maturities in excess of 60 days are valued at current market prices, as discussed above. Short-term securities with 60 days or less remaining to maturity are, unless conditions indicate otherwise, amortized to maturity based on their cost to the Fund if acquired within 60 days of maturity or, if already held by the Fund on the 60th day, based on the value determined on the 61st day. Corporate debt securities are valued on the basis of valuations provided by dealers in those instruments, by an independent pricing service, approved by the Board, or at fair value as determined in good faith by procedures approved by the Board. Any such pricing service, in determining value, will use information with respect to transactions in the securities being valued, quotations from dealers, market transactions in comparable securities, analyses and evaluations of various relationships between securities and yield to maturity information. An option that is written by the Fund is generally valued at the last sale price or, in the absence of the last sale price, the last offer price. An option that is purchased by the Fund is generally valued at the last sale price or, in the absence of the last sale price, the last bid price. If an options exchange closes after the time at which the Fund's net asset value is calculated, the last sale or last bid and asked prices as of that time will be used to calculate the net asset value. Any assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars at the official exchange rate or, alternatively, at the mean of the current bid and asked prices of such currencies against the U.S. dollar last quoted by a major bank that is a regular participant in the foreign exchange market or on the basis of a pricing service that takes into account the quotes provided by a number of such major banks. If neither of these alternatives is available or both are deemed not to provide a suitable methodology for converting a foreign currency into U.S. dollars, the Board in good faith will establish a conversion rate for such currency. All other assets of the Fund are valued in such manner as the Board in good faith deems appropriate to reflect their fair value. TAXATION The Fund intends to continue to qualify and elect to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, (the "Code"), for each taxable year by complying with all applicable requirements regarding the source of its income, the diversification of its assets, and the timing of its distributions. The Fund's policy is to distribute to its shareholders all of its investment company taxable income and any net realized capital gains for each fiscal year in a manner that complies with the distribution requirements of the Code, so that the Fund will not be subject to any federal income or excise taxes based on net income. However, the Board may elect to pay such excise taxes if it determines that payment is, under the circumstances, in the best interests of the Fund. In order to qualify as a regulated investment company, the Fund must, among other things, (a) derive at least 90% of its gross income each year from dividends, interest, payments with respect to loans of stock and securities, gains from the sale or other disposition of stock or securities or foreign currency gains related to investments in stock or securities, or other income (generally including gains from options, futures or forward contracts) derived with respect to the business of investing in stock, securities or currency, and (b) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of its assets is represented by cash, cash items, U.S. Government securities, securities of other regulated investment companies and other securities limited, for purposes of this calculation, in the case of other securities of any one issuer to an amount not greater than 5% of the Fund's assets or 10% of the voting securities of the issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government securities or securities of other regulated B-23 investment companies). As such, and by complying with the applicable provisions of the Code, the Fund will not be subject to federal income tax on taxable income (including realized capital gains) that is distributed to shareholders in accordance with the timing requirements of the Code. If the Fund is unable to meet certain requirements of the Code, it may be subject to taxation as a corporation. Distributions of net investment income and net realized capital gains by the Fund will be taxable to shareholders whether made in cash or reinvested by the Fund in shares. In determining amounts of net realized capital gains to be distributed, any capital loss carry-overs from the eight prior taxable years will be applied against capital gains. Shareholders receiving a distribution from the Fund in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the net asset value of a share of the Fund on the reinvestment date. Fund distributions also will be included in individual and corporate shareholders' income on which the alternative minimum tax may be imposed. The Fund or the securities dealer effecting a redemption of the Fund's shares by a shareholder will be required to file information reports with the Internal Revenue Service ("IRS") with respect to distributions and payments made to the shareholder. In addition, the Fund will be required to withhold federal income tax at the rate of 31% on taxable dividends, redemptions and other payments made to accounts of individual or other non-exempt shareholders who have not furnished their correct taxpayer identification numbers and certain required certifications on the New Account application or with respect to which the Fund or the securities dealer has been notified by the IRS that the number furnished is incorrect or that the account is otherwise subject to withholding. The Fund intends to declare and pay dividends and other distributions, as stated in the prospectus. In order to avoid the payment of any federal excise tax based on net income, the Fund must declare on or before December 31 of each year, and pay on or before January 31 of the following year, distributions at least equal to 98% of its ordinary income for that calendar year and at least 98% of the excess of any capital gains over any capital losses realized in the one-year period ending October 31 of that year, together with any undistributed amounts of ordinary income and capital gains (in excess of capital losses) from the previous calendar year. The Fund may receive dividend distributions from U.S. corporations. To the extent that the Fund receives such dividends and distributes them to its shareholders, and meets certain other requirements of the Code, corporate shareholders of the Fund may be entitled to the "dividends received" deduction. Availability of the deduction is subject to certain holding period and debt-financing limitations. If more than 50% in value of the total assets of the Fund at the end of its fiscal year is invested in stock or securities of foreign corporations, the Fund may elect to pass through to its shareholders the pro rata share of all foreign income taxes paid by the Fund. If this election is made, shareholders will be (i) required to include in their gross income their pro rata share of the Fund's foreign source income (including any foreign income taxes paid by the Fund), and (ii) entitled either to deduct their share of such foreign taxes in computing their taxable income or to claim a credit for such taxes against their U.S. income tax, subject to certain limitations under the Code, including certain holding period requirements. In this case, shareholders will be informed in writing by the Fund at the end of each calendar year regarding the availability of any credits on and the amount of foreign source income (including or excluding foreign income taxes paid by the Fund) to be included in their income tax returns. If not more than 50% in value of the Fund's total assets at the end of its fiscal year is invested in stock or securities of foreign corporations, the Fund will not be entitled under the Code to pass through to its shareholders their pro rata share of the foreign taxes paid by the Fund. In this case, these taxes will be taken as a deduction by the Fund. The Fund may be subject to foreign withholding taxes on dividends and interest earned with respect to securities of foreign corporations. B-24 The use of hedging strategies, such as entering into futures contracts and forward contracts and purchasing options, involves complex rules that will determine the character and timing of recognition of the income received in connection therewith by the Fund. Income from foreign currencies (except certain gains therefrom that may be excluded by future regulations) and income from transactions in options, futures contracts and forward contracts derived by the Fund with respect to its business of investing in securities or foreign currencies will qualify as permissible income under Subchapter M of the Code. For accounting purposes, when the Fund purchases an option, the premium paid by the Fund is recorded as an asset and is subsequently adjusted to the current market value of the option. Any gain or loss realized by the Fund upon the expiration or sale of such options held by the Fund generally will be capital gain or loss. Any security, option, or other position entered into or held by the Fund that substantially diminishes the Fund's risk of loss from any other position held by the Fund may constitute a "straddle" for federal income tax purposes. In general, straddles are subject to certain rules that may affect the amount, character and timing of the Fund's gains and losses with respect to straddle positions by requiring, among other things, that the loss realized on disposition of one position of a straddle be deferred until gain is realized on disposition of the offsetting position; that the Fund's holding period in certain straddle positions not begin until the straddle is terminated (possibly resulting in the gain being treated as short-term capital gain rather than long-term capital gain); and that losses recognized with respect to certain straddle positions, which would otherwise constitute short-term capital losses, be treated as long-term capital losses. Different elections are available to the Fund that may mitigate the effects of the straddle rules. Certain options, futures contracts and forward contracts that are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held by the Fund at the end of its taxable year generally will be required to be "marked to market" for federal income tax purposes, that is, deemed to have been sold at market value. Sixty percent of any net gain or loss recognized on these deemed sales and 60% of any net gain or loss realized from any actual sales of Section 1256 Contracts will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss. Section 988 of the Code contains special tax rules applicable to certain foreign currency transactions that may affect the amount, timing and character of income, gain or loss recognized by the Fund. Under these rules, foreign exchange gain or loss realized with respect to foreign currency-denominated debt instruments, foreign currency forward contracts, foreign currency denominated payables and receivables and foreign currency options and futures contracts (other than options and futures contracts that are governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and for which no election is made) is treated as ordinary income or loss. Some part of the Fund's gain or loss on the sale or other disposition of shares of a foreign corporation may, because of changes in foreign currency exchange rates, be treated as ordinary income or loss under Section 988 of the Code rather than as capital gain or loss. A shareholder who purchases shares of the Fund by tendering payment for the shares in the form of other securities may be required to recognize gain or loss for income tax purposes on the difference, if any, between the adjusted basis of the securities tendered to the fund and the purchase price of the Fund's shares acquired by the shareholder. Section 475 of the Code requires that a "dealer" in securities must generally "mark to market" at the end of its taxable year all securities which it owns. The resulting gain or loss is treated as ordinary (and not capital) gain or loss, except to the extent allocable to periods during which the dealer held the security for investment. The "mar to market" rules do not apply, however, to a security held for investment which is clearly identified in the dealer's records as being held for investment before the end of the day in which the security was acquired. The IRS has issued guidance under Section 475 that provides that, for example, a bank that regularly originates and sells loans is a dealer in securities, and subject to the "mark to market" rules. Shares of the Fund held by a dealer in securities will be subject to the "mark to market" rules unless they are held by the dealer for investment and the dealer property identifies the shares as held for investment. B-25 Redemptions and exchanges of shares of the Fund will result in gains or losses for tax purposes to the extent of the difference between the proceeds and the shareholder's adjusted tax basis for the shares. Any loss realized upon the redemption or exchange of shares within six months from their date of purchase will be treated as a long-term capital loss to the extent of distributions of long-term capital gain dividends during such six-month period. All or a portion of a loss realized upon the redemption of shares may be disallowed to the extent shares are purchased (including shares acquired by means of reinvested dividends) within 30 days before or after such redemption. Distributions and redemptions may be subject to state and local income taxes, and the treatment thereof may differ from the federal income tax treatment. Foreign taxes may apply to non-U.S. investors. The above discussion and the related discussion in the prospectuses are not intended to be complete discussions of all applicable federal tax consequences of an investment in the Fund. The law firm of Paul, Hastings, Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign persons are subject to different tax rules, and may be subject to withholding of up to 30% on certain payments received from the Fund. Shareholders are advised to consult with their own tax advisers concerning the application of foreign, federal, state and local taxes to an investment in the Fund. DIVIDENDS AND DISTRIBUTIONS The Fund will receive income in the form of dividends and interest earned on its investments in securities. This income, less the expenses incurred in its operations, is the Fund's net investment income, substantially all of which will be declared as dividends to the Fund's shareholders. The amount of income dividend payments by the Fund is dependent upon the amount of net investment income received by the Fund from its portfolio holdings, is not guaranteed and is subject to the discretion of the Board. The Fund does not pay "interest" or guarantee any fixed rate of return on an investment in its shares. The Fund also may derive capital gains or losses in connection with sales or other dispositions of its portfolio securities. Any net gain the Fund may realize from transactions involving investments held less than the period required for long-term capital gain or loss recognition or otherwise producing short-term capital gains and losses (taking into account any carryover of capital losses from the eight previous taxable years), although a distribution from capital gains, will be distributed to shareholders with and as a part of dividends giving rise to ordinary income. If during any year the Fund realizes a net gain on transactions involving investments held more than the period required for long-term capital gain or loss recognition or otherwise producing long-term capital gains and losses, the Fund will have a net long-term capital gain. After deduction of the amount of any net short-term capital loss, the balance (to the extent not offset by any capital losses carried over from the eight previous taxable years) will be distributed and treated as long-term capital gains in the hands of the shareholders regardless of the length of time the Fund's shares may have been held by the shareholders. For more information concerning applicable capital gains tax rates, see your tax advisor. Any dividend or distribution paid by the Fund reduces the Fund's net asset value per share on the date paid by the amount of the dividend or distribution per share. Accordingly, a dividend or distribution paid shortly after a purchase of shares by a shareholder would represent, in substance, a partial return of capital (to the extent it is paid on the shares so purchased), even though it would be subject to income taxes. Dividends and other distributions will be made in the form of additional shares of the Fund unless the shareholder has otherwise indicated. Investors have the right to change their elections with respect to the reinvestment of dividends and distributions by notifying the Transfer Agent in writing, but any such change will be effective only as to dividends and other distributions for which the record date is seven or more business days after the Transfer Agent has received the written request. B-26 PERFORMANCE INFORMATION TOTAL RETURN Average annual total return quotations used in the Fund's advertising and promotional materials are calculated according to the following formula: n P(1 + T) = ERV where "P" equals a hypothetical initial payment of $1,000; "T" equals average annual total return; "n" equals the number of years; and "ERV" equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. For the period April 1, 1999 through April 30, 2000 and the fiscal year ended April 30, 2000, the Fund's average annual total return was 19.18% and 14.93%, respectively. Certain fees and expenses of the Fund have been waived or reimbursed during this period. Accordingly, return figures are higher than they would have been had such fees and expenses not been waived or reimbursed YIELD Annualized yield quotations used in the Fund's advertising and promotional materials are calculated by dividing the Fund's investment income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the net asset value per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2 [(a-b + 1)6 - 1] --- cd where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends, and "d" equals the maximum offering price per share on the last day of the period. Except as noted below, in determining net investment income earned during the period ("a" in the above formula), the Fund calculates interest earned on each debt obligation held by it during the period by (1) computing the obligation's yield to maturity, based on the market value of the obligation (including actual accrued ion the last business day of the period or, if the obligation was purchased during the period, the purchase price plus accrued interest; (2) dividing the yield to maturity by 360 and multiplying the resulting quotient by the market value of the obligation (including actual accrued interest). Once interest earned is calculated in this fashion for each debt obligation held by the Fund, net investment income is then determined by totaling all such interest earned. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. B-27 OTHER INFORMATION Performance data of the Fund quoted in advertising and other promotional materials represents past performance and is not intended to predict or guarantee future results. The return and principal value of an investment in the Fund will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. In advertising and promotional materials the Fund may compare its performance with data published by Lipper Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc. ("CDA"). The Fund also may refer in such materials to mutual fund performance rankings and other data, such as comparative asset, expense and fee levels, published by Lipper or CDA. Advertising and promotional materials also may refer to discussions of the Fund and comparative mutual fund data and ratings reported in independent periodicals including, but not limited to, THE WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD and BARRON'S. GENERAL INFORMATION Advisors Series Trust is an open-end management investment company organized as a Delaware Business Trust under the laws of the State of Delaware on October 3, 1996. The Trust currently consists of 16 series of shares of beneficial interest, par value $0.01 per share. The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interest in the Fund. Each share represents an interest in the Fund proportionately equal to the interest of each other share. Upon the Fund's liquidation, all shareholders would share pro rata in the net assets of the Fund available for distribution to shareholders. Income and operating expenses not specifically attributable to a particular Fund are allocated fairly among the Funds by the Trustees, generally on the basis of the relative net assets of each Fund in the Trust. The Declaration of Trust does not require the issuance of stock certificates. If stock certificates are issued, they must be returned by the registered owners prior to the transfer or redemption of shares represented by such certificates. If the Board of Trustees should determine that it would be detrimental to the best interests of the remaining shareholders of the Fund to make payment wholly or partly in cash, the Fund may pay redemption proceeds in whole or in part by a distribution in kind of securities from the portfolio of the Fund, in compliance with the Trust's election to be governed by Rule 18f-1 under the 1940 Act. Pursuant to Rule 18f-1, the Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day period for any one shareholder. If shares are redeemed in kind, the redeeming shareholder will likely incur brokerage costs in converting the assets into cash. Rule 18f-2 under the 1940 Act provides that as to any investment company which has two or more series outstanding and as to any matter required to be submitted to shareholder vote, such matter is not deemed to have been effectively acted upon unless approved by the holders of a "majority" (as defined in the Rule) of the voting securities of each series affected by the matter. Such separate voting requirements do not apply to the election of Trustees or the ratification of the selection of accountants. The Rule contains special provisions for cases in which an advisory contract is approved by one or more, but not all, series. A change in investment policy may go into effect as to one or more series whose holders so approve the change even though the required vote is not obtained as to the holders of other affected series. B-28 The Fund's principal underwriter is First Fund Distributors, Inc., 4455 E. Camelback Rd., Suite 261E, Phoenix, AZ 85018. The Fund's custodian, Firstar Institutional Custody Services, 425 Walnut Street, Cincinnati, Ohio 45202, is responsible for holding the Fund's assets. American Data Services, Inc., 150 Motor Parkway, Hauppage, NY 11787 acts as the Fund's accounting services agent. The Fund's independent accountants, PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY 10036, assist in the preparation of certain reports to the Securities and Exchange Commission and the Fund's tax returns. The validity of the Fund's shares has been passed on by Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco, CA 94104. Shares of the Fund owned by the Trustees and officers as a group were less than 1% at August 1,2000. On July 31, 2000, the following persons owned of record and/or beneficially more than 5% of the Fund's outstanding voting securities: Charles Schwab & Co. Inc., Special Custody Account for the Exclusive Benefit of Customers, ATTN Mutual Funds, 101 Montgomery Street, San Francisco, CA 94104; 60.67% record. National Financial Services Corp. for Exclusive Benefit of Customers, 200 Liberty Street, 5th FL, New York, NY 10281; 14.75% record. LaSalle Bank Cust, FBO Segall Bryant Omnibus, C-8159Q103, PO Box 1443, Chicago, IL 60690-1443; 7.76% record. The Boards of the Trust, the Advisor and the Distributor have each adopted a Code of Ethics under Rule 17j-1 of the 1940 Act. These Codes permit, subject to certain conditions, personnel of the Advisor and Distributor to invest in securities that may be purchased by the Fund. B-29 APPENDIX DESCRIPTION OF RATINGS MOODY'S INVESTORS SERVICE, INC.: CORPORATE BOND RATINGS Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa-Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa-Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great period of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Moody's applies numerical modifiers "1", "2" and "3" in each generic rating classification from Aa through B in its corporate bond rating system. The modifier "1" indicates that the security ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that the issue ranks in the lower end of its generic rating category. STANDARD & POOR'S RATINGS GROUP: CORPORATE BOND RATINGS AAA-This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. B-30 A-Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB-Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. Plus (+) or Minus (-)--The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major categories. COMMERCIAL PAPER RATINGS Moody's commercial paper ratings are assessments of the issuer's ability to repay punctually promissory obligations. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--higher quality; Prime 3--high quality. A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Issues assigned the highest rating, A, are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers "1", "2" and "3" to indicate the relative degree of safety. The designation A-1 indicates that the degree of safety regarding timely payment is either overwhelming or very strong. A "+" designation is applied to those issues rated "A-1" which possess extremely strong safety characteristics. Capacity for timely payment on issues with the designation "A-2" is strong. However, the relative degree of safety is not as high as for issues designated A-1. Issues carrying the designation "A-3" have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effect of changes in circumstances than obligations carrying the higher designations. B-31 PART C OTHER INFORMATION ITEM 23. EXHIBITS. (a) Agreement and Declaration of Trust (1) (b) By-Laws (1) (c) Not applicable (d) Form of Investment Advisory Agreement (4) (e) Distribution Agreement (2) (f) Not applicable (g) Custodian Agreement (3) (h) (i) Administration Agreement with Investment Company Administration Corporation (2) (ii) Fund Accounting Service Agreement (2) (iii) Transfer Agency and Service Agreement (2) (i) Opinion of Counsel (5) (j) (i) Consent of PricewaterhouseCoopers LLP (ii) Opinion and Consent of McGladrey & Pullen (k) Not applicable (l) Not applicable (m) Form of Rule 12b-1 Plan (4) (n) Not applicable (o) Not applicable (p) Code of Ethics (i) Advisors Series Trust (6) (ii) First Fund Distributors (7) (iii) Avatar Investors Associates Corp. (iv) Chase Investment Counsel (v) Rockhaven Asset Management, LLC (vi) Segall Bryant & Hamill (vii) National Asset Management - ---------- (1) Previously filed with the Registration Statement on Form N-1A (File No. 333-17391) on December 6, 1996 and incorporated herein by reference. (2) Previously filed with Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A (File No. 333-17391) on January 29, 1997 and incorporated herein by reference. (3) Previously filed with Pre-Effective Amendment No. 2 to the Registration Statement on Form N-1A (File No. 333-17391) on February 28, 1997 and incorporated herein by reference. (4) Previously filed with Post-Effective Amendment No. 37 to the Registration Statement on Form N-1A (File No. 333-17391) on January 15, 1999 and incorporated herein by reference. (5) Previously filed with Post-Effective Amendment No. 45 to the Registration Statement on Form N-1A (File No. 333-17391) on June 29, 1999 and incorporated herein by reference. (6) Previously filed with Post-Effective Amendment No. 61 to the Registration Statement on Form N-1A (File No. 333-17391) on April 19, 2000 and incorporated herein by reference. (7) Previously filed with Post-Effective Amendment No. 62 to the Registration Statement on Form N-1A (File No. 333-17391) on April 28, 2000 and incorporated herein by reference. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. None. ITEM 25. INDEMNIFICATION. Article VI of Registrant's By-Laws states as follows: Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this Article, "agent" means any person who is or was a Trustee, officer, employee or other agent of this Trust or is or was serving at the request of this Trust as a Trustee, director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise or was a Trustee, director, officer, employee or agent of a foreign or domestic corporation which was a predecessor of another enterprise at the request of such predecessor entity; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes without limitation attorney's fees and any expenses of establishing a right to indemnification under this Article. Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of this Trust) by reason of the fact that such person is or was an agent of this Trust, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, if it is determined that person acted in good faith and reasonably believed: (a) in the case of conduct in his official capacity as a Trustee of the Trust, that his conduct was in the Trust's best interests, and (b) in all other cases, that his conduct was at least not opposed to the Trust's best interests, and (c) in the case of a criminal proceeding, that he had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this Trust or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of this Trust to procure a judgment in its favor by reason of the fact that that person is or was an agent of this Trust, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this Trust and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the agent's office with this Trust. No indemnification shall be made under Sections 2 or 3 of this Article: (a) In respect of any claim, issue, or matter as to which that person shall have been adjudged to be liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity; or (b) In respect of any claim, issue or matter as to which that person shall have been adjudged to be liable in the performance of that person's duty to this Trust, unless and only to the extent that the court in which that action was brought shall determine upon application that in view of all the circumstances of the case, that person was not liable by reason of the disabling conduct set forth in the preceding paragraph and is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; or (c) of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval, or of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval, unless the required approval set forth in Section 6 of this Article is obtained. Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this Trust has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 of this Article or in defense of any claim, issue or matter therein, before the court or other body before whom the proceeding was brought, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, provided that the Board of Trustees, including a majority who are disinterested, non-party Trustees, also determines that based upon a review of the facts, the agent was not liable by reason of the disabling conduct referred to in Section 4 of this Article. Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this Article, any indemnification under this Article shall be made by this Trust only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article and is not prohibited from indemnification because of the disabling conduct set forth in Section 4 of this Article, by: (a) A majority vote of a quorum consisting of Trustees who are not parties to the proceeding and are not interested persons of the Trust (as defined in the Investment Company Act of 1940); or (b) A written opinion by an independent legal counsel. Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this Trust before the final disposition of the proceeding upon a written undertaking by or on behalf of the agent, to repay the amount of the advance if it is ultimately determined that he or she is not entitled to indemnification, together with at least one of the following as a condition to the advance: (i)security for the undertaking; or (ii) the existence of insurance protecting the Trust against losses arising by reason of any lawful advances; or (iii) a determination by a majority of a quorum of Trustees who are not parties to the proceeding and are not interested persons of the Trust, or by an independent legal counsel in a written opinion, based on a review of readily available facts that there is reason to believe that the agent ultimately will be found entitled to indemnification. Determinations and authorizations of payments under this Section must be made in the manner specified in Section 6 of this Article for determining that the indemnification is permissible. Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which persons other than Trustees and officers of this Trust or any subsidiary hereof may be entitled by contract or otherwise. Section 9. LIMITATIONS. No indemnification or advance shall be made under this Article, except as provided in Sections 5 or 6 in any circumstances where it appears: (a) that it would be inconsistent with a provision of the Agreement and Declaration of Trust of the Trust, a resolution of the shareholders, or an agreement in effect at the time of accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid which prohibits or otherwise limits indemnification; or (b) that it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 10. INSURANCE. Upon and in the event of a determination by the Board of Trustees of this Trust to purchase such insurance, this Trust shall purchase and maintain insurance on behalf of any agent of this Trust against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, but only to the extent that this Trust would have the power to indemnify the agent against that liability under the provisions of this Article and the Agreement and Declaration of Trust of the Trust. Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not apply to any proceeding against any Trustee, investment manager or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of this Trust as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a Trustee, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER. Information required by this item is contained in the Form ADV of the following entities and is incorporated herein by reference: Name of Investment Adviser File No. -------------------------- -------- Rockhaven Asset Management, LLC 801-54084 Capital Advisors, Inc. 801-14050 Chase Investment Counsel Corp. 801-3396 Avatar Investors Associates Corp. 801-7061 The Edgar Lomax Company 801-19358 AF Holdings, Inc. 801-30528 Heritage West Advisors, LLC 801-55233 Howard Capital Management 801-10188 Segall Bryant & Hamill 801-47232 National Asset Management Corporation 801-14666 Charter Financial Group, Inc. 801-50956 Chartwell Investment Partners 801-54124 ITEM 27. PRINCIPAL UNDERWRITERS. (a) The Registrant's principal underwriter also acts as principal underwriter for the following investment companies: Guinness Flight Investment Funds Fleming Capital Mutual Fund Group, Inc. Fremont Mutual Funds, Inc. Jurika & Voyles Fund Group Kayne Anderson Mutual Funds Masters' Select Investment Trust O'Shaughnessy Funds, Inc. PIC Investment Trust The Purisima Funds Professionally Managed Portfolios Rainier Investment Management Mutual Funds RNC Mutual Fund Group, Inc. Brandes Investment Trust Allegiance Investment Trust The Dessauer Global Equity Fund Puget Sound Alternative Investment Trust UBS Private Investor Funds FFTW Funds, Inc. Investors Research Fund, Inc. Harding, Loevner Funds, Inc. Samco Funds, Inc. TIFF Investment Program Trust for Investment Managers (b) The following information is furnished with respect to the officers and directors of First Fund Distributors, Inc.: Position and Offices Position and Name and Principal with Principal Offices with Business Address Underwriter Registrant - ------------------ --------------- ----------- Robert H. Wadsworth President and Vice President 4455 E. Camelback Road Treasurer Suite 261E Phoenix, AZ 85018 Eric M. Banhazl Vice President President, 2020 E. Financial Way, Ste. 100 Treasurer Glendora, CA 91741 and Trustee Steven J. Paggioli Vice President and Vice President 915 Broadway, Ste. 1605 Secretary New York, New York 10010 (c) Not applicable. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS. The accounts, books and other documents required to be maintained by Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and the rules promulgated thereunder are in the possession of the following persons: (a) the documents required to be maintained by paragraph (4) of Rule 31a-1(b) will be maintained by the Registrant; (b) the documents required to be maintained by paragraphs (5), (6), (10) and (11) of Rule 31a-1(b) will be maintained by the respective investment advisors: American Trust Company, One Court Street, Lebanon, NH 03766 Rockhaven Asset Management, 100 First Avenue, Suite 1050, Pittsburgh, PA 15222 Chase Investment Counsel Corp., 300 Preston Avenue, Charlottesville, VA 22902 Avatar Associates Investment Corp., 900 Third Avenue, New York, NY 10022 The Edgar Lomax Company, 6564 Loisdale Court, Springfield, VA 22150 AF Holdings, Inc. 465 Forest Avenue, Suite I, Laguna Beach, CA 92651 Heritage West Advisors, LLC, 1850 North Central Ave., Suite 610, Phoenix, AZ 85004 Liberty Bank and Trust Company, 4101 Pauger St., Suite 105, New Orleans, LA 70122 Howard Capital Management, 45 Rockefeller Plaza, Suite 1440, New York, New York 10111 Segall Bryant & Hamill, 10 South Wacker Drive, Suite 2150, Chicago, IL 60606 National Asset Management Corporation, 101 South Fifth Street, Louisville, KY 40202 Charter Financial Group, Inc., 1401 I Street N.W., Suite 505, Washington, DC 20005 Chartwell Investment Partners, 1235 Westlakes Drive, Suite 330, Berwyn, PA 19312 Capital Advisors, Inc. 3205 S. Boston Ave., Suite 1300, Tulsa, OK 74013 (c) with respect to The Heritage West Preferred Securities Income Fund series of the Registrant, all other records will be maintained by the Registrant; and (d) all other documents will be maintained by Registrant's custodian, Firstar Bank, 425 Walnut Street, Cincinnati, OH 45202. ITEM 29. MANAGEMENT SERVICES. Not applicable. ITEM 30. UNDERTAKINGS. Registrant hereby undertakes to: (a) Furnish each person to whom a Prospectus is delivered a copy of the applicable latest annual report to shareholders, upon request and without charge. (b) If requested to do so by the holders of at least 10% of the Trust's outstanding shares, call a meeting of shareholders for the purposes of voting upon the question of removal of a trustee and assist in communications with other shareholders. (c) On behalf of each of its series, to change any disclosure of past performance of an Advisor to a series to conform to changes in the position of the staff of the Commission with respect to such presentation. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant represents that this amendment meets the requirements for effectiveness pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement on Form N-1A of Advisors Series Trust to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Phoenix and State of Arizona on the 22nd day of August, 2000. ADVISORS SERIES TRUST By /s/ Eric M. Banhazl* ------------------------- Eric M. Banhazl President This Amendment to the Registration Statement on Form N-1A of Advisors Series Trust has been signed below by the following persons in the capacities indicated on August 22, 2000 /s/ Eric M. Banhazl* President, Principal Financial - ---------------------------- and Accounting Officer, and Trustee Eric M. Banhazl /s/ Walter E. Auch Sr.* Trustee - ---------------------------- Walter E. Auch, Sr. /s/ Donald E. O'Connor* Trustee - ---------------------------- Donald E. O'Connor /s/ George T. Wofford III* Trustee - ---------------------------- George T. Wofford III * /s/ Robert H. Wadsworth -------------------------- By: Robert H. Wadsworth Attorney in Fact EXHIBITS Exhibit No. Description - ----------- ----------- 99B.J.i Consent of PricewaterhouseCoopers 99B.J.ii Opinion and consent of McGladrey & Pullen 99B.P.iii Code of Ethics-Avatar Investors Associates Corp. 99B.P.iv Code of Ethics-Chase Investment Counsel 99B.P.v Code of Ethics-Rockhaven Asset Management 99B.P.vi Code of Ethics-Segall Bryant & Hamill 99B.P.vii Code of Ethics-National Asset Management EX-99.B.J.I 2 0002.txt CONSENT OF PRICEWATERHOUSECOOPERS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our reports dated May 23, 2000, relating to the financial statements and financial highlights which appear in the April 30, 2000 Annual Report to Shareholders of Segall Bryant & Hamill Mid Cap (a series of Advisors Series Trust) which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights", "Financial Statements", and "Counsel and Independent Accountants" in such Registration Statement. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York August 18, 2000 EX-99.B.J.II 3 0003.txt OPINION AND CONSENT OF MCGLADREY & PULLEN CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated May 28, 1999, on the 1999 financial statements of Segall Bryant & Hamill Mid Cap Fund referred to in the Post-Effective Amendment to the Registration Statement on Form N-1A as filed with the Securities and Exchange Commission. /s/ McGladrey & Pullen, LLP McGladrey & Pullen, LLP New York, New York August 18, 2000 INDEPENDENT AUDITOR'S REPORT THE BOARD OF TRUSTEES AND SHAREHOLDERS SEGALL BRYANT & HAMILL MID CAP FUND We have audited the statement of changes in net assets and financial highlights for the period April 1, 1999 to April 30, 1999 of Segall Bryant & Hamill Mid Cap Fund series of Advisors Series Trust. This financial statement and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on this financial statement and financial highlights based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statement and financial highlights referred to above present fairly, in all material respects, the changes in its net assets and the financial highlights of Segall Bryant & Hamill Mid Cap Fund for the period indicated, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP McGladrey & Pullen, LLP New York, New York May 28, 1999 EX-99.B.P.III 4 0004.txt CODE OF ETHICS - AVATAR INVESTORS ASSOCIATES AVATAR CODE OF ETHICS 1. PROHIBITION AGAINST INSIDER TRADING A. INTRODUCTION Trading securities while in possession of material, nonpublic information, or improperly communicating that information to others, may expose you to stringent penalties. Criminal sanctions may include a fine of up to $1,000,000 and/or ten years imprisonment. The SEC can recover the profits gained or losses avoided through the violative trading, a penalty of up to three times the illicit windfall, and an order permanently barring you from the securities industry. Finally, you may be sued by investors seeking to recover damages for insider trading violations. The rules contained in this Manual apply to securities trading and information handling by directors, officers and employees of the Company (including spouses, minor children and adult members of their households). The law of insider trading is unsettled and continuously developing; an individual legitimately may be uncertain about the application of the rules contained in this Manual in a particular circumstance. Often, a single question can forestall disciplinary action or complex legal problems. YOU MUST NOTIFY THE COMPLIANCE OFFICER IMMEDIATELY IF YOU HAVE ANY REASON TO BELIEVE THAT A VIOLATION OF THIS MANUAL HAS OCCURRED OR IS ABOUT TO OCCUR. B. POLICY ON INSIDER TRADING No person to whom this Manual applies may TRADE, either personally or on behalf of others (such as investment companies and private accounts managed by the Company), while in possession of material, nonpublic information, nor may any personnel of the Company COMMUNICATE material, nonpublic information to others in violation of the law. 1. WHAT IS MATERIAL INFORMATION? Information is material where there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions. Generally, this includes any information the disclosure of which will have a substantial effect on the price of a company's securities. No simple test exists to determine when information is material; assessments of materiality involve a highly fact-specific inquiry. For this reason, you should direct any questions about whether information is material to the Compliance Officer. 1 Material information often relates to a company's results and operations, including, for example, dividend changes, earnings results, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments. Material information also may relate to the MARKET for a company's securities. Information about a significant order to purchase or sell securities may, in some contexts, be material. Prepublication information regarding reports in the financial press also may be material. For example, the United States Supreme Court upheld the criminal convictions of insider trading defendants who capitalized on prepublication information about THE WALL STREET JOURNAL'S HEARD ON THE STREET column. 2. WHAT IS NONPUBLIC INFORMATION? Information is "public" when it has been disseminated broadly to investors in the marketplace. For example, information is public after it has become available to the general public through a public filing with the SEC or some other government agency, the Dow Jones "tape" or THE WALL STREET JOURNAL or some other publication of general circulation, and after sufficient time has passed so that the information has been disseminated widely. As a general rule, any information received from an issuer that has not been made public in a press release or a public filing will be considered nonpublic information. 3. IDENTIFYING INSIDE INFORMATION Before executing any trade for yourself or others, including investment companies or private accounts managed by the Company ("Client Accounts"), you must determine whether you have access to material, nonpublic information. If you think that you might have access to material, nonpublic information, you should take the following steps: * Report the information and proposed trade immediately to the Compliance Officer. * Do not purchase or sell the securities on behalf of yourself or others, including investment companies or private accounts managed by the Company. In addition, do not recommend to others that they should buy or sell that security. 2 * Do not communicate the information inside or outside the Company, other than to the Compliance Officer. * After the Compliance Officer has reviewed the issue, the Company will determine whether the information is material and nonpublic and, if so, what action the Company should take. YOU SHOULD CONSULT WITH THE COMPLIANCE OFFICER BEFORE TAKING ANY ACTION. THIS DEGREE OF CAUTION WILL PROTECT YOU, YOUR CLIENTS AND THE COMPANY. 4. CONTACTS WITH PUBLIC COMPANIES Contacts with public companies represent an important part of our research efforts. The Company may make investment decisions on the basis of conclusions formed through such contacts and analysis of publicly-available information. Difficult legal issues arise, however, when, in the course of these contacts, an employee of the Company or other person subject to this Manual becomes aware of MATERIAL, nonpublic information. This could happen, for example, if a company's Chief Financial Officer prematurely discloses quarterly results to an analyst, or an investor relations representative makes a selective disclosure of adverse news to a handful of investors. In such situations, the Company must make a judgment as to its further conduct. To protect yourself, your clients and the Company, you should contact the Compliance Officer immediately if you believe that you may have received material, nonpublic information. 5. TENDER OFFERS Tender offers represent a particular concern in the law of insider trading for two reasons: First, tender offer activity often produces extraordinary gyrations in the price of the target company's securities. Trading during this time period is more likely to attract regulatory attention (and produces a disproportionate percentage of insider trading cases). Second, the SEC has adopted a rule which expressly forbids trading and "tipping" while in possession of material, nonpublic information regarding a tender offer received from the tender offer or, the target company or anyone acting on behalf of either. Employees of the Company and others subject to this Manual should exercise particular caution any time they become aware of nonpublic information relating to a tender offer. 6. SAFEGUARDING CONFIDENTIAL INFORMATION Employees should take the following steps to ensure that the firm's policies are observed: (i) Avoid discussion of sensitive information in elevators, restaurants and other public places; and (ii) Exercise care to avoid placing documents containing sensitive information in areas where they may be read by unauthorized individuals. 3 2. PROHIBITIONS RELATING TO INVESTMENT COMPANIES A. Rule 17j-1 (the "Rule") under the Investment Company Act requires all registered investment companies to adopt a written Code of Ethics. The Rule also requires investment advisers to registered investment companies to adopt a written Code of Ethics and to report to the Board of Directors/Trustees of the investment company any material compliance violations. The Rule prohibits fraudulent activities by affili- ated persons of the investment company from: (i) employing any device, scheme or artifice to defraud any investment company; (ii) making any untrue statement of a material fact to an investment company or omitting to state a material fact necessary in order to make the statement made to an investment company, in light of the circumstances under which they are made, not misleading: (iii) engaging in any act, practice or course of business that operates or would operate as a fraud or deceit on any investment company; or (iv) engaging in any manipulative practice with respect to any investment company. 3. PERSONAL SECURITIES TRADING A. GENERAL PRINCIPLES The Company has adopted the following principles governing personal investment activities by Company personnel: * The interests of Client Accounts will at all times be placed first. * All personal securities transactions will be conducted in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility. 4 * Company personnel should not take inappropriate advantage of their positions. No officer, director or employee of the Company (or his or her family members) shall buy or sell any security for his or her own account or for an account in which he or she has, or as a result of the transaction acquires, any direct or indirect beneficial ownership (referred to herein as a "personal transaction") unless: * Advance clearance of the transaction has been obtained; and * The transaction is reported in writing to the Compliance Department in accordance with the requirements below. The term "security" includes any stock, warrant, option, bond, debenture, or any derivative instrument. B. RESTRICTIONS AND LIMITATIONS ON PERSONAL SECURITIES TRANSACTIONS The following restrictions and limitations govern investments and personal securities transactions by all officers, directors and employees of the Company (and their family members): 1. PROHIBITION ON 30 DAY SHORT-TERM TRADING Securities purchased may not be sold at a profit until at least 30 days from the purchase trade date, and securities sold may not be purchased at a lower price until at least 30 days from the sale trade date. Any violation will result in disgorgement of all profits from the transaction. This restriction on 30 day short-term trades may be waived by the Compliance Officer with respect to trades of 500 shares or less of the common stock of a company with a market capitalization of at least $1 billion. 2. PROHIBITION ON PARTICIPATION IN IPOS No officer, director or employee of the Company may acquire any security in an Initial Public Offering (IPO). 3. SPECIAL PERMISSION REQUIRED FOR PRIVATE PLACEMENTS Private placements of any kind (including limited partnership investments and venture capital investments) may only be acquired 5 with special permission of the Compliance Officer and, if approved, will be subject to continuous monitoring for possible future conflict. A request for approval of a private placement should generally be submitted at least one week in advance of the proposed date of investment. 4. DISCLOSURE OF PRIVATE PLACEMENTS IN SUBSEQUENT INVESTMENT DECISIONS Any officer, director or employee of the Company (or his or her family members) who has or acquires a personal position in an issuer through a private placement must affirmatively disclose that interest if such officer, director or employee is involved in consideration of any subsequent investment decision regarding any security of that issuer or an affiliate by any account managed by the Company. In such event, the final investment decision shall be independently reviewed by the Compliance Officer. Written records of any such circumstance shall be maintained and sent to the Compliance Officer. 5. TRADING IN A SECURITY ON THE SAME DAY THERE IS A PENDING "BUY" OR "SELL" ORDER No purchase or sale transactions may be made in any security by any officer, director or employee of the Company (or his or her family members) on any day during which any Client Account has any pending "buy" or "sell" order in the same security until that order is executed or withdrawn. This restriction may be waived by the Compliance Officer with respect to trades of 500 shares or less of the common stock of a company with a market capitalization of at least $1 billion. Any transactions in violation of this restriction will be required to be reversed and any resulting profits will be subject to disgorgement. 6. RESTRICTIONS ON TRADING IN A SECURITY BOUGHT OR SOLD FOR A CLIENT No purchase or sale transactions may be made in any security by any officer, director or employee of the Company (or his or her family members) for a period of seven (7) days before or after that security is bought or sold by any Client Account. This restriction may be waived by the Compliance Officer with respect to trades of 500 shares or less of the common stock of a company with a market capitalization of at least $1 billion. Any transactions in violation of this restriction will be required to be reversed and any resulting profits will be subject to disgorgement. 6 THE FOREGOING RESTRICTIONS AND LIMITATIONS (EXCEPT FOR ITEM B2) WILL NOT APPLY TO ANY INVESTMENT LIMITED PARTNERSHIP OR OTHER SIMILAR ACCOUNT (1) WHICH IS MANAGED BY THE COMPANY (2) HAS MORE THAN $1.5 MILLION IN ASSETS AND (3) WHOSE BENEFICIAL OWNERS INCLUDE BOTH EMPLOYEES AND AT LEAST TWO (2) INDIVIDUALS OR ENTITIES UNRELATED BY BIRTH OR MARRIAGE TO ANY EMPLOYEE. C. ADVANCE CLEARANCE REQUIREMENT 1. PROCEDURES * FROM WHOM OBTAINED. Advance clearance of all personal transactions in a security must be obtained from the Compliance Officer. * TIME OF CLEARANCE. All approved securities transactions must take place on the same day or the next business day that the advance clearance is obtained. If the transaction is not completed on the date of clearance or the next business day, a new clearance must be obtained, including one for any uncompleted portion. Post-approval is not permitted. A clearance may be revoked at any time (for example, if orders for the same security are subsequently placed for Client Accounts). * BROKERAGE ACCOUNTS. If you maintain outside brokerage accounts, it is your responsibility to arrange for the broker-dealer to send duplicate confirmations of such trades and either monthly or quarterly brokerage statements to the Compliance Officer. * INTERNET TRADING. If you execute trades through a third party on the Internet, the pre-clearance requirements and duplicate confirmations requirements continue to apply. * FORM. Clearance must be obtained by completing and signing the Securities Transaction Request Form provided for that purpose by the Compliance Department and obtaining the signature of the Compliance Officer. A sample copy of the Securities Transaction Request Form is attached. 4. FACTORS CONSIDERED IN CLEARANCE OF PERSONAL TRANSACTIONS The Compliance Officer, in keeping with the general principles and objectives of this Manual, may refuse to grant clearance of a personal 7 transaction without being required to specify any reason for the refusal. Generally, the Compliance Officer will consider the following factors in determining whether or not to clear a proposed transaction: * Whether the amount or the nature of the transaction or person making it is likely to affect the price or market of the security. * Whether the individual making the proposed purchase or sale is likely to benefit from purchases or sales being made or considered on behalf of any account managed by the Company. * Whether the transaction is voluntary on the part of the individual. As discussed above, certain of the restrictions and limitations on personal securities transactions may not apply to trades of 500 shares or less in the common stock of a company with a market capitalization of at least $1 billion. A list of such companies is maintained by the Compliance Department. Such trades nevertheless do require advance clearance from the Compliance Officer. (IMPORTANT: The Compliance Department monitors all transactions by all officers, directors and employees of the Company (including transactions in the common stock of such $1 billion market capitalization companies) in order to ascertain any pattern of conduct which may evidence conflicts or potential conflicts with the principles and objectives of this Manual, including a pattern of frontrunning.) 5. EXEMPT SECURITIES The securities listed below are exempt from the above advance clearance requirement AND the quarterly reporting requirements described below. Therefore, it is not necessary to obtain advance clearance for personal transactions in any of the following securities nor is it necessary to report such securities in the quarterly transaction reports: * U.S. Government Securities; * Bank Certificates of Deposit; * Bankers' Acceptances; * Commercial Paper; 8 * Municipal Securities (so long as the Company does not invest in such securities); * Money Market Instruments; and * Money Market Funds and Other Open-end Investment Companies (Mutual Funds) (Closed-end funds must be pre-approved). This includes mutual funds to which the Company serves as investment advisor. Automatic dividend reinvestment plan investments (DRIP's) for stock in publicly traded companies are also exempt from the advance clearance requirement and the quarterly reporting requirement; however, DRIP acquisitions should be reported on an annual basis. Commodities futures contracts and options on futures contracts are not treated as securities and do not need to be reported. 4. ACCOUNTS COVERED Advance clearance must be obtained for any personal transaction in a security by an officer, director or employee of the Company if such person has, or as a result of the transaction acquires, any direct or indirect beneficial ownership in the security. The term "beneficial ownership" is defined by rules of the SEC. Generally, a person is regarded as having beneficial ownership of securities held in the name of: * a husband, wife or a minor child; * a relative (including in-laws, step-children, or step-parents) sharing the same house; * anyone else if the officer, director or employee: + obtains benefits substantially equivalent to ownership of the securities; or + can obtain ownership of the securities immediately or at some future time. 9 5. EXEMPTION FROM CLEARANCE REQUIREMENT Clearance is not required for any account over which an officer, director or employee has no influence or control. However, the existence of such an account must be reported to the Compliance Officer. The Compliance Officer has the authority to request further information and documentation regarding any account over which an officer, director or employee reports he or she has no influence or control. D. REPORT OF TRANSACTIONS 1. INITIAL HOLDINGS REPORT As of March 1, 2000, within ten (10) days of beginning employment at the Company Employees must report the following information to the Compliance Officer: (i) The name, number of shares and principal amount of every security in which that employee had any direct or indirect beneficial ownership when the employee joined the Company. (ii) The name of any broker, dealer or bank with whom the employee maintained an account in which any securities were held for the direct or indirect benefit of the employee. (iii) The date the Report is submitted by the employee. A sample copy of the Initial Holdings Report is attached. 2. TRANSACTIONS AND ACCOUNTS COVERED All personal transactions in any account for which advance clearance is required must also be reported in the next quarterly transaction report after the transaction is effected. Every officer, director and employee of the Company must file a report when due even if such person made no purchases or sales of securities during the period covered by the report. 10 3. TIME OF REPORTING Reports of personal transactions must be made within 10 days after the end of each calendar quarter. Thus, reports are due on the 10th day of January, April, July and October. 4. FORM OF REPORTING Each Report shall contain the following information: (i) The date of the transaction, the name of the issuer and the number of shares or the principle amount of each security involved; (ii) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); (iii) The price (both per share and total amount) at which the transaction was effected; (iv) The name of the broker, dealer or bank with or through whom the transaction was effected; and (v) The date that the Report is submitted by the employee. A sample copy of the Personal Securities Transaction Report is attached. 5. ANNUAL HOLDINGS REPORT Each year, within thirty (30) days of the end of the calendar year, every employee must report the following information: (i) The name of the issuer, number of shares and principal amount of every security in which the employee had any direct or indirect beneficial ownership. (ii) The name of any broker, dealer or bank with whom the employee maintains an account in which any securities were held for the direct or indirect benefit of the employee. (iii) The date the report is submitted by the employee. A sample copy of the Annual Holdings Report is attached. 11 6. RESPONSIBILITY TO REPORT The responsibility for taking the initiative to report is imposed on each individual required to make a report. Any effort by the Compliance Department to facilitate the reporting process does not change or alter that responsibility. 7. WHERE TO FILE REPORT All reports must be filed with the Compliance Department. 8. ADMINISTRATION OF REPORTS The Compliance Officer shall compare the Reports submitted under this Section with completed and contemplated portfolio transactions of the investment companies advised by the Company to determine whether a possible violation of the Code of Ethics and/or other applicable trading policies and procedures may have occurred. NO EMPLOYEE SHALL REVIEW HIS OR HER OWN REPORT(S). THE COMPLIANCE OFFICER SHALL APPOINT AN ALTERNATIVE TO REVIEW HIS OR HER OWN REPORT(S). E. HIGH-RISK TRADING ACTIVITIES Certain high-risk trading activities, if used in the management of a personal trading portfolio, are risky not only because of the nature of the securities transactions themselves, but also because it may not be possible to close out open transactions. Examples of such activities include short sales of common stock and trading in derivative instruments, such as option contracts to purchase or sell securities at predetermined prices. Officers, directors and employees of the Company should understand that short sales and trading in derivative instruments involve special risks -- derivative instruments, for example, ordinarily have greater price volatility than the underlying security - - and that the obligations owed by each officer, director and employee to the Company may heighten those risks. For example, if the Company becomes aware of material, nonpublic information about the issuer of the underlying securities, Company personnel may find themselves "frozen" in a position in a derivative security. The Company will not bear any losses resulting in personal accounts from the implementation of this Manual. 12 F. RESTRICTIONS ON DISCLOSURES Officers, directors and employees of the Company shall not disclose any nonpublic information (whether or not it is material) relating to the Company or their securities transactions on behalf of clients to any person outside the Company (unless such disclosure has been authorized by such Company). Material, nonpublic information may not be communicated to anyone, including persons within the Company, except as provided in Section I above. Such information must be secured. For example, access to files containing material, nonpublic information and computer files containing such information should be restricted, and conversations containing such information, if appropriate at all, should be conducted in private (for example, NOT by cellular telephone, to avoid potential interception). G. REVIEW The Compliance Officer will review and consider any proper request of an officer, director or employee of the Company for relief or exemption from any restriction, limitation or procedure contained in this Manual which is claimed to cause a hardship for such person. The Compliance Officer's decision is completely within his or her discretion. H. SANCTIONS The Compliance Officer shall investigate any possible violations of the restrictions on securities trading set forth in this Section 2 to determine whether sanctions should be imposed, and will make appropriate recommendations to the President and the Board of Directors. Sanctions may include oral or written reprimand, disgorgement of profits from unauthorized or improper securities transactions, other financial penalties, demotion, or suspension or termination of employment of the violator, or such other course of action as may be appropriate. I. RECORDKEEPING The Compliance Officer shall maintain with the Code of Ethics (i) a record of any violation of this Code and any action taken as a result of such violation for a period of not less than five years following the end of the fiscal year in which the violation occurs; (ii) a copy of each report made by an employee pursuant to this Code for a period of not less than five years from the end of the fiscal year in which it is made; and (iii) a list of all persons who are, or within the past five years have been, required to make reports pursuant to the Code. 13 5. SERVICE AS DIRECTOR No officer, director or employee of the Company may serve on the board of any company whose securities are publicly traded without the prior approval of the Compliance Officer. If such approval is granted, it may be subject to the implementation of appropriate procedures to isolate investment personnel serving as directors from making investment decisions for an account managed by the Company concerning the company in question. 6. GIFTS The Advisers Act prohibits any practice or course of business which operates as a fraud or deceit upon a client. The acceptance or offering of gifts, entertainment, and/or other things of value by an employee may create a conflict of interest between the Company and the account to which a fiduciary duty is owed. This conflict of interest may be viewed as fraud. No officer, director or employee of the Company shall accept, directly or indirectly, anything of value, including gifts and gratuities, in excess of $100 per year from any person or entity that does business with the Company. This restriction does not apply to bona fide dining or bona fide entertainment if, during such dining or entertainment, the officer, director or employee is with the person or representative of the entity that does business with the Company. The following should be kept in mind when considering the receipt or giving of gifts: + Avoid even the appearance of impropriety or conflict of interest. + Gifts and entertainment should be reasonable in terms of frequency and value. + Never accept gifts, favors, entertainment or other things of value which could influence your decision making or make you feel beholden to a person or a firm. + Never offer gifts, favors or entertainment that could be viewed as overly generous or aimed at influencing decision-making or making a client feel beholden to the Company. + Gifts, favors and/or entertainment should not be solicited. + Gifts should not be sent to an employee's home. 7. PRINCIPAL AND CROSS TRANSACTIONS In a principal transaction an investment adviser enters into transactions for its own account. As a matter of policy, the Company does not engage in any principal transactions with its clients. An employee may not engage in principal transactions between a personal account and a Client Account. 14 Agency cross transactions arise where an adviser acts as broker for both its advisory client and for the counterparty on the other side of the transaction. An employee of the Company may not cause one Client Account to sell a security to another Client Account in a cross transaction if any employee or other affiliate of the Company receives compensation from any source for acting as broker. If no compensation for acting as a broker has been received, cross transactions can be executed if done as set forth below. Prior to execution of a cross transaction, the employee recommending the trade will be responsible for preparing a brief memorandum setting forth the reasons why the transaction is suitable for each client involved (e.g., differences in invested positions, investment objectives, risk tolerances, tax situations, etc.). The memorandum shall be signed by the officer or employee under whose direction it was prepared and initialed by the Compliance Officer or President and copies shall be maintained in the appropriate client files. The cross transaction must be effected for cash consideration at the current market price of the security, based on current sales data relating to transactions of comparable size. If no comparable sales data are available on the day in question, then the cross transaction shall be effected at a price equal to the average of the highest current independent bid and lowest current independent offer determined on the basis of reasonable inquiry. Restricted securities or securities for which market quotations are not readily available may not be crossed. No brokerage commission, fee (except for customary transfer fees), or other remuneration shall be paid in connection with any cross transaction. ERISA ACCOUNTS MAY NOT ENTER INTO CROSS TRANSACTIONS WITHOUT FIRST OBTAINING AN EXEMPTION FROM THE DEPARTMENT OF LABOR. 8. REPORTING OF AND CONSENT FOR OUTSIDE ACTIVITIES All outside activities conducted by an employee which either (i) involve a substantial time commitment or (ii) involve employment, teaching assignments, lectures, publication of articles, or radio or television appearances must be approved beforehand by the Compliance Officer or President. The Compliance Officer or President may require full details concerning the outside activity including the number of hours involved and the compensation to be received. Prior to accepting an officership or directorship in any private business, charitable organization or non-profit organization, an employee must also obtain approval from the Compliance Officer or President. 15 9. CONFIDENTIALITY Any information that an employee obtains regarding advice furnished by the Company to its clients, non-public data furnished to the Company by any client or the analyses and other proprietary data or information of the Company is strictly confidential and may not be revealed to third parties. Such information is the property of the Company and disclosure of such information to any third party without the permission of the Compliance Officer, President or another officer of the Company is grounds for immediate dismissal by the Company. 10. CONFLICTS OF INTEREST; PROHIBITED ACTIVITIES It is a violation of an employee's duty of loyalty to the Company for any employee, without the prior written consent of the Compliance Officer or President, to: * rebate, directly or indirectly, to any person, firm or corporation any part of the compensation received from the Company as an employee; * accept, directly or indirectly, from any person, firm, corporation or association, other than the Company, compensation of any nature as a bonus, commission, fee, gratuity or other consideration in connection with any transaction on behalf of the Company or a Client Account; or * own any stock or have, directly or indirectly, any financial interest in any other organization unrelated to the Company, engaged in any securities, financial or related business, except for a minority stock ownership or other financial interest in any business which is publicly owned. 11. INVOLVEMENT IN LITIGATION An employee must advise the Compliance Officer immediately if he or she becomes involved in or threatened with litigation or an administrative investigation or proceeding of any kind, is subject to any judgment, order or arrest, or is contacted by any regulatory authority. 12. NEW EMPLOYEE ORIENTATION All new employees will receive a copy of this Manual. Employees will be advised specifically of the Company's policies against trading in securities while in the possession of material non-public information. 13. ANNUAL ACKNOWLEDGMENT FORM Each employee shall at least annually sign a written statement acknowledging his or her receipt and understanding of, and agreement to abide by, the policies described in this Manual. 16 14. REPORT TO INVESTMENT COMPANY DIRECTORS/TRUSTEES The Company, on an annual basis, shall report to the Board of Directors/Trustees of any registered investment company to which it provides investment advisory services, a written report of any material violations of the Code of Ethics and the sanctions imposed for such violation. The Company shall also annually certify that it has adopted procedures reasonably necessary to prevent persons reporting under this Code of Ethics from violating such procedures. 15. APPROVAL AND ADMENDMENTS The Board of Directors/Trustees of any registered investment company to which the Company provides investment advisory services shall review and approve any material change to this Code of Ethics within six (6) months of such change. This Code of Ethics will be filed as an exhibit to the Registration Statement for any registered investment company to which the Company provides investment advisory services. 17 COMPLIANCE PROCEDURES 16. ADVISORY CONTRACTS A. REQUIRED PROVISIONS Advisory contracts are required to have the following provisions: 1. PROHIBITION OF ASSIGNMENT All advisory contracts must specifically provide that the Company may not assign or otherwise transfer its obligations under the contract to another adviser without the consent of the client. (If the client is an investment company, however, the advisory contract will automatically terminate in the event of an assignment.) 2. COMPENSATION ARRANGEMENTS The Advisers Act specifically prohibits an advisory contract from containing a provision that provides for compensation based on a share of capital gains or capital appreciation of a client's funds or any portion thereof. Provisions have been made, however, for payment of performance fees, which will be discussed in the section on Fees. 3. PROHIBITION ON WAIVER OF COMPLIANCE No contractual or other provision may purport to waive compliance with the Advisers Act or the rules thereunder. Similarly, the SEC staff has taken the position that any legend, hedge clause, or other contractual provision that is likely to lead a client to believe it has waived any available right of action against the Company may violate the Advisers Act's anti-fraud provisions. SAMPLE CONTRACTS ARE MAINTAINED IN THE MARKETING DEPARTMENT. THE COMPLIANCE DEPARTMENT WILL PERIODICALLY REVIEW THE CONTRACTS AND APPRISE MARKETING OF ANY AMENDMENTS TO THE CONTRACTS REQUIRED BY NEW STATUTORY INTERPRETATIONS. 17. CLIENT RELATIONS DISCLOSURE The Company is required by the Advisers Act to provide certain information to prospective and existing clients. The information required to be provided to clients is that which is provided by registered investment advisers in response to the questions contained in Part II of Form ADV, which is filed with the SEC. 18 This disclosure ensures that existing or prospective clients are furnished with at least a minimum amount of information on the background and business practices of the Company and its staff so that the client will be able to make an informed decision to initiate or continue its relationship with the Company. This includes information about the Company on such matters as the types of services provided, its methods of securities analysis and selection, its brokerage practices and the education and experience of certain of its employees. DELIVERY REQUIREMENTS All prospective clients, pursuant to Rule 204-3 under the Advisers Act, must be given a copy of Part II of Form ADV, at least 48 hours prior to the signing of the advisory contract, or at the time of entering the contract, provided the client can terminate the contract within 5 business days, together with a copy of the relevant advisory contract. To ensure that its clients have current information regarding the Company and its operations, the Company is required to deliver, or offer to deliver, copies of the current version of Part II of Form ADV on an annual basis, free of charge. This offer must be made once every calendar year beginning the year after the advisory relationship is established. This offer may be included in other dated correspondence sent to clients, such as the quarterly invoice for advisory fees. As with the initial delivery, evidence of this annual offer should be retained in the client files. THE COMPANY SENDS A COPY OF PART II OF FORM ADV TO EACH OF ITS INSTITUTIONAL CLIENTS ANNUALLY. EITHER THE COMPANY OR THE SPONSOR OF THE WRAP PROGRAMS IN WHICH THE COMPANY PARTICIPATES ANNUALLY OFFERS COPIES OF AVATAR'S PART II OF FORM ADV TO CLIENTS IN THE WRAP PROGRAMS. PERIODIC REVIEW AND UPDATING To ensure the continued accuracy of the contents of the Company's Form ADV, the Compliance Department will review the Form and circulate portions of it to employees responsible for certain sections. Any required or proposed revisions will be returned to the Compliance Department which will be responsible for making the necessary revisions to the Form and filing same with federal and state regulators. If under certain circumstances it becomes necessary to amend the disclosures in Form ADV at other than the required annual update, the Compliance Department will be responsible for making revisions and filing same with federal and state regulators. However, it is the obligation of all employees to bring to the attention of the Compliance Department any information which may give rise to a need to amend the disclosure. (See also Regulatory Reporting.) 19 18. MAINTENANCE OF CLIENT FILES When opening an account, it is advisable to document the background and investment objectives of the client. This procedure preserves a record for reference in making future investment decisions for the client's account and also serves as a basis for substantiating that the adviser's recommendations or trades were proper in light of the client's circumstances. Any form of client consent required under any regulatory scheme should be identified and obtained at the time the account is opened. It is the Company's responsibility to maintain client files, which should include the following documents: A. LEGAL FILE 1. Executed copy of the agreement with the client (with original signatures) with the fee schedule attached, along with originally executed copies of all amendments thereto. 2. A statement of investment objectives and guidelines along with any restrictions placed on the account by the client. 3. For institutional clients: a. a certified copy of the resolution of the Board authorizing the appointment of the Company as the investment adviser; b. a copy of the pension or profit sharing plan, its trust and custodian agreements along with any amendments thereto, and any other similar documents which might relate to the Company's advisory responsibilities (including an updated list of persons authorized to act on the plan's behalf); and c. a list of "parties in interests", if any, for ERISA clients. 4. Completed New Account Form. 5. A record of the annual offer by the Company of disclosure documents and a record of any delivery of such documents. Efforts should be made to obtain these documents from existing clients if they are not currently in the Company's files. 20 B. CORRESPONDENCE FILE 1. Copies of all correspondence, including marketing and sales materials, relating to the client's account. 19. REFERRAL AND SOLICITATION AGREEMENTS It is the position of the SEC that payment of some form of compensation by an investment adviser to another person or entity for the referral of clients to that investment adviser may be a violation of the antifraud provisions of the Advisers Act unless certain conditions are met. The conditions imposed by the SEC depend upon the form of compensation paid by the adviser, and the relationship between the adviser and those that refer clients to it. PAYMENT OF CASH REFERRAL FEES 1. AFFILIATED SOLICITORS Federal regulations impose few limitations on the payment of cash referral fees by the Company. It is only required that such payments be made pursuant to a written agreement between the Company and the solicitor, that the affiliation with the Company is disclosed at the time of the solicitation and that the solicitor has not been found to have violated any securities laws or other statutes, as described in the regulations. The laws and regulations of various states that require the individual registration of persons associated with investment advisers has been revised. Generally, only if the solicitor is not a supervised person of the advisory firm, will he or she have to be registered in the states. 2. UNAFFILIATED SOLICITORS Additional requirements are imposed by Federal regulations when an adviser makes cash payments to an unaffiliated solicitor. These include the following: a. A written agreement between the adviser and the solicitor that: (1) describes the solicitor's activities and its compensation for those activities; (2) contains the solicitor's undertaking to perform those duties under the agreement consistent with the adviser's instructions and the Advisers Acts; and 21 (3) requires the solicitor, at the time of any solicitation, to provide the prospective client with a copy of the adviser's disclosure documents and a separate written disclosure document describing the solicitor's relationship with the adviser. b. The solicitor's disclosure document must contain basic information relating to the solicitation, including (1) the names of the solicitor and the adviser; (2) the nature of any relationship or affiliations between the solicitor and adviser, (3) a statement that the solicitor will be compensated for his solicitation service by the adviser; (4) a description of the terms of the compensation the solicitor will be paid; and (5) the amount the client is being charged in addition to the advisory fee as a consequence of the solicitation agreement. PAYMENT OF NON-CASH REFERRAL FEES Payment of non-cash referral fees made primarily by directing brokerage to a broker-dealer who has either made the referral or has been designated by the solicitor must be done with caution. While there is no specific prohibition of this practice under the securities laws, adequate disclosure of this practice is required to be made in the adviser's disclosure document. In addition, any brokerage transactions must still meet the adviser's fiduciary responsibility of obtaining best price and execution for its clients. The concern of the regulatory authorities with this practice is that, absent adequate disclosure of the practice, the client who has been referred may not be aware of the additional expense that his account is incurring because his transactions are being directed to a specific broker rather than to those brokers whom the adviser has determined to be providing the most favorable price and execution. IT IS THE COMPANY'S POLICY THAT ANY SOLICITATION AGREEMENT CONFORM TO THE STATUTE. IN THE CASE OF DIRECTING BROKERAGE OR MAKING OTHER NON-CASH PAYMENTS FOR CLIENT REFERRALS, THE COMPANY'S DISCLOSURE DOCUMENTS WILL MAKE REFERENCE TO THESE PRACTICES, WHERE APPLICABLE. SOLICITATION ACTIVITIES ON BEHALF OF THE COMPANY'S MUTUAL FUNDS WILL BE CARRIED OUT IN ACCORDANCE WITH 22 THE INVESTMENT COMPANY ACT AND THE PROSPECTUS DISCLOSURE. AT A MINIMUM SOLICITORS MUST BE REGISTERED PRIOR TO ANY SOLICITATION. 3. PAYMENTS TO CLIENTS OR AFFILIATES OF CLIENTS Under no circumstances may payments in any form be made to any person or to anyone having influence over the decision-making process of that person (unless the person exercising influence is an employee of the Company or its subsidiaries or has a solicitor relationship as described above) for the purpose of obtaining or retaining that person or account as a client of the Company. 20. FEES Except for performance fees, the regulations do not specifically address or explicitly regulate the types or amount of advisory fees that an adviser may charge. Rather, advisers are required to make full and fair disclosures about the fees that they charge. For example, while there is no prohibition against charging a fee that is substantially higher than the fees normally charged for comparable services (considering such factors as the size of the account and the nature of the services provided), the SEC would expect to see disclosure stating that comparable services are available from other advisers at lower cost. (Generally, the staff would expect this disclosure if fees are at 3% or above, but may question even lower fees if the account is substantial and the services provided are not out of the ordinary.) If the adviser requires the prepayment of fees, disclosure must be made regarding the manner in which a refund of unearned fees may be obtained. Failure to refund the unearned portion of any prepaid fee, with the exception of a reasonable amount for start-up expenses has been held to be inherently fraudulent. In addition, if the adviser requires the prepayment of more than $500 more than six months in advance, current financial information on the adviser must be provided to the client. The staff of the SEC has also expressed concern over what it refers to as "dual fees". This would occur if an adviser charges a fee for advising clients to invest in securities, such as mutual funds, from which the same adviser also receives a fee. THE COMPANY WILL MONITOR ANY ADVISED ACCOUNT INVESTING IN ITS MUTUAL FUNDS AND MAKE FULL DISCLOSURE OF ALL FEES. 23 PERFORMANCE FEES The specific prohibition contained in the Advisers Act and the securities laws of many states against an adviser sharing in the capital gains or appreciation of its clients is based on Congressional concern that such arrangements would present the adviser with the additional opportunity for gain at the expense of the client without the adviser incurring any additional risk. It was believed that such an arrangement would encourage speculation on the part of the adviser and could lead to investment decisions being based on the potential of gain for the adviser and not in consideration of the long-term interests of its clients. This prohibition applies also to fees that may provide for the payment of additional compensation to be contingent upon the realization of a specific level of gains or appreciation (or the absence of losses). It should be noted, however, that this prohibition does not apply to an arrangement in which the payment of additional compensation to the adviser is based on the level of investment income (such as dividends or interest) received by the account. While this, too, could result in a certain bias in the adviser's decisions, it was believed that such bias, being inherently conservative, posed less risk to the well-being of the client. Of course, such arrangements would need to be described in the adviser's disclosure documents. The following are exceptions to the prohibition on performance fees: 1. FULCRUM FEES Recognizing that, in certain circumstances, some type of incentive fee arrangement would not be in conflict with the best interests of the client, the Advisers Act contains an exemption from its prohibition on performance- based fees. However, this type of arrangement, called a "fulcrum fee", may only be used with certain types of clients and the method of computing the additional compensation must follow specific guidelines. a. Eligible Clients The Advisers Act provides that a fulcrum fee can only be included in an advisory contract with: (1) a registered investment company, or (2) the account of any person as long as the account has a value in excess of $1,000,000 and that person is not a trust (such as retirement plans), governmental plan, collective trust fund or separate account. b. Calculation Method 24 The feature from which this type of arrangement derives its name is that the adviser's potential for additional compensation under this plan must be equal to the amount by which its fee could be reduced. The plan must provide that the performance fee be based on a comparison of the account's performance in relation to an appropriate index over a specified time period. An "appropriate index" would be one that reflected a universe of securities with similar risks and objectives as that of the portfolio. 2. RULE 205-3 In 1985, bowing to the wishes of the industry, the SEC adopted Rule 205-3 permitting advisers to enter into performance-based fee arrangements with a much wider spectrum of clientele. This action was based on the assumption that "sophisticated" clients (i.e. those with more money) are in a better position to protect their own interests. To retain some modicum of protection for these clients, the rule contained certain requirements that must be satisfied. They are as follows: a. Client Eligibility In order to be charged a performance-based fee under this provision, a client must be a natural person or a company (unless specifically excluded below) that has at least $750,000 under the management of the adviser at the initiation of the relationship or a net worth of at least $1,500,000 or is a qualified purchaser under Section 2(a)(51)(A) of the Investment Company Act at the time of entering into the contract. Specifically excluded are: (1) a private investment company (i.e., an investment company, such as a "hedge fund", excepted from registration under the Investment Company Act by Section 3(c)(1) thereunder), (2) an investment company registered under the Investment Company Act; or (3) a business development company (as defined in Section 202(a)(22) of the Advisers Act). 25 b. Arm's Length Arrangement To emphasize the importance that the SEC places on the adviser's duty to deal fairly with the client, the final condition imposed by this rule is that the adviser must have a reasonable basis to believe that the contract represents an "arm's length agreement" (but does not define what it means by that phrase). The adviser must also have a reasonable basis to believe that the client, together with its independent agent, if any, understands the performance fee and its risks. ERISA REQUIREMENTS Shortly after the adoption of Rule 205-3, the Department of Labor (DOL) was asked if such arrangements would present any problems for retirement plans under ERISA. The DOL issued two advisory opinions permitting performance fees if certain additional conditions were met. These include the following: a. Investments generally would be limited to securities with readily available market quotations and the small portion of investments in securities without readily available market quotations would be valued by third parties independent of the adviser; b. The compensation formula would take into account both realized and unrealized gains and losses and income during a pre-established valuation period; c. The adviser must be registered under the Advisers Act; d. The arrangement complies fully with Rule 205-3 under the Advisers Act; and e. The plans must be substantial in size (at least $50,000,000). 21. ADVERTISING AND PROMOTIONAL MATERIALS Federal and state securities laws generally prohibit an investment adviser from "engaging in any fraudulent, deceptive or manipulative activities" and have given the regulatory agencies the authority to adopt rules to define such activities and prescribe reasonable means to prevent them. Under this authority, regulations have been adopted that prohibit certain advertising activities. In addition, interpretations have been issued on specific topics, primarily the use of performance data. A. GENERAL PROHIBITIONS It is unlawful for the Company or any employee to: 26 * employ any device, scheme or artifice to defraud any client or prospective client; * make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; * engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any client or prospective client; * engage in any fraudulent, deceptive or manipulative practice with respect to any client or prospective client; or * make any communication with the public which: + operates as a fraud or deceit; or + employs or is part of a high-pressure approach; or + makes any statement that futures trading is appropriate for all persons. B. ADVERTISEMENTS BY INVESTMENT ADVISERS No employee shall publish, circulate or distribute any advertisement: * which refers, directly or indirectly, to any testimonial of any kind concerning the Company or concerning any advice, analysis, report or other service rendered by the Company; or * which refers, directly or indirectly, to past specific recommendations of the Company which were or would have been profitable to any person; provided, however, that this shall not prohibit an advertisement which sets out or offers to furnish a list of all recommendations made by the Company within the immediately preceding period of not less than one year in accordance with SEC Rule 206(4)-1; or * which represents, directly or indirectly, that any graph, chart, formula or other device being offered can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them; or which represents, directly or indirectly, that any graph, chart, formula or other device being offered will 27 assist any person in making his own decisions as to which securities to buy or sell, or when to buy or sell them, without prominently disclosing in such advertisement the limitations thereof and the difficulties with respect to its use; or * which contains any statement to the effect that any report, analysis, or other service will be furnished free or without charge, unless such report, analysis or other service actually is or will be furnished entirely free and without any condition or obligation, directly or indirectly; or * which contains any untrue statement of a material fact, or which is otherwise false or misleading. For purposes of the preceding paragraph, the term "advertisement" shall include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers: (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities. C. PERFORMANCE ADVERTISING Due to the important role that it plays in the marketing of advisory services and because of the potential for misinterpretation, the use of performance data is of great concern to the regulatory agencies. While there is no requirement that an adviser disclose its performance record, and no specific regulations dealing with the way in which it is presented, disclosure of performance is demanded by the marketplace. In an effort to provide some guidance to the industry, the staff of the SEC has issued several interpretive letters in which they identified areas of concern. The principal letter on performance advertising was issued to Clover Capital Management, Inc. in 1986 (the "Clover Letter"). The Clover Letter was not intended to be an all inclusive list of prohibited advertising practices, nor was it intended to create a "safe harbor" that could be relied upon as the exclusive factors that need to be considered in determining the necessary disclosure to make performance advertising not false or misleading. 28 1. ACTUAL PERFORMANCE In reporting the performance of accounts under management, the matters that must be considered include: a. Disclosure of Expenses - Disclosure that performance figures do not reflect the deduction of advisory fees and other expenses. b. Use of Indices - An adviser may compare its performance with that of an index. A large number of such indices are available and the regulatory concern lies with the selection of an appropriate index. The Clover Letter states that an advertisement may be fraudulent if it "...compares model or actual results to an index without disclosing all material facts relevant to the comparison." Generally, if the performance of an account is to be compared to an index, the index should be reflective of the universe in which it is anticipated that the account will invest. The indices should parallel, as much as possible, the risk or investment style the account is expected to track. For accounts that invest in various types of securities, the use of multiple indices may be appropriate. IT IS THE PRACTICE OF THE COMPANY TO USE AN APPROPRIATE INDEX WHENEVER POSSIBLE. c. Reinvestment of Income - The regulatory agencies have not specified whether performance data must reflect the reinvestment of dividends and interest earned by the account. The Clover Letter requires that all advertisements containing performance data clearly state whether or not the reinvestment of dividends and interests is included. Consistency in this practice must also be maintained between portfolio results and the indices. IT IS THE USUAL PRACTICE OF THE COMPANY TO DISCLOSE THAT ITS RESULTS INCLUDE THE REINVESTMENT OF DIVIDENDS AND INTEREST IN ALL PERFORMANCE DATA. d. Risk - The Clover Letter prohibits an advertisement that "...suggests or makes claims about the potential for profit without also disclosing the possibility of loss." 29 THE COMPANY'S MARKETING MATERIALS CONTAINING PERFORMANCE DATA MUST CONTAIN A STATEMENT TO THE EFFECT THAT PAST PERFORMANCE CANNOT BE CONSIDERED AS A GUARANTEE OF FUTURE RESULTS. e. The Investment Environment - Investment results have little meaning unless viewed in the context of the larger investment environment. An annual return of 15% may be impressive if the market declined by 5% during that same period but would not be so if the market rose by 20% or more during that period. The Clover Letter prohibits an advertisement that "...fails to disclose the effect of material market or economic conditions on the results portrayed." f. Investment Strategy - The manner in which an adviser achieves its investment results could be as relevant to the client as the results themselves. Accordingly, the Clover Letter prohibits an advertisement that "... fails to disclose material conditions, objectives or investment strategies used to obtain the results portrayed." THE COMPANY'S POLICY IS TO MAKE FULL DISCLOSURE OF MATERIAL MARKET OR ECONOMIC CONDITIONS AND/OR INVESTMENT STRATEGIES, WHEN APPROPRIATE. 2. MODEL PERFORMANCE The SEC has recognized that, in certain circumstances, it may be appropriate and even necessary for advisers to use performance data based on hypothetical or model portfolios, which has its performance tracked for current periods (unlike backtested performance--see below). However, it believes that the theoretical nature of such results makes them inherently unreliable and easily misleading. Therefore, in addition to the above mentioned items, the Clover Letter details four additional areas of concern applicable to the use of model performance data: (a) The Clover Letter, expressing concerns about the basic unreliability of model results, stated that an advertisement using model results must "...disclose prominently the limitations inherent in model results." Such limitations include such things as the inability of model results to accurately reflect the effect that transactions may have had on the price of a security. Also, hypothetical results 30 assume a strict adherence to a stated methodology for selecting securities, giving no effect to contemporaneous events which may have had a significant influence on the selection process (b) A major shortcoming of hypothetical data is the lack of records to document management decisions. The adviser must be relied upon for information regarding how the results were produced. The Clover Letter states that if model data is used, the adviser must "...disclose, if applicable, material changes in the conditions, objectives or investment strategies of the model portfolio during the period portrayed and, if so, the effect thereof." (c) The SEC was concerned with the possibility that the investment theories that were the basis of the model results may not be related to the methodology that the adviser currently uses to manage accounts. The Clover Letter states that an advertisement may be considered fraudulent for "...failing to disclose, if applicable, that some of the securities or strategies reflected in the model portfolio do not relate, or relate only partially, to the services currently offered by the adviser." (d) It has been the practice of some advisers to use model results even though they have actual clients. Usually the adviser does this to show how an account, free from "interference" of the client, can truly portray the adviser's management capability. The Clover Letter requires an adviser in this situation to "...disclose, if applicable, that the adviser's clients actually had investment results that were materially different from those portrayed in the model." The SEC has significantly narrowed the use of back-tested performance since it believes such results are inherently misleading because such results are a restatement of what was successful in past markets. Back-tested performance must be accompanied by a statement indicating that the results "do not represent the results of actual trading using client assets but were achieved by means of the retroactive application of a model." Back-tested performance should never be distributed to unsophisticated investors. 3. ADVISORY FEES A question arose as to whether performance data should be shown gross or net of management fees. The SEC has consistently, with one exception, mandated the use of net performance data, since 31 the only relevant measure of performance is the one actually realized by a client, which is net of fees and expenses. In 1988, the SEC approved the use of gross performance data when used in one-on-one presentations to certain clients (e.g. wealthy individuals, pension funds, consultants). The following four items must be present in any written materials accompanying gross performance data: (i) Disclosure that the performance figures do not reflect the deduction of investment advisory fees; (ii) Disclosure that the client's return will be reduced by the advisory fees and any other expenses it may incur in the management of its investment advisory account; (iii) Disclosure that the investment advisory fees are described in Part II of the adviser's Form ADV; and (iv) A representative example (table, chart, graph) of the effect an advisory fee, compounded over a period of years, could have on the total value of a client's account. It is the Company's policy that gross performance data may only be included in one-on-one presentation materials. However, in a 1996 no-action letter to AIMR, the SEC permitted the use of gross and net-of-fee performance with equal prominence and in a format designed not to be misleading. (Note: Presentations to registered representatives will not use gross performance data since the Company cannot control how the reps will ultimately present the information to the clients.) In computing the representative example of the effect of the advisory fee, as specified in item (iv) above, the Company will use the highest rate charged to an account. 4. AIMR PERFORMANCE PRESENTATION STANDARDS Detailed standards for the presentation of performance data were adopted by the Association of Investment Management and Research (AIMR). These standards are intended to foster a fair representation and full disclosure of performance results. A second goal of the standards is to promote greater uniformity and comparability among performance presentations. These standards 32 will have the most significant impact on the Company in the manner in which it constructs its composites. While the SEC has accepted the elimination of certain accounts from composites under certain circumstances, AIMR standards require that all fee paying accounts be included in a composite. Significant differences between accounts are to be accommodated by creating multiple composites, such as separate composites for taxable and non-taxable accounts, or accounts with varying restrictions. By requiring that every account be in at least one composite, the ability of an adviser to effectively "hide" the performance of an underperforming account is eliminated. AIMR permits an adviser to combine wrap and non-wrap accounts in one composite as long as a model wrap fee equal to the highest fee charged against the wrap accounts is deducted. AIMR also permits an adviser to use gross performance figures in all advertisements if net performance is presented in a format designed for easy comparison with appropriate disclosure. The AIMR standards require that performance presentations incorporate the following general practices: + Use of total return to calculate performance; + Use of accrual, as opposed to cash, accounting; + Use of time-weighted rates of return; + Inclusion of cash in returns; + Inclusion of all fee paying discretionary portfolios in at least one composite; + No linking of simulated and model portfolios with actual performance; + No portability of portfolio results; + Presentation of at least a 10-year performance record (or since inception, if shorter); and + Inclusion of an appropriate benchmark for comparison purposes. (eff. 1/2000) WHILE AIMR MAY IMPOSE CERTAIN REQUIREMENTS ON ITS MEMBERS REGARDING ADHERENCE TO ITS STANDARDS, THE SEC DOES NOT MANDATE COMPLIANCE WITH THOSE STANDARDS. HOWEVER, IF THE COMPANY STATES IN ITS ADVERTISING MATERIALS OR SALES PRESENTATIONS THAT THE PERFORMANCE DATA HAS BEEN COMPILED IN ACCORDANCE WITH AIMR STANDARDS, FAILURE TO LIVE UP TO THOSE STANDARDS WOULD BE CONSIDERED FALSE AND MISLEADING BY THE SEC. 33 D. PROMOTIONAL MATERIALS BY COMMODITY TRADING ADVISOR No employee shall use any promotional material on behalf of the Company which: * is likely to deceive the public; or * contains any material misstatement of fact or which the employee knows omits a fact if the omission makes the promotional material misleading; or * mentions the possibility of profit unless accompanied by an equally prominent statement of the risk of loss; or * includes a measurement or description of or makes any reference to hypothetical results which could have been achieved had a particular trading system been employed in the past unless accompanied by the statement prescribed in CFTC Rule 4.41(b)(1); or * includes any reference to actual past trading profits without mentioning that past results are not necessarily indicative of future results; or * includes any specific numerical or statistical information about the past performance of any actual accounts (including rate of return) unless such information is and can be demonstrated to the NFA to be representative of the actual performance for the same time period of all reasonably comparable accounts and, in the case of rate of return figures, unless such figures are calculated in a manner consistent with that required under CFTC Rule 4.21(A)(4)(ii)(F); or * includes statements of opinion which are not clearly identifiable as such or which do not have a reasonable basis in fact. For purposes of the preceding paragraph, "promotional material" includes: (1) any text of a standardized oral presentation, or any communication for publication in any newspaper, magazine or similar medium, or for broadcast over television, radio, or other electronic medium, which is disseminated or directed to the public concerning a futures account, agreement or transaction; (2) any standardized form of report, letter, circular, memorandum, or publication which is disseminated or directed to the public; and (3) any other written material disseminated or directed to the public for the purpose of soliciting a futures account, agreement or transaction. 34 E. REVIEW OF PROMOTIONAL MATERIALS All advertisements and promotional materials must be reviewed and approved prior to use by the Compliance Officer, the President or managing director of the Company (other than the individual who prepared such material), with a view towards ensuring that all applicable advertising guidelines are met. F. RECORDKEEPING Copies of all promotional material along with a record of the review and approval of the appropriate company official must be maintained for a period of five years from the date of the last use. Supporting documentation, including all account statements showing all debits, credits and other transactions in a client's account, must also be kept to demonstrate the calculation of performance results or hypothetical results contained in any promotional material. 22. MAINTENANCE AND RETENTION OF BOOKS AND RECORDS The Advisers Act requires that certain records be prepared and maintained by all advisers with additional records specified if the adviser provides portfolio management services or if it maintains custody of or has access to its clients' cash and securities. These records are required to be maintained on a "current" basis, which means for journals, order tickets and other records of original entry, that they be created concurrently with the transaction or other event they are recording. Summary records, like ledgers, need only be created as needed by the adviser's requirement, but usually no less frequently than monthly. The records required to be kept by Rule 204-2 under the Advisers Act are summarized below. 1. GENERAL RECORDS a. Financial Records Every registered adviser is required to maintain the standard accounting records to enable it and others to determine its financial condition. These include cash receipts and disbursement journals, a general ledger, a general journal and if appropriate, monthly trial balances. These records must be prepared in accordance with Generally Accepted Accounting Principles, which require that income and expenses be reflected on an accrual basis. THE COMPANY MAINTAINS CASH RECEIPTS AND DISBURSEMENT JOURNALS, A GENERAL LEDGER AND A GENERAL JOURNAL AND MONTHLY TRIAL BALANCES. 35 b. Order Memoranda The Advisers Act specifies that a memorandum (known as trade tickets or order tickets) of each order be maintained that reflects the following information: (1) Terms and conditions of the order; (2) Any instruction, modification or cancellation of the order; (3) The identity of the person who recommended the transaction (usually the portfolio manager) as well as who placed the order (usually the trader); (4) The account for which the order was placed and date of entry; (5) The identity of the broker, dealer, or bank with which the order was placed; and (6) Indication of whether the order was entered pursuant to the use of discretionary authority. c. Bank Records All checkbooks, bank statements, canceled checks and cash reconciliations of the adviser. THE COMPANY MAINTAINS REQUIRED BANK RECORDS RELATING TO ITS BUSINESS. d. Bills and Statements All bills or statements, paid or unpaid, relating to the business of the adviser. THE COMPANY MAINTAINS REQUIRED BILLS AND STATEMENTS RELATING TO ITS BUSINESS. e. Correspondence The originals of all written communications received and copies of all written communications sent relating to 1) recommendations or advice given or proposed to be given, 2) any receipt, disbursement or delivery of funds or securities, and 3) the placing or executing of any order to purchase or sell a security. 36 f. Discretionary Accounts An adviser is required to maintain a list of all accounts over which it has the power to exercise investment discretion. THE COMPANY EXERCISES DISCRETIONARY POWER OVER EACH OF THE ACCOUNTS IT ADVISES. g. Agreements All written agreements with clients and others relating to the Company's advisory business. This would include, in addition to advisory agreements with each client, such things as contracts to buy research services (soft dollar contracts) or to obtain other advisory services. h. Discretionary Agreement All documents evidencing discretionary powers in addition to any written advisory contracts in effect with clients. THERE ARE NO DOCUMENTS OTHER THAN THE WRITTEN ADVISORY CONTRACT EVIDENCING THE COMPANY'S DISCRETIONARY POWER OVER CLIENT ACCOUNTS. i. Advertisements Copies of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication recommending the purchase or sale of a specific security sent to 10 or more persons. If the advertisement itself does not state the basis for the recommendation, the advertising file must contain a memorandum setting for the basis. j. Personal Securities Transactions A record of every transaction in any security in which the firm or any of its "advisory representatives" acquires a direct or indirect beneficial interest, excluding accounts over which the firm or its advisory representatives have no control or transactions in U.S. Government securities. THE COMPANY'S COMPLIANCE DEPARTMENT MAINTAINS THE RECORDS EVIDENCING EMPLOYEE SECURITIES TRANSACTION. 37 k. Disclosure Documents A copy of the disclosure document used by the firm (for the Company, it is Part II of Form ADV) and a record of the dates of their initial delivery and subsequent annual delivery to clients. l. Solicitation Documents In the case of clients obtained through third party solicitors who have received referral fees, written acknowledgment by the client of the receipt of the adviser's disclosure documents as well as the disclosure documents of the solicitor. 2. RECORDS REQUIRED OF ADVISER PROVIDING PORTFOLIO MANAGEMENT Certain additional records are required for accounts that the adviser has under management. a. Account Records For each account under management, the adviser must maintain a record of the securities purchased and sold for the account and the date, amount and price at which the transaction occurred. b. Security Record For each security which is held in a client account, information from which the adviser can promptly (within 24 hours) determine the identity of each client holding a position in that security and the size of that position. 3. RETENTION The Advisers Act requires that all records be retained for at least 5 years, the first 2 of which should be in the offices of the adviser. Rule 204-2(g) of the Advisers Act states that records may be maintained on microfilm or may be computerized records, as appropriate, but only if there is adequate provision for the prompt location of and access to hard copy reproduction of such records. 38 23. PORTFOLIO MANAGEMENT PLACEMENT OF PORTFOLIO TRANSACTION 1. DUTY OF BEST EXECUTION An adviser is obligated to use its best efforts to obtain best available price and most favorable execution with respect to all portfolio transactions executed on behalf of clients. "Best price and execution" typically means the execution of a particular investment decision at a price and commission that provides the most favorable net cost or proceeds reasonably obtainable under the circumstances. In selecting a broker, an adviser should use its best judgment to choose the broker most capable of providing the range and quality brokerage services necessary to obtain best available price and most favorable execution. Factors to consider include: capable floor brokers or traders, competent block trading coverage, good communications, ability to position, arbitrage skills, administrative ability, etc. An adviser is not obligated to choose the broker offering the lowest available commission rate if, in its judgment, there is a material risk that the net cost or proceeds from the transaction might be less favorable than obtainable elsewhere. 2. SOFT DOLLAR ARRANGEMENTS a. Securities broker-dealers have long used research to attract business to their firms. When fixed minimum commission rates set by the exchanges effectively precluded competition among broker-dealers based on the price of their services, they attempted to differentiate themselves by the quality of the investment analysis produced by their research departments. To both retail and institutional clientele, the reputation as a good "stock-picker" insured a steady order flow. Through the late 1960's and into the early 1970's, as institutional interest in equities grew (primarily due to the explosive growth of mutual funds), pressure was brought to bear on the SEC and the exchanges to eliminate "fixed rates". The phase-out began in 1972 on large orders and culminated on May 1, 1975, when "negotiated rates" became the rule for transactions of all sizes. During the period in which fixed rates were being phased out, concerns arose among institutional investors, and the broker-dealers who had been providing research services to them. When competition based on price became possible, the high overhead associated with large research departments had the potential to prevent these broker- dealers from competing with other brokerage firms that might enter the field offering nothing but a low-cost execution service. Moreover, institutional investors, who were primarily managing money for others, recognized that their fiduciary duty could require them to seek the lowest-cost provider of execution services, regardless of the 39 value of the research or execution services they received. In that event, they would be deprived of the regular flow of "free" research to which they had become accustomed and would be required to pay for it out of their own resources. In response to these concerns, Congress adopted legislation in 1975 adding Section 28(e) to the Securities Exchange Act of 1934. This section provides a "safe harbor" (a non-exclusive method that, if followed, assures compliance with the law) to an investment adviser against claims that it breached its fiduciary duty under state or federal law (including ERISA) solely because the adviser caused its clients' accounts to "pay-up", that is pay more than the lowest available commission for executing a securities trade in return for brokerage and research services. Section 28(e) does not, however, relieve the adviser of the duty to obtain best execution. Because brokerage and research services acquired in this manner do not involve actual payments by the adviser out of its own pocket, this use of client commission dollars has become known as "soft-dollar arrangements". In recent years, the term "soft dollar arrangements" has been used by some to refer only to those cases where the broker-dealer is providing third-party services. However, as described above, the term is meant primarily to apply to proprietary research and brokerage services provided by the broker-dealer through whom the trade is being placed. Accordingly, when examining the Company's soft-dollar practices, it is necessary to include in that examination the transactions being placed with all broker-dealers that are providing brokerage or research services, third party and proprietary, to us. b. Availability of the Safe Harbor Section 28(e) is only available to advisers who exercise investment discretion. To rely on the safe harbor offered by Section 28(e), two conditions must be satisfied: 1) the adviser must make a good-faith determination that the amount of commissions is reasonable in relation to the value of the brokerage and research services being received, and 2) the brokerage and research services must provide lawful and appropriate assistance to the adviser in carrying out its investment decision-making responsibilities. REASONABLE RELATIVE VALUE It is the responsibility of the investment adviser to continually monitor that the services it is receiving have a value which is reasonable in light of the commissions it is paying for them. 40 This is important not only when the services are also available for cash and the relationship between the soft dollar and cash price must be kept within reasonable limits, but also when the broker-dealer is providing proprietary services. With proprietary services, the adviser should regularly survey the users of the services to determine the value that they place on the services provided. The reasonableness of the commission rate applied to these trades by the broker, as compared to what is being charged by other brokers, must also be assessed. Under no circumstances, however, should the amount of commissions being allocated for a particular service exceed 2.5 times the cash value of that service. It is expected that the ratio will generally be significantly lower. In making this good faith determination, an adviser may consider not only the benefit to be derived by the account paying the commissions, but also the benefits that may be derived by other accounts. ASSISTANCE IN INVESTMENT DECISIONS From 1975 to 1986, the SEC held that Section 28(e) was not available for the acquisition of products that were available to the adviser for cash. However, due to the difficulty in applying this standard, the test for whether or not a service was eligible for purchase using soft dollars under Section 28(e) was changed to one based upon whether the brokerage or research service provides lawful and appropriate assistance to the money manager in carrying out its investment decision-making responsibilities. While this position greatly expanded services that could legally be obtained under Section 28(e), such services still must serve some legitimate brokerage or research function. Services that assist the adviser in recordkeeping, administrative, marketing and client servicing, among others, cannot be obtained in reliance on Section 28(e). c. Mixed Use Services In many cases, a service that a broker-dealer is making available through soft dollar payments has both a research and another function. An example of such a product could be computer hardware that runs software that is used for research to benefit clients and also assists the adviser in a non-research capacity, such as bookkeeping or some other administrative function. In such instances, the adviser must allocate the cost of the service being provided between what can be incurred under Section 28(e) and what cannot. Written documentation of a good-faith attempt to make this allocation must be maintained. That portion of the cost of the service that cannot be incurred under 28(e) must be paid in cash. 42 d. Third Party Research Section 28(e) indicates that the safe harbor is available only when proprietary brokerage and research services are being provided and not when such services are originating from a third party. However, the SEC has permitted third party services under Section 28(e) subject to the following guidelines: (1) An adviser cannot first incur a direct obligation for research with a third party and then arrange to have a broker-dealer pay that amount in exchange for commissions; (2) An adviser cannot agree to make up any shortfall in the level of commissions generated by paying in cash; (3) An adviser may participate in selecting the third party research to be provided by the broker; (4) Third party research can be delivered directly to the adviser by the third party; and (5) Payments can be made to an introducing broker-dealer for third party research only if that broker-dealer is engaged in securities activities more extensive in nature than the mere receipt of commissions in payment for research services supplied to advisers. e. Eligible Transactions The obligation to determine the reasonableness of the value of the services being provided by the broker-dealer relative to compensation being received by the broker-dealer has effectively limited the availability of Section 28(e) to those types of transactions in which the amount of that compensation is determinable. Thus, only agency transactions, in which the broker-dealer is acting as agent and is paid a commission, along with initial or secondary public offerings, in which a fixed concession specified in the prospectus is paid to the members of the selling group, may be used to make soft dollar payments. PRINCIPAL TRANSACTIONS, INCLUDING RISKLESS PRINCIPAL TRANSACTIONS, AND TRANSACTIONS IN FINANCIAL FUTURES MAY NOT BE USED TO SATISFY SOFT-DOLLAR OBLIGATIONS EVEN IF THE BROKER-DEALER IMPOSES A CHARGE IDENTIFIED AS A "COMMISSION" OR "COMMISSION EQUIVALENT". 43 f. Disclosure Obligations An investment adviser must adequately disclose to clients any soft dollar arrangements, whether or not they fall within the Section 28(e) safe harbor. Disclosure is imperative because the acquisition of services for use in its business by an adviser through the use of its clients' assets (commissions generated by transactions in a client's account are as much the client's property as the account itself) is fraught with potential conflicts of interest. Item 12 of Part II of Form ADV requires disclosure of soft-dollar arrangements to provide clients with material information to assist them in deciding whether to hire an adviser or renew an existing contract. Item 12 requires disclosure regarding whether: (1) The adviser or a related party has authority to determine, without specific client consent, the broker-dealer to be used in any securities transaction or the commission rate to be paid; or (2) The adviser or a related party suggests broker-dealers to clients. If the adviser engages in either of these practices, it must describe the factors considered in selecting broker-dealers and in determining the reasonableness of commissions charged. If the value of research products or services given the adviser or a related party is a factor in these decisions, the adviser must describe the following on Schedule F of its Form ADV: (a) The research products and services; (b) Whether clients may pay commissions higher than those obtainable from other broker-dealers in return for these products and services; (c) Whether research is used to service all of the adviser's clients or just those accounts whose commission dollars are used to acquire research products or services; and (d) Any procedures the adviser has used during the past fiscal year to direct client transactions to a particular broker-dealer in return for research products or services. An adviser need not list individually each research product or service it receives, but rather can describe the types of 43 research products and services it has obtained with enough specificity so that clients can understand what is being obtained. According to the SEC, disclosure merely to the effect that "various" research products or services are obtained by the adviser does not provide the specificity required. The SEC also has cautioned that more detailed or additional information and explanatory material could and should be provided to clients where necessary in light of the particular circumstances. DISCLOSURE CONCERNING THE COMPANY'S SOFT DOLLAR PRACTICES IS CONTAINED IN SCHEDULE F OF THE COMPANY'S FORM ADV AND IS REVIEWED ANNUALLY TO ENSURE ACCURACY. THE COMPLIANCE OFFICER ALSO REVIEWS THE PROPOSED SOFT DOLLAR BUDGET PREPARED IN JANUARY OF EACH YEAR TO ENSURE COMPLIANCE WITH SECTION 28(E). MONTHLY REVIEW OF REPORTS LISTING PAYMENT OF SOFT DOLLARS ARE ALSO MONITORED. 3. CLIENT DIRECTED-BROKERAGE In some cases, the client or someone authorized to act on its behalf, will instruct the Company to direct a portion of the brokerage transactions to be effected for its account to a specific broker-dealer. In most cases, this is being done in return for services provided directly to that client, such as research, performance evaluation or other administrative services. As these commissions or any other benefit derived from transactions for an account are generally held to be the property of that account, the Company accedes to the client's direction. However, because of the Company's fiduciary responsibility to the client, the SEC has indicated that the Company must disclose to the client that it will forgo any benefit from savings on execution costs that the Company could obtain for its clients through negotiated volume discounts or bunched orders. This disclosure is contained in Part II of the Company's Form ADV. It is essential that when a client directs brokerage, documentation of the delivery of the Form ADV is retained. Specific directions received from the client must also be in writing as part of the advisory contract or as a separate amendment. WITH RESPECT TO ERISA ACCOUNTS, THE DOL HAS MADE CLEAR THAT ALL PLAN FIDUCIARIES MUST ACT PRUDENTLY AND FOR A PURPOSE THAT EXCLUSIVELY BENEFITS PLAN PARTICIPANTS AND BENEFICIARIES WHEN CAUSING SUCH A PLAN TO ENTER INTO A DIRECTED BROKERAGE ARRANGEMENT. SUCH ARRANGEMENTS CANNOT BE REMUNERATIVE TO THE FIDUCIARY (OR ANY AFFILIATE OF THE FIDUCIARY) AND MAY NOT BE USED TO PAY EXPENSES THAT ARE THE RESPONSIBILITY OF THE FIDUCIARY. ERISA RELEASE 86-1 CONTAINS THE DOL'S VIEWS ON SOFT DOLLAR POLICIES AND DIRECTED COMMISSION ARRANGEMENTS. 45 4. ALLOCATION OF TRADES Advisers need to be sensitive to allocating securities, particularly where a security is unusually attractive at the time of purchase or unattractive at the time of sale. Whether an allocation is unfair will depend on the facts and circumstances involved. At the least, an adviser should have a formula or program for allocating securities among client accounts. Advisers must also decide when and how to combine brokerage orders when deciding to fill orders for various accounts with the same security. An adviser may not allocate trades in a manner that benefits itself or its officers and employees, to the detriment of its clients. Each client must be dealt with fairly and no client should be given priority over any other client. IT IS THE COMPANY'S PRACTICE TO AGGREGATE OR "BUNCH" ORDERS FOR VARIOUS ACCOUNTS WHEN BUYING OR SELLING THE SAME SECURITY FOR EACH. ANY BENEFIT RECEIVED BY BUNCHING ORDERS (USUALLY LOWER COSTS) WILL BE PASSED ALONG TO EACH ACCOUNT INVOLVED. ALLOCATIONS TO THE VARIOUS ACCOUNTS WILL BE MADE NO LATER THAN ONE DAY AFTER THE TRADE DATE (T+1). IT IS THE COMPANY'S GENERAL PRACTICE TO ALLOCATE SECURITIES ON A PRO-RATA BASIS AMONG ACCOUNTS. Disclosure concerning this practice as well as disclosure concerning the allocation of initial public offerings that trade at a premium shortly after issuance is contained in Schedule F of the Company's Form ADV. 5. INTER-POSITIONING Inter-positioning is a practice in which an adviser, on behalf of a client, places an order with a broker to effect the transaction as agent, rather than placing the order directly with a market maker. The SEC has held this practice to be a violation of the antifraud provisions of the Advisers Act because it constitutes a device, scheme or artifice to defraud. THE COMPANY GENERALLY PLACES ORDERS DIRECTLY WITH A MARKET MAKER AND NOT THROUGH AN AGENT FOR OTC SECURITIES. 6. FRONT-RUNNING AND SCALPING Front-running occurs when an adviser or any of its employees trade in advance of the Company's customers in order to take advantage of the market impact of the customers' transaction. Scalping occurs when an adviser or any of its employees secretly place orders for their own accounts prior to publication of a 45 research recommendation and then immediately sells (or buys back) that security when the market price changes in response to the recommendation. THE COMPANY CONTINUALLY MONITORS ITS TRADING PRACTICES AND EMPLOYEE TRADING RECORDS TO ENSURE THAT NEITHER OF THESE TWO PRACTICES OCCUR. 7. CHURNING Churning is a synonym for over-trading and refers to an excessive rate of turnover in an account for the purpose of increasing the amount of commissions. In Wrap programs, there may be an incentive to engage in "negative churning". Negative churning may occur when few or no trades are made for a wrap account when circumstances warrant some level of trading. Less trading minimizes the transaction costs associated with the account to the broker. The broker, however, is still guaranteed its wrap fee, regardless of the trading activity in the account. THE COMPANY STRICTLY MONITORS ITS TRADING PRACTICES TO ENSURE THAT NEITHER CHURNING NOR NEGATIVE CHURNING OCCURS WITH RESPECT TO ANY CLIENT ACCOUNT. 8. OVERDRAFTS Overdrafts occur when a client account does not have sufficient cash in it to cover securities purchases on settlement date. The Company is prohibited from using other clients' funds to finance such an overdraft position. At the time that an order is placed for an account, the portfolio manager for the account must determine that the account will have sufficient cash on settlement date to avoid overdraft positions. 9. CLASS ACTIONS When class action notices are received on behalf of active client accounts, the Company will forward such notices to the client's custodian to make any necessary filings. It is the Company's standing policy to recommend that eligible clients participate in such class actions. 24. TRADE ERRORS It is the Company's policy that the utmost care be taken in making and implementing investment decisions on behalf of client accounts. To the extent that any errors occur, they are to be (i) corrected by the Company as soon as practical and in such a manner that the client incurs no loss, 46 (ii) reported to the appropriate internal authority, and (iii) reviewed carefully with a view toward providing supervision and procedures to prevent a recurrence. Errors may occur either in the investment making process (e.g. purchase of a security that violates investment restrictions) or in the trading process (e.g. executing a purchase instead of a sale). Errors in both categories will be referred to as trade errors. (In re Jack Allen Pirrie, July 1991). The SEC took the position in the Lerner Letter that "...an investment manager has an obligation to place orders correctly for its advised and non-advised accounts. Accordingly, if an investment manager makes an error while placing a trade for an account, then the investment manager, in order to comply with its obligation to its customer, must bear any costs of correction of such trade." To the extent that a broker-dealer absorbs losses due to an error caused by the investment manager, in the SEC's view, the broker-dealer is providing a benefit to the investment manager and not to the client for whose account the error was made. Thus the SEC has taken the position that it is inappropriate to compensate brokers with soft dollars for absorbing trade errors. The SEC stated in Lerner that the absorption of trade error losses by a broker-dealer relieves the adviser of the responsibility it would otherwise have to bear for the cost of the error. The DOL has taken the position that the receipt by an investment manager of such consideration from a party dealing with an employee benefit plan client is a violation of Section 406(b)(3) of ERISA. Under the Advisers Act, the receipt by an adviser of a benefit not protected by Section 28(e) could be deemed a violation of the anti-fraud provisions of Section 206, as well as the adviser's fiduciary duty. PROCEDURES FOR CORRECTION OF ERRORS CAUSED BY THE COMPANY In order to prevent the Company from violating the law or its fiduciary duty to clients, the following guidelines have been adopted for handling trade errors caused by the Company: a. All losses suffered by a client as a result of a trade error caused by the Company are to be reimbursed by the Company. All gains realized by an account as a result of a trade error caused by the Company are to remain in the client's account. Netting of gains and losses between clients or in the case of multiple trade errors resulting from more than one investment decision for the same client is not permissible. 47 b. Trade errors must be corrected as soon after discovery as reasonably practical, consistent with maintaining an orderly disposition and/or acquisition of the securities in question. If a correction will take longer than 2 business days after discovery to correct, the Compliance Department should be alerted. If a trade error remains uncorrected for longer than 30 days, interest on the amount of that loss should be payable to the account from the date of the error through the date of correction, at a recognized prevailing rate. c. Broker-dealers will not be permitted to assume responsibility for trade error losses caused by the Company. In the case of a dispute between the Company and a broker in which the Company believes in good faith that it was not responsible for the error and can adequately document it, the Company will allow the broker to assume responsibility for the error. d. All trade errors involving the breach of a client's investment policies or restrictions on investments should be reported to the client (which could be in the next periodic report sent to the client). e. Any trade ticket that is altered for the purpose of correcting a trade error by changing the trade date or time, the amount purchased or sold, the name of the security or the client account must be maintained. All modifications or cancellations to an order after a trade ticket has been prepared must be noted on the ticket (or an attachment) together with the reason therefor. If the record of the trade in question is system generated, an appropriate audit trail reflecting any modification or cancellation of the trade must be created. f. A trade error in one client's account may be corrected through a reallocation or other transfer of securities to another client's account only if such reallocation or other transfer represents a legitimate investment decision on behalf of each account involved, and then only if the reallocation or other transfer is done without loss to that account. PROCEDURES FOR CORRECTION OF ERRORS CAUSED BY BROKERS There may be occasions when brokers may make errors in committing to fulfill orders placed by the Company on behalf of client accounts. The following rules will apply: a. A broker's request to cancel or modify a trade will be allowed if the Company believes the broker acted in good faith and made an honest mistake. A record indicating "broker error" on a trade ticket or some other document as the reason for such cancellation or modification 48 should be maintained by the Company's trading department. Any cancellation or modification must be effected prior to settlement date. b. There must be no actual loss or expense charged to the client. 25. PROXY VOTING 1. Neither the Advisers Act nor ERISA contain regulations that provide specific instructions in this area. However, both the staff of the SEC and the DOL have provided some interpretative guidance. The SEC believes that the Advisers Act requires the adviser to act at all times solely in the best interest of its clients. The DOL issued two letters in which it set forth what it believes to be the proxy voting duties and obligations imposed on investment advisers by ERISA (the "Avon" and "Monks" letters). As a result of these letters, the adviser and the named fiduciary have the following responsibilities: a. There must be a clear delineation of the proxy voting responsibilities between the adviser and the client; b. An adviser with proxy voting authority must take steps that are reasonable under the circumstances to verify that it has actually received all the proxies for which it has voting authority; c. The named fiduciary who has delegated proxy voting authority to the adviser may not decide how the proxies are to be voted. However, it must periodically monitor the adviser's proxy voting activities; d. In order for the named fiduciary to carry out its monitoring obligation, the investment adviser must keep accurate proxy voting records. The named fiduciary must keep records of its monitoring activities; and e. In voting proxies, investment advisers must act prudently, solely in the interest of plan participants and beneficiaries, and for the exclusive purpose of providing benefits to them. An investment adviser must consider those factors that would affect the value of the plan's investments and may not subordinate the interests of plan participants and beneficiaries in their retirement income to unrelated objectives, such as social considerations (However, with respect to the related issue of making investment decisions, other DOL pronouncements emphasize that social consideration may be used in making investment decisions only to select among investments of equal risk and return.) 49 THE COMPANY WILL MAINTAIN RECORDS OF PROXY VOTING WHICH CAN BE REVIEWED BY CLIENTS AND BY THE COMPLIANCE DEPARTMENT. A MANUAL CONTAINING THE COMPANY'S PROXY VOTING GUIDELINES HAS BEEN WRITTEN AND IS REVIEWED FOR ANY NECESSARY CHANGES ANNUALLY. 2. With respect to the responsibilities of an adviser to an ERISA plan in takeover situations, a joint DOL/Department of the Treasury statement announced that ERISA does not require an adviser to automatically tender shares to capture any premium over market in these situations. Rather, the adviser must weigh the terms of any offer against the underlying intrinsic value of the company and the likelihood that the value will be realized by current management or by another offer. 26. RESPONSIBILITIES UNDER ERISA Whenever the Company acts as investment adviser or investment manager of an employee benefit plan (the "Plan") covered under ERISA, it becomes a "fiduciary" subject to the fiduciary responsibility provisions of ERISA and the DOL rules adopted in this area. A Plan sponsor may request that the Company acknowledge in writing that it is a plan fiduciary with respect to the Plan. Such an acknowledgment is appropriate, as long as it has been reviewed by the Compliance Department. The Company is also a Qualified Professional Asset Manager ("QPAM") under ERISA's regulations. A QPAM includes, among other entities, a registered investment adviser with total client assets under management of in excess of $50 million and shareholders equity in excess of $750,000. Generally, there are 3 categories of plans which are not considered employee benefit plans and thus subject to ERISA. These are: (1) an individual retirement account (IRA) annuity or bond established by an individual employee to which his employer does not contribute; (2) a plan which covers only the sole owner of a business and/or his spouse ("one-man plan") and (3) a partnership pension plan which covers only partners and their spouses ("partners- only plan"). GENERAL FIDUCIARY STANDARDS There are five general standards that govern the Company's conduct when it is a plan fiduciary: a. INTEREST OF PARTICIPANTS - It must discharge its duties regarding the Plan solely in the interest of participants and beneficiaries of the Plan b. EXCLUSIVE PURPOSE - It must discharge its duties for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the Plan. 50 c. PRUDENCE - It must discharge its duties with respect to the Plan "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of a like character and with like aims". The DOL regulations list several factors in determining prudence: (i) whether an investment is reasonably designed to further the purposes of the Plan, taking into consideration the risk of loss and the opportunity for gain. The regulation allows a "total portfolio" approach, under which the prudence of any investment is to be judged with regard to the role that it plays in the entire portfolio. Moreover, the list of permissible investments is not limited to investments that are permissible for trusts under common law; (ii) diversification of the portfolio; (iii) the liquidity and current return of the portfolio in relation to the Plan's funding objectives; and (iv) the projected return of the portfolio in relation to the Plan's anticipated cash flow requirements. d. DIVERSIFICATION - It must diversify the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. Appropriate diversification may not be described solely in terms of a fixed percentage. e. PLAN DOCUMENTS - It must discharge its duties in accordance with the Plan documents, insofar as those documents are consistent with the requirements of ERISA. PROHIBITED TRANSACTIONS Under Section 406(a) of ERISA, certain transactions between a Plan and a party-in-interest (defined as the employer and/or certain affiliates of the employer whose employees are covered by a Plan or any sponsor, fiduciary or service provider to a Plan) are prohibited because they involve potential conflicts of interest. Included in this category are the following: (1) Acquisition of any employer securities or real property in violation of Section 407(a) of ERISA. Section 407 exempts certain qualifying employer real property and securities, as long as the value of such assets do not exceed 10% of the Plan's assets. (2) Transfer to, or use by or for the benefit of, a party-in-interest of any assets of the Plan. (3) Sale, exchange or lease of any property between the Plan and a party-in-interest. 51 Under the Internal Revenue Code, an excise tax may be assessed against the Company if it participates in a prohibited transaction, even if the Plan does not incur a loss. In addition, the Company may be liable for any loss caused by a prohibited transaction in which it participated. SELF DEALING Self-dealing is also a prohibited transaction. Section 406(b) of ERISA describes certain transactions that constitute self-dealing, including: (1) Dealing with the assets of the Plan in the interest or for the account of the party-in-interest. (2) Acting on behalf of a party whose interests are adverse to the interests of the Plan in any transaction involving the Plan. (3) Receiving consideration for the adviser's own account from any party dealing with the Plan in connection with a transaction involving Plan assets. (There are certain exemptions for services provided by a bank or broker-dealer that is affiliated with the investment adviser, but this is a complicated area). BONDING REQUIREMENT ERISA requires that every fiduciary and other designated plan officials of a Plan be bonded against loss by reason of acts of fraud or dishonesty, on the part of plan officials, directly or through connivance with others. The amount of the bonds must not be less than 10% of the funds handled, but in any case cannot be less than $1,000 or more than $500,000. No deductible is permitted. Although a separate bond for each Plan is not required, each Plan must be named as an insured party under the bond. A blanket bond obtained for other purposes may not satisfy this bonding requirement. (Section 412 of ERISA). THE COMPLIANCE DEPARTMENT WILL MONITOR SECURITIES TRANSACTIONS AND INSTITUTIONAL ERISA ACCOUNTS TO ENSURE THAT NONE OF ERISA'S PROHIBITIONS ARE VIOLATED, IN THE ABSENCE OF A VALID EXEMPTION. 27. COMMODITY TRADING ADVISER The Company is registered with the CFTC and the NFA as a commodity trading adviser ("CTA"). Employees of the Company who either solicit investments in a commodity pool or who have discretionary authority to invest in futures or options, or who supervise someone who does, must register with the NFA as an "associated person". As a CTA, the Company may provide a Disclosure Document to each actual or potential client for whose account commodity trading will be utilized. 52 28. REGULATORY REPORTING FORM ADV An investment adviser has a responsibility to keep current the information in its Form ADV or become subject to disciplinary action by the SEC. In addition, a materially misleading Form ADV could result in a client asserting a claim against the adviser for fraud. An adviser must file an amendment to its Form ADV as follows: + Promptly for any changes in: Part I - Items 1, 2, 3, 4, 5, 8, 11, 13A, 13B, 14A and 14B. + Promptly for material changes in: Part I - Items 9 and 10; Part II - All items except Item 14; or Schedule H + Within ninety (90) days after the end of the fiscal year for any other changes. Amendments on Form ADV become effective upon filing. Currently, no fee is charged for filing an amendment to Form ADV. SECTION 13(f) - REPORTS OF INSTITUTIONAL INVESTMENT MANAGERS Section 13(f) under the Securities Exchange Act of 1934 requires institutional managers with over $100,000,000 of securities under management to file a quarterly report listing the holdings of the accounts under its management. Securities subject to this report include all voting equity securities that are listed either on a national securities exchange or are traded through the National Association of Securities Dealers Automated Quotation system. There is no minimum size requirement for the positions to be reported. Form 13F reports are due within 45 days after the end of each calendar quarter. COMMODITY REPORTS The Company must annually complete a self-examination questionnaire from the NFA. The Compliance Department will complete and maintain copies of these questionnaires. 29. REGULATORY INQUIRIES It is the Company's policy that all regulatory inquiries be handled by the Compliance Department. 53 Regulatory inquiries may be received by mail, telephone or personal visit. Telephone and mail inquiries should be forwarded to the Compliance Department. Personal visitors should be asked to wait in the reception area until the Compliance Department is notified. Under no circumstances should any documents or material be released without prior approval of the Compliance Department. Nor should any employee have substantive discussions with any regulatory personnel. LITIGATION AGAINST THE COMPANY All lawsuits against the Company should be immediately brought to the attention of the Compliance Department upon receipt of service or other notification of the pending action. Compliance should also be notified upon receipt of a subpoena for information from the firm relating to any matter in litigation or receipt of a judgment against the Company or any of its clients. 30. ADMINISTRATION AND RECORDS The Compliance Officer shall be responsible for general administration of the policies and procedures set forth in this Manual. The Compliance Officer shall review all reports submitted pursuant to this Manual, answer questions regarding the policies and procedures set forth in the Manual, update this Manual as required from time to time, and arrange for appropriate records to be maintained, including copies of all reports submitted under this Manual. The Compliance Officer shall render such reports to the Board of Directors of the Company with respect to compliance matters as the Board of Directors shall from time to time request, including reports on any violations of the policies and procedures set forth in this Manual or any law or regulation known to him or her and the disposition or proposed disposition thereof. Notwithstanding the foregoing, the Compliance Officer shall have discretion not to make a report to the Board of Directors if the Compliance Officer finds that by reason of the size of the transaction, the circumstances or otherwise, no fraud or deceit or manipulative practice could reasonably be found to have been practiced on any other person. A written memorandum of any such finding shall be filed with reports made pursuant to this Manual. 31. SANCTIONS The Compliance Officer shall investigate any possible violations of the policies and procedures set forth in this Manual to determine whether sanctions should be imposed, and will make appropriate recommendations to the President and the Board of Directors. Sanctions may include oral or written reprimand, distribution of profits from unauthorized or improper securities transactions, other financial penalties, demotion, or suspension or termination of employment of the violator, or such other course of action as may be appropriate. 54 Annex A To Avatar Investors Associates Corp. Compliance Manual and Code of Ethics EMPLOYEE ANNUAL ACKNOWLEDGMENT FORM The undersigned employee (the "Employee") of Avatar Investors Associates Corp. (the "Company") acknowledges having received and read a copy of the Compliance Manual and Code of Ethics, dated June 1998 (the "Manual"), and agrees to abide by the provisions contained therein. The Employee understands that observance of the policies and procedures contained in the Manual is a material condition of the Employee's employment by the Company and that any violation of any of such policies and procedures by the Employee will be grounds for immediate termination by the Company. The Employee specifically agrees as follows: The Employee will not trade on the basis of, nor disclose to any third party, material non-public information, nor confidential information regarding the activities of any Client Account. The Employee will not engage in any securities transactions without obtaining the prior approval of the Compliance Officer as required in Section 2. The Employee will report all securities transactions to the Compliance Officer as provided in Section 2. The Employee will provide to the Compliance Officer, at least monthly, copies of all trade confirmations and brokerage statements relating to such accounts. The Employee will not, without the permission of the Compliance Officer, disclose to any third party any information that the Employee obtains regarding advice furnished by the Company to its Client Accounts, non-public data furnished by any client, or the programs, analyses or other proprietary data or information of the Company. The Employee will annually certify to the Compliance Officer that the Employee has reported all transactions in all accounts which the Employee owns 1 or in which the Employee has a beneficial interest and all private securities transactions which are not carried out through brokerage accounts. By the signature below, the Employee pledges to abide by the policies and procedures described above and affirms that the Employee has not previously violated such policies or procedures and has reported all securities transactions for his personal account in the most recent calendar year as required by the Manual. - --------------------------- ---------------------------------------- Date Name of Employee ---------------------------------------- Signature of Employee EX-99.B.P.IV 5 0005.txt CODE OF ETHICS - CHASE INVESTMENT COUNSEL February 1, 2000 CHASE INVESTMENT COUNSEL CODE OF ETHICS Purpose: AN INVESTMENT ADVISER IS A FIDUCIARY, AND AS SUCH, OWES UNDIVIDED LOYALTY TO ITS CLIENTS. CLIENT INTERESTS TAKE PRIORITY OVER ALL NON-CLIENT MEMBERS OF CHASE INVESTMENT COUNSEL CORPORATION ("CICC" OR THE "CORPORATION"). TO AVOID CONFLICTS OF INTEREST WITH CLIENT INTERESTS THIS CODE OF ETHICS IS ADOPTED. The Securities and Exchange Commission (the "SEC") adopted Rule 17j-l under the Investment Company Act of 1940, as amended (the "Investment Company Act") to require investment companies to adopt a written Code of Ethics designed to deal with the potential "conflicts of interests" that might arise with regard to transactions by affiliated persons of an investment company. Thus, each investment company ("Fund" or "Client") advised by Chase Investment Counsel Corporation (the "Adviser" or "CICC") requires the Adviser to adopt a Code of Ethics. The Compliance Officer is David Scott and questions about the meaning or application of this Code should be directed to him. Capitalized terms are further defined at Section V. I. PROHIBITED PURCHASES, SALES AND OTHER ACTIONS The following procedures apply to all Access Persons (as such term is defined at Section V): (a) Access Person security transactions (including private placements) should not in any way adversely affect the interests of clients. (b) No Access Person may purchase any security which at the time is being purchased or is on the active list of buy recommendations until Clients' commitments have been satisfactorily filled. (c) Sales of securities by Access Persons may not be made just before or during a period where active sales are being executed, or, to his or her knowledge are being considered for sale, by Clients until Client holdings have been satisfactorily eliminated, unless mitigating circumstances arise, and then prior approval must be obtained from the Compliance Officer. (d) Access Persons are prohibited from selling short a security which is held long in any Client's account, except that short sales may be made "against the box" for tax purposes. (e) Access Persons may only purchase Initial Public Offerings (IPOs) and Limited Public Offerings (I.E. private placements) with prior approval by the Compliance Officer. An exception would be where the Access Person is a depositor in a saving bank converting from a mutual to a stock form of ownership. (f) Access Persons must provide the Compliance Officer a list of securities owned and brokerage accounts held within 10 days of employment by CICC (an "Initial Holdings Report"). This Initial Holdings Report must be updated with an Annual Holdings Report within 30 days of each year-end. 1 (g) Access Persons are prohibited from receiving any gift or other thing of more than de minimis value (more than nominal value - I.E., $100) from any broker or other entity that does business with or on behalf of CICC. II. SCOPE OF THIS CODE OF ETHICS This Code of Ethics applies to any security in which the Access Person has "a direct or indirect beneficial ownership." "Beneficial ownership," as used in this Code, generally covers securities: (a) held for your benefit, regardless of how registered. (b) held by your spouse, or minor children, or any relative of yours or your spouse who is presently sharing your home. (c) held by you as trustee when you or members of your family have a beneficial interest in the trust. (d) held by another person, if by reason of any agreement, relationship or other arrangement, you obtain benefits substantially equivalent to those of ownership. Furthermore, a person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, if he or she can vest or revest title in himself or herself at once, or at some future time, or if he or she has investment discretion over the account. The prohibitions set forth in this Code shall not apply to: (a) Purchases or sales effected in any security over which an Access Person has no direct or indirect influence or control; (b) Purchases or sales of securities which are not eligible for purchase or sale by a Fund, except that this Code does apply to purchases or sales of securities which are derivatives of securities that are eligible for purchase or sale by a Fund. (c) Purchases or sales of securities which are issued by the Government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper and shares of registered open-end investment companies; (d) Purchases which are part of an automatic dividend reinvestment plan; (e) Purchases effected upon exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. When an Access Person intends a security transaction not clearly beyond the bounds of conflict of interest, as outlined above, clearance must be obtained from the Compliance Officer, or Derwood S. Chase (the "President"), or other authorized person, before the transaction is made. If you have questions, please don't hesitate to ask for further information. 2 III. THE QUARTERLY TRANSACTION REPORTING REQUIREMENT Each Access Person shall file with the Fund's President a report within 10 days of each calendar quarter, reporting every transaction in a security in which he or she has, or by reason of such transaction acquires, any direct or indirect beneficial ownership, except purchases and sales specified in this Code as exempt (a "Quarterly Transaction Report"). The Quarterly Transaction Report shall also list any brokerage account opened by the Access Person during the previous quarter. FORM OF REPORT. * Access Persons shall report to the Compliance Officer every transaction in any security in which such Access Person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership, except purchases or sales effected in any account over which such Access Person has no direct or indirect control. The report must indicate: the nature of the transaction (I.E., purchase, sale or any other type of acquisition or disposition), number of units, name of security, date of trade, price, broker, name of holder, date of purchase or sale. A COPY OF THE TRANSACTION CONFIRMATION WHICH DUPLICATES THE ABOVE INFORMATION MAY BE SUBSTITUTED FOR THE QUARTERLY TRANSACTION REPORT. * All transactions during a calendar quarter to be reported should be listed on the Quarterly Transaction Report provided by the Adviser and reported no later than ten (10) days after the end of each quarter. COPIES OF CONFIRMATION STATEMENTS MAY BE ATTACHED TO AN ACCESS PERSON'S SIGNED REPORT IN LIEU OF LISTING OF THE TRANSACTIONS. * Information supplied on the Quarterly Transaction Reports is available for inspection by the SEC at any time during the five year period following the end of the fiscal year in which each report is made. IV. SANCTIONS No Code of Ethics can cover every possible circumstance, and an individual's conduct must depend ultimately upon his or her sense of fiduciary obligation to a Fund and its shareholders. Nevertheless, this Code of Ethics sets forth the policy regarding conduct in those situations in which conflicts of interest are most likely to develop. Because the standards in this Code of Ethics are minimal rather than permissive, careful adherence to the Code is essential. Violation of this Code will result in sanctions appropriate under the circumstances. Violators may be required to give up any profit or other benefit realized from any transaction in violation of this Code. In addition, conduct inconsistent with this Code may result in a letter of censure or suspension or termination of the employment of the violator. A record of violations of this Code of Ethics, and of any action taken as a result of such violations. will be available for inspection by the SEC at any time during the five-year period following the end of the fiscal year in which each such violation occurs. 3 Each year the Compliance Officer shall provide to the Board of Trustees of a Fund a written report that describes any material violation of this Code and sanctions imposed. The report shall also certify that the Adviser has adopted procedures reasonably necessary to prevent Access Persons from violating this Code. V. DEFINITIONS ACCESS PERSON. As used in this Code, the term "Access Person" shall mean any trustee, officer or Advisory Person of a Fund. The Adviser will maintain, and update, a list of Access Persons. ADVISORY PERSON. The term "advisory person" shall mean (a) any employee of the Adviser or of any company in a control relationship to the Adviser, who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by a Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (b) any natural person in a control relationship to a Fund or the Adviser who obtains information concerning recommendations made to a Fund with regard to the purchase or sale of a security. The Compliance Officer will maintain a list of employees considered advisory persons for each Fund. PURCHASE OR SALE OF A SECURITY. As used in this Code, "purchase or sale of a security" includes, INTER ALIA, the writing of an option to purchase or sell a security. SECURITY. As used in this Code, the term "security" shall have the same meaning as set forth in Section 2(a)(36) of the Investment Company Act, except that it shall not include securities issued by the Government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper and shares of registered open-end investment companies. SECURITY HELD OR TO BE ACQUIRED. As used in this Code, this term shall mean any security as defined, which, within the most recent 15 days (a) is or has been held by a Fund or (b) is being or has been considered by a Fund or its Adviser for purchase by a Fund. AUTHORIZED PERSON. Shall mean an officer of a Fund or of a Fund's Adviser and such other persons as shall be specifically designated by a Fund's trustees. A security is "BEING CONSIDERED FOR PURCHASE OR SALE" when a recommendation to purchase or sell a security has been made or communicated and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation. Reviewed and Approved by the Board of Trustees on ______________________________ 4 February 1, 2000 PERSONAL TRADING POLICIES AND PROCEDURES Attached is our current policy statement prohibiting the misuse of inside information by employees. I am sure you will appreciate the importance of this policy to our business. Please sign and return this page to David Scott indicating you and your spouse have read the attached policy statement and are complying with it. Please retain the policy statement for your reference. Cordially, Derwood S. Chase, Jr. President, Chase Investment Counsel Corp. Attachment - ---------------------------------------- -------------------------------- Employee's Signature Date - ---------------------------------------- -------------------------------- Spouse's Signature Date 5 February 1, 2000 PERSONAL TRADING POLICIES AND PROCEDURES PURPOSE OF PERSONAL TRADING POLICIES AND PROCEDURES Federal law prohibits Chase Investment Counsel Corporation (the "Adviser" or "CICC") and each of its Employees from purchasing or selling any publicly-traded stock, bond, option or other security on the basis of material, nonpublic information (I.E., insider trading). In addition, the Adviser and each of its Employees has a fiduciary obligation to the Adviser's clients to protect the confidentiality of all proprietary, sensitive or other confidential information communicated to the Adviser or such Employees by the Adviser's clients. Finally, because the Adviser and each of its Employees is a fiduciary to the Adviser's clients, the Adviser and such Employees must also maintain the highest ethical standards and refrain from engaging in activities that may create actual or apparent conflicts of interest between the interests of the Adviser or such Employees and the interests of the Adviser's clients. To ensure that insider trading laws are not violated, that client confidences are maintained, and that conflicts of interest are avoided, the Adviser has adopted the policies and procedures set forth in these Personal Trading Policies and Procedures. The policies and procedures set forth herein are intended to articulate the Adviser's policies, educate the Employees about the issues and the Adviser's policies, establish procedures for complying with those policies, monitor compliance with such policies and procedures, and ensure, to the extent feasible, that the Adviser satisfies its obligations in this area. By doing so, the Adviser hopes that the highest ethical standards are maintained and that the reputation of the Adviser is sustained. To the extent that the Adviser serves as a subadviser to any investment company registered under the Investment Company Act of 1940, as amended (the "Company Act"), these Personal Trading Policies and Procedures are intended to constitute a Code of Ethics as required by Rule 17j-1 under the Company Act. GENERALLY INSIDER TRADING It is unlawful to engage in "insider trading." This means, in general, that no "insider" may (i) purchase or sell a security on the basis of material, nonpublic information or (ii) communicate material, nonpublic information to another where the communication leads to, or is intended to lead to, a purchase or sale of securities. Although the insider trading prohibitions extend to the activities of the Employees, because the Adviser does not have an investment banking division or affiliate, it is anticipated that Employees will not routinely receive "inside information." However, to educate the Employees, more information describing "insider trading" and the penalties for such trading is set forth below. Compliance procedures regarding the use of inside information by the Employees are also described just in case an Employee receives inside information. 6 OTHER CONFIDENTIAL INFORMATION Certain information obtained by the Adviser that does not constitute "inside" information still constitutes confidential information that must be protected by the Adviser and its Employees. Compliance procedures regarding the use and treatment of that confidential information are set forth below. CONFLICTS OF INTEREST As a fiduciary to the Adviser's clients, each Employee must avoid actual and apparent conflicts of interest with the Adviser's clients. Such conflicts of interest could arise if securities are bought or sold for personal accounts in a manner that would significantly compete with the purchase or sale of securities for client accounts, or if securities are bought or sold for client accounts in a manner that is advantageous to such personal accounts. Also, the SEC has determined that it is a conflict of interest for an investment adviser's employees to personally take advantage of a limited investment opportunity without first considering whether the investment is appropriate for any of the adviser's clients. If so, the adviser's employees are first obligated to make such limited opportunity available to the adviser's clients. More information describing such conflicts of interest and the compliance procedures for avoiding such conflicts of interest are set forth below. INSIDER TRADING INSIDER TRADING DEFINED The term "insider trading" is generally used to refer to (i) a person's use of material, nonpublic information in connection with transactions in securities and (ii) certain communications of material, nonpublic information. The laws concerning insider trading generally prohibit: * The purchase or sale of securities by an insider, on the basis of material, nonpublic information; * The purchase or sale of securities by a non-insider, on the basis of material, nonpublic information where the information was disclosed to the non-insider in violation of an insider's duty to keep the information confidential or was misappropriated; or * The communication of material, nonpublic information in violation of a confidentiality obligation where the information leads to a purchase or sale of securities. 7 + WHO IS AN INSIDER? The concept of "insider" is broad. It includes officers, trustees, partners, employees and majority shareholders of a company or other entity. In addition, a person can be considered a "temporary insider" of a company or other entity if he or she enters into a confidential relationship in the conduct of the company's or entity's affairs and, as a result, is given access to information that is intended to be used solely for such company's or entity's purposes. A temporary insider can include, among others, an entity's attorneys, accountants, consultants, investment bankers, commercial bankers and the employees of such organizations. In order for a person to be considered a temporary insider of a particular entity, the entity must expect that the person receiving the information keep the information confidential and the relationship between the entity and the person must at least imply such a duty. Analysts are usually not considered insiders of the entities that they follow, although if an analyst is given confidential information by an entity's representative in a manner in which the analyst knows or should know to be a breach of that representative's duties to the entity, the analyst may become a temporary insider. + WHAT IS MATERIAL INFORMATION? Trading on inside information is not a basis for liability unless the information is "material." Material information is generally defined as information that a reasonable investor would likely consider important in making his or her investment decision, or information that is reasonably certain to have a substantial effect on the price of a company's securities. Information that should be considered material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidity problems and extraordinary management developments. Material information does not have to relate to a company's business, it can be significant market information. For example, a reporter for THE WALL STREET JOURNAL was found criminally liable for disclosing to others the dates on which reports on various companies would appear in THE WALL STREET JOURNAL and whether or not those reports would be favorable. + WHAT IS NONPUBLIC INFORMATION? Information is nonpublic unless it has been effectively communicated to the market place. For information to be considered public, one must be able to point to some fact to show that the information has been generally disseminated to the public. For example, information found in a report filed with the SEC or appearing in Dow Jones, REUTERS ECONOMIC SERVICES, THE WALL STREET JOURNAL or another publication of general circulation is considered public. Market rumors are not considered public information. + PENALTIES FOR INSIDER TRADING Penalties for trading on or communicating material, nonpublic information are severe, both for the individuals involved in the unlawful conduct and for their employers. A person can be subject to some or all of the penalties set forth below even if he or she does not personally benefit from the violation. Penalties include: * civil injunctions; * disgorgement of profits; 8 * jail sentences; * fines for the person who committed the violation of up to three times the profit gained or loss avoided (per violation, or illegal trade), whether or not the person actually benefited from the violation; and * fines for the employer or other controlling person of the person who committed the violation of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided (per violation, or illegal trade). In addition, any violation of the procedures set forth in these Personal Trading Policies and Procedures can be expected to result in serious sanctions by the Adviser, including dismissal of the persons involved. POLICY STATEMENT REGARDING INSIDER TRADING The Adviser expects that each of its Employees will obey the law and not trade on the basis of material, nonpublic information. In addition, the Adviser discourages its Employees from seeking or knowingly obtaining material, nonpublic information. The Adviser also prohibits each of its Employees from serving as an officer or director of any company having Publicly-Traded Securities. PROCEDURES TO PREVENT INSIDER TRADING As indicated above, because the Adviser does not have an investment banking division or affiliate and because the Adviser prohibits its Employees from serving as officers or directors of companies having Publicly-Traded Securities, the Adviser does not anticipate that its Employees will routinely be in receipt of material, nonpublic information. From time to time, however, Employees may receive such information. If any Employee receives any information which may constitute such material, nonpublic information, such Employee (i) should not buy or sell any securities, including options or other securities convertible into or exchangeable for such securities for a personal account or a client account, (ii) should not communicate such information to any other person (other than the Compliance Officer) and (iii) should discuss promptly such information with the Compliance Officer. Under no circumstances should such information be shared with any persons not employed by the Adviser, including family members and friends. Each Employee contacting an issuer or analyst should identify himself as associated with the Adviser and identify the Adviser as an investment management firm, and, after the conversation, make a memorandum memorializing the conversation with the issuer or analyst (including the beginning of the conversation where such Employee identified himself as associated with the Adviser). 9 OTHER CONFIDENTIAL INFORMATION CONFIDENTIAL INFORMATION DEFINED As noted above, even if the Adviser and its Employees do not receive material, nonpublic information (I.E., "inside information"), such persons may receive other confidential or sensitive information from or about the Adviser's clients and ,they will receive confidential or sensitive information about the Adviser's affairs. Such confidential or sensitive information may include, among other things: * The name of the client. The Adviser is obligated by law not to divulge or use its clients' names without their consent. * Financial or other information about the client, such as the client's financial condition or the specific securities held in a specific client's portfolio. * The names of the securities on the Adviser's buy, sell and source of funds lists. * The name of any security under consideration for placement on the buy, sell or source of funds list. * Any information privately given to an Employee, that if publicly known, would be likely to (i) affect the price of any security in the portfolio of any client of the Adviser or (ii) embarrass or harm the client or the Adviser. Given the breadth of the above, all information that an Employee obtains through the Adviser should be considered confidential unless that information is specifically available to the public. POLICY STATEMENT REGARDING USE AND TREATMENT OF CONFIDENTIAL INFORMATION All confidential information, whatever the source, may be used only in the discharge of the Employee's duties with the Adviser. Confidential information may not be used for any personal purpose, including the purchase or sale of securities for a personal account. PROCEDURES REGARDING USE AND TREATMENT OF CONFIDENTIAL INFORMATION The Adviser encourages its Employees to be aware of, and sensitive to their treatment of confidential information. The Adviser prohibits its Employees from discussing such information unless necessary as part of their duties and responsibilities to the Adviser. Furthermore, the Adviser requires that each Employee take precautions to avoid storing confidential information in plain view in public areas of the Adviser's facilities, and requires that each Employee remove confidential information from conference rooms, reception areas and other areas where it may be seen by third parties. Particular care should be exercised when confidential information must be discussed in public places, such as restaurants, elevators, taxicabs, trains or airplanes, where such information may be overheard. Under no circumstances may confidential information be shared with any person, including any spouse or other family member, who is not an Employee of the Adviser. 10 CONFLICTS OF INTEREST INVOLVING TRADING SECURITIES FOR PERSONAL ACCOUNTS FIDUCIARY DUTY TO AVOID CONFLICTS OF INTEREST BETWEEN CLIENT ACCOUNTS AND PERSONAL ACCOUNTS As noted above, because the Adviser and each of its Employees is a fiduciary to the Adviser's clients, such persons must avoid actual and apparent conflicts of interest with the Adviser's clients. The client's interest takes precedence over the personal interests of the Adviser and its Employees. If a potential conflict arises, the Adviser and the Employee must resolve the matter in the client's favor. An actual or apparent conflict of interest could arise when both an Employee and a client of the Adviser engage in transactions involving a Publicly-Traded Security (as defined herein). In such cases, transactions for client accounts must take precedence over transactions for Personal Accounts. Conflicts of interest will often arise when an Employee becomes aware of limited investment opportunities, such as private placements, limited partnerships or any thinly traded securities, whether public or private (referred to hereafter as "Limited Investment Opportunities"). Because of the inherent potential for conflict, extreme care is required to prevent, limited investment opportunities demand extreme care and are subject to closer scrutiny in the pre-approval procedures discussed below. PERSONAL ACCOUNT DEFINED + GENERALLY The "PERSONAL ACCOUNT" of an Employee shall include each and every account (other than an account for the benefit of any of the Adviser's clients) for which such Employee influences or controls investment decisions. An account for the benefit of any of the following will be presumed to be a "personal account" unless the Adviser and the Employee otherwise agree in writing. * An Employee of the Adviser. * The spouse of an Employee. * Any child under the age of 22 of an Employee, whether or not residing with the Employee. * Any other dependent of an Employee residing in the same household with the Employee. * Any other person residing in the same household as the Employee. 11 * Any other account in which an Employee has a direct or indirect beneficial interest, E.G., an account for a trust, estate, partnership or closely held corporation in which the Employee has a beneficial interest. + EXEMPTION If an Employee certifies in writing to the Compliance Officer (or, in the case of the Compliance Officer, to the Chief Operating Officer or the Chief Executive Officer) that (i) the certifying Employee does not influence the investment decisions for any specified account of such spouse, child or dependent person and (ii) the person or persons making the investment decisions for such account do not make such decisions, in whole or in part, upon information that the certifying Employee has provided, the Compliance Officer (or, in the case of the Compliance Officer, the Chief Operating Officer or the Chief Executive Officer) may, in his or her discretion, determine that such an account is not an Employee's "personal account". + OTHER EXCEPTIONS Special policies apply when trading in an Employee's Personal Account is handled by someone other than the Employee. In situations where a third party exercises complete investment discretion in managing an Employee's Personal Account, pre-approval of trading is not required. If the Employee has any role in the managing the account, then this exception does not apply. Securities held or traded for these accounts must be included in the Employee's quarterly and annual reports. Any actual or appearance of a conflict of interest in the trading in the Employee's excepted accounts will render these accounts subject to the pre-approval requirements. In order to fit within the exception regarding accounts for which the Employee has no investment discretion, the following is required: (a) a written verification by the Employee and (b) a written verification by a third party involved in the management of the account. In all cases, whether to grant the exception is in the discretion of the Compliance Officer. DEFINITION OF PUBLICLY-TRADED SECURITIES "Publicly-Traded Securities" means any (a) equity or debt instrument traded on an exchange, through NASDAQ or through the "Pink sheets," (b) options to purchase or sell such equity or. debt instrument, (c) index stock or bond group options that include such equity or debt instrument, (d) futures contracts on stock or bond groups that include such equity or debt instrument, and (e) any option on such futures contracts; PROVIDED that Publicly-Traded Securities shall not include (1) equity securities issued by mutual funds (other than mutual funds for which the Adviser acts as a sub-adviser) having total assets under management of at least $100,000,000, and (2) certificates of deposit, U.S. treasury bills and other U.S. government-issued debt instruments. "Publicly-Traded Securities" also includes securities traded on foreign security exchanges. 12 POLICY STATEMENT REGARDING TRADING FOR PERSONAL ACCOUNTS The Adviser recognizes that the personal investment transactions of its Employees demand the application of a strict code of ethics. Consequently, the Adviser requires that all personal investment transactions be carried out in a manner that will not endanger the interest of any client or create any apparent or actual conflict of interest between the Adviser or its Employees, on the one hand, and the client, on the other hand. Therefore, the Adviser has adopted the procedures set forth below. PROCEDURES REGARDING TRADING FOR PERSONAL ACCOUNTS + TRADING PROCEDURES (FOR PUBLICLY-TRADED SECURITIES) The following procedures must be followed by all Employees before buying or selling any Publicly-Traded Security for a Personal Account; PROVIDED, that such procedures shall not be required with respect to (a) a purchase or sale of a Publicly traded Security for a Personal Account where such purchase or sale is non-volitional on the part of the Personal Account (E.G., a sale in connection with a court order) or (b) a purchase of a Publicly-Traded Security where such purchase is part of an automatic dividend reinvestment plan. CONFIRM THAT NOT IN RECEIPT OF INSIDE INFORMATION Each Employee wishing to buy or sell a Publicly traded Security for a Personal Account should first confirm that he or she is not in receipt of any material, nonpublic information (I.E., "inside information") that would affect the price of that Publicly-Traded Security. CONFIRM THAT CONTEMPLATED TRANSACTION IS NOT APPROPRIATE FOR CLIENT OF ADVISER When an Employee intends to effect a transaction that is a Limited Investment Opportunity, the Employee must confirm in writing that the planned investment is not one that is appropriate for any of the Adviser's clients. If the investment opportunity MAY be appropriate for any of the Adviser's clients--that is, the planned Limited Investment Opportunity is not a restricted transaction even though it is not the type of investment usually made on behalf of the Adviser's clients--the Employee must consider the investment for each such client. If the Limited Investment Opportunity is not prohibited by a client's investment restrictions, then the opportunity must be first offered to the Adviser's clients. The Employee engaging the in Limited Investment Opportunity must document that he or she has complied with this process. SEEK PRE-APPROVAL OF ALL TRADES MADE FOR A PERSONAL ACCOUNT Each Employee wishing to buy or sell any Publicly-Traded Security for a Personal Account shall request approval to buy or sell such Publicly-Traded Security by completing and submitting to the Director of Investments (or, in the case of the Director of Investments, to the Compliance Officer) a Request for Preapproval of Purchase or Sale of Publicly-Traded Securities for Personal Account (a "Preapproval Form"), attached hereto as Exhibit B. The Director of Investments or the Compliance Officer, as the case may be, must give such approval in writing prior to the trade being executed. The Director of Investments or the Compliance Officer, as the case may be, will sign the Preapproval form only if the trade complies with the following guidelines: 13 SECURITY NEITHER HELD NOR BEING CONSIDERED FOR CLIENT ACCOUNTS The Publicly-Traded Security must neither be currently held by the Adviser for any client account nor currently under consideration for purchase or sale by the Adviser for any client account, unless, in the case of an Employee's proposed sale of a Publicly-Traded Security for a Personal Account, the Employee has obtained the prior written approval of the Director of Investments (or, in the case of an approval requested by the Director of Investments, the Compliance Officer), which approval may be granted only if the Employee demonstrates to the satisfaction of the Director of Investments (or the Compliance Officer, as the case may be), that (i) there is an appropriate reason unique to the account holder's circumstances for proposing such sale and (ii) the proposed sale is likely to have no material impact on the market price of the Publicly-Traded Security because of the size of the proposed sale, the daily trading volume of the Publicly-Traded Security, and other factors. SECURITY NOT PART OF INITIAL PUBLIC OFFERING No Employee may purchase for a Personal Account any Publicly-Traded security in an initial public offering (IPO). EXECUTION OF TRADES All trades for Personal Accounts must be executed by the end of the trading day following the day the approval is given by the Director of-Investments (or, in the case of the Director of Investments, by the Compliance Officer). If the trade is not executed by the end of such period, another Preapproval form must be submitted. Any approval of the proposed transaction may be rescinded by the Director of Investments (or, in the case of an approval requested by the Director of Investments, by the Compliance Officer) at any time prior to the consummation of the proposed transaction. + LIMITATIONS ON TRADES BY DECISION-MAKING ACCESS PERSONS. Because of the special circumstances involving trading for Personal Accounts by the Adviser's decision-making employees who have access to inside information, the Adviser has adopted certain additional limits on trading by these Access Persons. In addition to the personal trading policies applicable to all of the Adviser's Access Persons may not execute trades in a Publicly-Traded Security within 15 days of the purchase or sale of that security by the Adviser for its client accounts, even if the security is no longer held by a client account or if the Adviser merely considered trading in the security, but did not do so. Under extraordinary circumstances, the Chief Operating Officer may waive the 15-day "black out" period to prevent undue personal hardships. Such waiver may not conflict with the Adviser's fiduciary duty to put client interests first. If the Adviser purchases or considers the purchase of a Publicly-Traded Security in which an Access Person has previously executed a trade within 15 days of the Adviser's purchase or consideration of a purchase, the Access Person must immediately disclose the circumstances to the Director of Investments and the Compliance Officer. 14 + REPORTS OF PERSONAL TRANSACTIONS (FOR PUBLICLY-TRADED SECURITIES). SUBMISSION OF REPORTS In order for the Adviser to monitor compliance with its insider trading and conflict of interest policies and procedures, each Employee shall submit, or shall cause to be submitted, to the Compliance Officer the following reports: NOTIFICATION OF PERSONAL ACCOUNTS Each Employee shall submit to the Compliance Officer a Statement of Personal Accounts in the form attached hereto as Exhibit C. If an Employee's outside activity and brokerage report Account should become inaccurate or incomplete at any time, such Employee shall promptly submit to the Compliance Officer an amended Statement of Personal Accounts correcting all inaccurate or incomplete information. (The report includes information on outside activities that are prohibited without the prior approval of the Chief Operating Officer.) DUPLICATE CONFIRMATIONS Each Employee shall authorize brokerage firm or other firm where such Employee's Personal Accounts are maintained to send to the Compliance Officer duplicate confirmations of all transactions in Publicly-Traded Securities effected for such Employee's Personal Accounts. A form letter to be used for this purpose is attached hereto as Exhibit D. QUARTERLY TRANSACTION REPORTS Each Employee shall submit a "Quarterly Transaction Report" in the form attached hereto as Exhibit E for each of his or her Personal Accounts. The report shall be submitted to the Compliance Officer within ten calendar days following the end of each calendar quarter regardless of whether any trading activity took place in that account during the quarter. The Quarterly Report may consist of an account statement for each Personal Account. INITIAL PERSONAL HOLDINGS REPORTS Within ten days of the start of employment, each Employee shall submit to the Compliance Officer a report of all of the holdings in the Employee's Personal Accounts. The report may include copies of brokerage statements. ANNUAL PERSONAL HOLDINGS REPORTS Within thirty days of the calendar year end, each Employee shall submit to the Compliance Officer an annual report of all of the holdings in the Employee's Personal Accounts. The report may include copies of brokerage statements or may incorporate by reference the Quarterly Reports provided for the calendar year. 15 REVIEW AND RETENTION OF REPORTS The Compliance Officer shall promptly review each duplicate confirmation, Monthly Report and Quarterly Personal Transaction Report and compare the transactions reported against the Preapproval Forms that were prepared during the month or the quarter, as the case may be, to determine whether any violations of the Adviser's policies or of the applicable securities laws took place. If any Employee's Monthly Report or Quarterly Report fails to contain all required information, the Compliance Officer shall promptly contact such Employee to obtain the missing information. Upon discovering a violation of these procedures, the Adviser may impose such sanctions as it deems appropriate, including, INTER ALIA, a letter of censure or suspension or termination of the employment of the violator. All material violations of these procedures and any sanctions imposed with respect thereto shall be reported periodically to the board of trustees of any investment company client of the Adviser if the violation involved the securities owned by such investment company client. The Adviser shall retain all documents required to be submitted by Employees under this provision, including, without limitation, all Quarterly Personal Transaction Reports and any documents referred to or incorporated therein, as part of the books and records required by the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder. + NOTIFICATION OF INTEREST (FOR ALL SECURITIES) If an Employee knows that the Adviser is contemplating buying or selling any security (whether a Publicly-Traded Security or not) held by a Personal Account of that Employee, the Employee must disclose his or her position in the security to (i) the Investment Committee at the time the security is being discussed or (ii) the analyst at the time the security is being discussed with the analyst, whichever event occurs earlier. This disclosure shall include the date of acquisition by the Personal Account, the size of the position held, the price paid and any other information requested by the Investment Committee, analyst or the Compliance Officer. The Adviser will determine what action is appropriate to avoid a conflict of interest. Such action may include requiring the Personal Account to liquidate its position in the security being contemplated for purchase by clients, or prohibiting the Personal Account from selling the security until the Adviser has decided what position it will take with respect to clients. SUMMARY IMPORTANCE OF ADHERENCE TO PROCEDURES It is very important that all Employees adhere strictly to these Personal Trading Policies and Procedures. Any violations of such policies and procedures may result in serious sanctions, including dismissal from the Adviser. ANNUAL CIRCULATION/CERTIFICATION These Personal Trading Policies and Procedures, an Appendix to the Adviser's Compliance Manual, shall be circulated at least annually to all Employees, and at least annually each Employee shall be asked to certify in writing pursuant to the form attached hereto as Exhibit G that he or she has followed the Personal Trading Policies and Procedures. 16 QUESTIONS Any questions regarding the Adviser's policies or procedures with respect to insider trading, confidential information and conflicts of interest should be referred to the Compliance Officer. 17 EMPLOYEE TRANSACTION CLEARANCE FORM EMPLOYEE: ____________________ DATE: ____________________________ SECURITY: ____________________ NUMBER OF SHARES _________________ BUY: ____________________ SELL:_____________________________ APPROVED: ____________________ DISAPPROVED:______________________ INITIALS: ________________________ 18 QUARTERLY EMPLOYEE TRANSACTION UPDATE NOTE: ALSO NEED THE SECURITY HOLDER - MAY NOT BE THE EMPLOYEE IN ALL CASES. PLEASE LIST THE SECURITIES YOU OR YOUR SPOUSE OR ANY OTHER MEMBER OF YOUR HOUSEHOLD HAVE BOUGHT OR SOLD SINCE THE LAST QUARTERLY REPORT. ALSO, LIST ANY SECURITIES YOU MAY HAVE FORGOTTEN TO REPORT BEFORE. IF YOU HAVE NO SECURITY TRANSACTIONS, PLEASE WRITE "NONE." SECURITY TRANSACTIONS NAME OF SECURITY BUY SELL TRADE DATE - ---------------- --- ---- ---------- - -------------------------------------- ---- ---- ----------------- - -------------------------------------- ---- ---- ----------------- EMPLOYEE'S SIGNATURE DATE ----------------------------------------- ------------ NAME OF SECURITY BUY SELL TRADE DATE - ---------------- --- ---- ---------- - -------------------------------------- ---- ---- ----------------- - -------------------------------------- ---- ---- ----------------- EMPLOYEE'S SIGNATURE DATE ----------------------------------------- ------------ NAME OF SECURITY BUY SELL TRADE DATE - ---------------- --- ---- ---------- - -------------------------------------- ---- ---- ----------------- - -------------------------------------- ---- ---- ----------------- EMPLOYEE'S SIGNATURE DATE ----------------------------------------- ------------ NAME OF SECURITY BUY SELL TRADE DATE - ---------------- --- ---- ---------- - -------------------------------------- ---- ---- ----------------- - -------------------------------------- ---- ---- ----------------- EMPLOYEE'S SIGNATURE DATE ----------------------------------------- ------------ 19 EX-99.B.P.V 6 0006.txt CODE OF ETHICS - ROCKHAVEN ASSET MGMT ROCKHAVEN ASSET MANAGEMENT, LLC COMPLIANCE MANUAL - -------------------------------------------------------------------------------- SECTION 18 CODE OF ETHICS While RAM is confident of its employees integrity and good faith, there are, certain instances, where employees possess knowledge regarding present or future transactions or have the ability to influence portfolio transactions made by the Company for its clients in securities in which they personally invest. In these situations personal interest may conflict with that of the Company's clients. In view of the above, RAM has adopted this Code of Ethics to specify or prohibit certain types of transactions deemed to create conflicts of interest (or the potential for or appearance of), and to establish reporting requirements and enforcement procedures. It is also RAM's desire and intention to have each of its employees who are members of the Association for Investment Management and Research ("AIMR") comply with the AIMR's Code of Ethics and Standards of Professional Conduct. Accordingly, a copy of the AIMR's Code of Ethics and Standards of Professional Conduct is attached hereto as Exhibit #7. The AIMR's Code of Ethics and Standards of Professional Conduct is hereby incorporated in its entirety as additional guidelines for those investment personnel who are covered by it. 18.1 STATEMENT OF GENERAL PRINCIPLES In recognition of the trust and confidence placed in RAM by its clients and to stress RAM's belief that its operations are directed to the benefit of its clients, the Company has developed and adopted the following general principles to guide its employees, officers, and directors. 1. The interests of the clients are paramount and all associated persons of the Company must conduct themselves in such a manner that the interests of the clients take precedence over all others. 2. All personal securities transactions by associated persons of the Company must be accomplished in such a way as to avoid any conflict between the interest of the Company's clients and the interest of any associated person. 3. All associated persons of the Company must avoid actions or activities that allow personal benefit or profit from their position with regard to the Company's clients. ROCKHAVEN ASSET MANAGEMENT, LLC COMPLIANCE MANUAL - -------------------------------------------------------------------------------- 18.2 DEFINITIONS 1. Access Person-any director, officer, or associated person who recommends the purchase or sale of securities for the Company on behalf of the client. 2. "Beneficial Ownership" of a security - a person is considered to be a beneficial owner of any securities in which he has a direct or indirect monetary interest or is held by his spouse, his minor children, a relative who shares his home, or other persons by reason of any contract, arrangement, understanding or relationship that provides him with sole or shared voting or investment power. 3. "Control" - means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Ownership of 25% or more of a company's outstanding voting security is presumed to give the holder control over the company. 4. "Investment Personnel" - means all Access Persons who occupy the position of portfolio manager with respect to the clients of RAM or any separately-managed series thereof (a "Fund"), and all Access Persons who provide or supply information and/or advice to any portfolio manager (or Trust Officer), or who execute or help execute any portfolio manager's decisions. 5. "Purchase or Sale of a Security" includes, among other things, the writing of an option to purchase or sell a security. 6. "Security" shall have the same meaning as that set forth in Section 2(a)(36) of the 1940 Act, except that it shall not include securities issued by the Government of the United States or an agency thereof, banker's acceptances, bank certificates of deposit, commercial paper and registered open-end mutual funds. 7. A "Security Held or to be Acquired" by the clients means any security which, within the most recent fifteen days, (i) is or has been held by the clients or (ii) is being or has been considered by the Company for purchase by the clients. 8. A Security is "being purchased or sold" by the clients from the time when a purchase or sale has been communicated to the Company until the time when such transaction has been fully completed or terminated. 18.3 PROHIBITED PURCHASES AND SALES OF SECURITIES 1. No Access Person shall, in connection with the purchase or sale, directly or indirectly: a. employ any device, scheme or artifice to defraud; b. make any untrue statement of a material fact or omit to state a material fact; c. engage in any act, practice or course of business which would operate as a fraud or deceit; or d. engage in any manipulative practice. ROCKHAVEN ASSET MANAGEMENT, LLC COMPLIANCE MANUAL - -------------------------------------------------------------------------------- 2. No Access Person or Investment Personnel shall purchase or sell, directly or indirectly, any security owned in accounts or Funds managed by RAM. If any such Access Person or Investment Personnel is the owner of a security (or related security) which RAM decides to buy for an account or Fund, he or she shall have the right to sell the security prior to RAM's purchase of it. If any such person does not sell the security prior to RAM's purchase for an account or Fund, he or she must own it as long as the account or Fund owns the security. 3. No Investment Personnel may acquire securities as part of an initial public offering or limited public offering (i.e., a private placement) by the issuer. 4. No Investment Personnel shall purchase or sell, directly or indirectly, any security for the purpose or with the result of realizing a short-term gain within 60 days from the date said security (or related security) was acquired. 17.4 PRE-CLEARANCE OF TRANSACTIONS 1. Except as provided in Section 18.4.2, below, all Investment Personnel must pre-clear each proposed transaction in securities with a designated Supervisor prior to proceeding with the transaction. In determining whether to grant such clearance, the designated Supervisor shall refer to the Section 18.4.3, below. 2. The requirements of Section 18.4.1 shall not apply to the following transactions: a. Purchases or sales over which the Investment Personnel has no direct or indirect influence or control. b. Purchases or sales which are non-volitional on the part of either the Investment Personnel or any Fund, including purchases or sales upon exercise of puts or calls Written by the Investment Personnel and sales from a margin account pursuant to a bona fide margin call. c. Purchases which are part of an automatic dividend reinvestment plan. d. Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer. 3. The following transactions must be approved by the designated Supervisor. a. Transactions which appear upon reasonable inquiry and investigation to present no reasonable likelihood of harm to the clients and which are otherwise in accordance with Rule 17j-1. b. Purchases or sales of securities which are not eligible for purchase or sale by any client, as determined by reference to the Act and blue sky laws and regulations thereunder, the investment objectives and policies and investment restrictions of the clients and their series, and undertakings made to regulatory authorities. ROCKHAVEN ASSET MANAGEMENT, LLC COMPLIANCE MANUAL - -------------------------------------------------------------------------------- c. Transactions which the designated Supervisor after consideration of all the facts and circumstances, determines to be in accordance with Section 18.3 and to present no reasonable likelihood of harm to the clients. 18.5 ADDITIONAL RESTRICTIONS AND REQUIREMENTS 1. No Access Person shall accept or receive any gift in excess of $100 value from any person or entity that does business with or on behalf of RAM. 2. Each Access Person must have duplicate statements for all personal brokerage accounts sent to the designated Supervisor. Compliance with this provision can be effected by the Access Person providing duplicate copies of all such statements directly to the designated Supervisor within two business days of receipt by the Access Person. 3. No Investment Personnel may accept a position as a director, trustee or general partner of a publicly-traded company unless such position has been presented to and approved by the Company and by Trusts' Board of Trustees as consistent with the interests of the Trusts and their shareholders. 4. All Access Persons must provide to the designated Supervisor a complete listing of all securities owned by such person, in addition to the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person, as of the effective date of employment (an "Initial &/or Annual Holdings Report"), and thereafter must submit a revised list of such holdings to the designated Supervisor as of January 1 of each subsequent year (an "Initial &/or Annual Holdings Report"). The Initial Holdings Report must be submitted within 10 days of the date upon which such person first became an Access Person of the Trusts, and each update thereafter must be provided no later than 30 days after the start of the subsequent year. A report form and reminder will be sent to all Access Persons prior to year-end. (see Exhibit #9). 18.6 REPORTING OBLIGATION 1. The Advisor shall create and maintain a listing of all Access Persons, Investment Personnel, and designated Supervisors. 2. Each Access Person shall report all transactions in securities in which the person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership. (see Exhibit #2). 3. Each Access Person shall sign an acknowledgment at the time this Code is adopted or at the time such person becomes an Access Person and on an annual basis thereafter that he has read, understands, and agrees to abide by this Code. ROCKHAVEN ASSET MANAGEMENT, LLC COMPLIANCE MANUAL - -------------------------------------------------------------------------------- 18.7 REPORTS 1. Each Access Person shall submit quarterly reports of personal securities transactions to the designated Supervisor. The designated Supervisor shall submit confidential quarterly reports with respect to his or her own personal securities transactions to an officer designated to receive his or her reports ("Alternate designated Supervisor"), who shall act in all respects in the manner prescribed herein for the designated Supervisor. 2. Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he has any direct or indirect beneficial ownership in the security to which the report relates. 3. Reports per Section 18.5.4 above. 4. Quarterly security transaction report shall be made not later than 10 days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information: a. The date of the transaction, the title and the number of shares or the principal amount of each security involved; b. The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); c. The price at which the transaction was effected; d. The name of the broker/dealer or bank with or through whom the transaction was effected; and e. The date the report was signed. 5. With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person: a. The name of the broker, dealer or bank with whom the Access Person established the account; b. The date the account was established; and c. The date the report is submitted by the Access Person. 6. In the event no reportable transactions occurred during the quarter, the report should be so noted and returned, signed and dated. 7. Report forms will be sent to all Access Persons by the designated Supervisor prior to the end of each quarter. 18.8 REVIEW AND ENFORCEMENT The designated Supervisor shall review reported personal securities transactions, brokerage statements, and/or the clients' securities transactions to determine whether a violation of this Code may have occurred. Before making any determination that a violation has been committed by any person, the designated Supervisor shall give such person an opportunity to supply additional explanatory material. ROCKHAVEN ASSET MANAGEMENT, LLC COMPLIANCE MANUAL - -------------------------------------------------------------------------------- If the designated Supervisor determines that a violation of this Code may have occurred, he shall submit his written determination, together with the confidential monthly report and any additional explanatory material provided by the individual, to the Counsel for the Advisor, who shall make an independent determination as to whether a violation has occurred. If the Counsel for the Advisor finds that a violation has occurred, the Counsel for the Advisor shall impose upon the individual such sanctions as he or she deems appropriate and shall report the violation and the sanction imposed to the Board of Trustees of the Trusts. No person shall participate in a determination of whether he has committed a violation of the Code or of the imposition of any sanction against himself. If a securities transaction of the Counsel for the Advisor is under consideration, any other Counsel shall act in all respects in the manner prescribed herein for the Counsel for the Advisor. On an annual basis, the designated Supervisor shall provide a written report of any material violation, and the sanctions imposed to the Board of Trustees of the Trusts. Further, RAM shall certify to the Board of Trustees that if it has adopted procedures reasonably necessary to prevent violations of this Code. 17.9 RECORDS The Company shall maintain records in the manner and to the extent set forth below, and will make them available for examination by representatives of the Securities and Exchange Commission. The Company shall maintain list of Access Persons and Investment Personnel. (see Exhibit #10). 1. A copy of this Code and any other code which is, or at any time within the past five years has been, in effect shall be preserved in an easily accessible place; 2. A record of any violation of this Code and any action taken as a result of such violation shall be preserved in an easily accessible place for a period of not less than five years following the end of the fiscal year in which the violation occurs; 3. A copy of each report made by an officer or Supervisor pursuant to this Code shall be preserved for a period of not less than five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place; and ROCKHAVEN ASSET MANAGEMENT, LLC COMPLIANCE MANUAL - -------------------------------------------------------------------------------- 4. A list of all persons who are, or within the past five years have been, required to make reports pursuant to this Code shall be maintained in an easily accessible place. ROCKHAVEN ASSET MANAGEMENT, LLC COMPLIANCE MANUAL - -------------------------------------------------------------------------------- 18.10 MISCELLANEOUS All reports of securities transactions and any other information filed with the Company pursuant to this Code shall be treated as confidential. The Company may from time to time adopt such interpretations of this Code as it deems appropriate. The Counsel for the Company, or an appropriate member of RAM, shall report to RAM and to the Board of Trustees of the Trusts at least annually as to the operation of this Code and shall address in any such report the need (if any) for further changes or modifications to this Code. Any material change must be reviewed and approved within six months of such change by the Board of Trustees of the Trusts. This Code will be filed as an exhibit to the Trusts' Registration Statements. EX-99.B.P.VI 7 0007.txt CODE OF ETHICS - SEGALL BRYANT & HAMILL CODE OF ETHICS SEGALL BRYANT & HAMILL 10 SOUTH WACKER DRIVE SUITE 2150 CHICAGO, ILLINOIS 60606 TABLE OF CONTENTS PAGE EXECUTIVE SUMMARY........................................... 1 SECTION I. PURPOSE AND DESIGN.......................................... 3 SECTION II. RESTRICTIONS................................................ 4 SECTION III. REPORTING REQUIREMENTS...................................... 7 SECTION IV. OTHER POLICIES.............................................. 10 SECTION V. SUPERVISORY PROCEDURES...................................... 11 SECTION VI. ENFORCEMENT AND SANCTIONS................................... 12 SECTION VII. MISCELLANEOUS PROVISIONS.................................... 16 SECTION VIII. DEFINITIONS................................................. 17 EXHIBIT A-1................................................. 24 Voyageur Pre-Clearance Form EXHIBIT A-2................................................. 25 Clifton Pre-Clearance Form EXHIBIT A-3................................................. 26 SBH Pre-Clearance Form EXHIBIT A-4................................................. 27 DSA Pre-Clearance Form EXHIBIT B................................................... 28 Quarterly Transaction Report SEGALL BRYANT ADDENDUM...................................... 29 i As most recently approved on: April 1, 2000 CODE OF ETHICS FOR DOUGHERTY FINANCIAL GROUP LLC AND AFFILIATES EXECUTIVE SUMMARY Advisory Persons/ All Access Investment Administration Employees Persons Personnel - -------------- --------- ------- --------- Must obtain pre-approval of transactions X X Disallowed personal transactions X seven days prior to or after a fund or managed account transaction in that same security except as allowed by the de minimis exemption Must receive approval of Chief X X Executive Officer to purchase private placements Prohibited from purchasing initial X X X public offerings Must submit quarterly report of X X transactions Prohibited from buying or selling a X X security the same day a fund or managed account is buying/selling or contemplating buying/selling that same security except as allowed by the de minimis exemption Notify Compliance before opening X X X brokerage accounts Have duplicate confirmations and X X X statements sent to Compliance Must report outside business activities X X X Must report related persons in X X X securities business Prohibition on insider trading X X X 1 Advisory Persons/ All Access Investment Administration Employees Persons Personnel - -------------- --------- ------- --------- Prohibited from accepting gifts X X X deemed excessive Prohibited from serving as director X X of public company without approval of Chief Executive Officer Prohibited from using the same X broker for their personal account as they use for accounts they manage. Must provide a report of initial X X holdings and list of all brokerage accounts. Must provide a report of Annual X X Holdings and list of all brokerage accounts. 2 I. PURPOSE AND DESIGN This Code of Ethics ("Code") is adopted by Dougherty Financial Group LLC ("DFG"), Voyageur Asset Management LLC ("Voyageur"), Segall Bryant & Hamill ("SBH"), The Clifton Group Investment Management Company ("Clifton") and Dougherty Summit Advisors LLC ("DSA"), (all preceding companies and affiliates shall hereinafter be referred to all-inclusively as "The Companies") in an effort to prevent violations of the 1940 Act and the Rules and Regulations thereunder. Capitalized terms used and not otherwise defined herein have the meaning set forth in Article VIII hereof. This Code is designed to: 1. prevent investment activities by persons with access to certain information that might be harmful to Clients or that might enable such persons to illicitly profit from their relationship with Clients; 2. summarize the written policies and procedures designed to prevent the misuse of material, non-public information in violation of the 1934 Act, the Advisers Act, or the Rules and Regulations thereunder, as required by Section 15(f) of the 1934 Act and Section 204A of the Advisers Act; 3. put our customers' interests first. The Companies seek to foster a reputation for integrity and professionalism. That reputation is a vital business asset. The confidence and trust placed in us by investors is something we value and endeavor to protect; 4. ensure that all personal securities transactions by employees are conducted consistent with the Code and in such a manner as to avoid any actual or potential conflict of interest or appearance of conflict or any abuse of an individual's position of trust and responsibility. Each employee must read and retain a copy of this Code and will be asked to sign an acknowledgment form. Direct any questions to the Chief Executive Officer and his/her designee. Each employee will be required to acknowledge compliance with the Code on an annual basis. 3 II. RESTRICTIONS A. Non-Public Information. 1. All employees shall use due care to ensure that material, non-public information remains secure and shall not divulge to any person any material, non-public information, except in the performance of his/her duties. For example, files containing material, non-public information should be restricted. If an Insider learns of any material, non-public information, such information shall not be divulged to any other person, except in the performance of his/her duties. Conversations containing such information should be conducted in private, not by analogue cellular phone, so as to avoid potential interception. 2. No Insider shall engage in Insider Trading, on behalf of himself/herself or others. 3. No employee shall divulge to any person contemplated or completed securities transactions of a Client, except in the performance of his/her duties, unless such information previously has become a matter of public knowledge. If you think you might have access to material, non-public information, you should direct that to the Chief Executive Officer or his/her designee. B. Section 17(d) Limitations. No Affiliated Person of The Companies acting as principal shall effect any transaction in which a Fund, or a company controlled by a Fund, is a joint or a joint and several participants with such person, SBH or Clifton, or Affiliated Person, in contravention of such rules and regulations as the Securities and Exchange Commission may prescribe under Section 17(d) of the 1940 Act for the purpose of limiting or preventing participation by the Funds or controlled companies on a basis different from or less advantageous than that of such other participant. C. Prescribed Activities Under Rule 17j-l(b). Rule 17j-l(b) under the 1940 Act generally provides: It is unlawful for any Affiliated Person of or principal underwriter for a registered investment company, or any Affiliated Person of an investment adviser of or principal underwriter for a registered investment company in connection with the purchase or sale, directly, or indirectly, by such person of a security held or to be acquired by the registered investment company - 5 1. To employ any device, scheme or artifice to defraud the Fund; 2. To make to the Fund any untrue statement of a material fact or omit to state to the Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; 3. To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any the Fund; or 4. To engage in any manipulative practice with respect to the Fund. Any violation of Rule 17j-l(b shall be deemed to be a violation of the Code. D. Covenant to Exercise Best Judgment. An Access/Advisory Person shall act on his/her best judgment in effecting, or failing to effect, any Fund transaction and such Access/Advisory Person shall not take into consideration his/her personal financial situation in connection with decisions regarding Fund Portfolio transactions. E. Preclearance. All Access and Advisory Persons must have all equity, municipal bond, and corporate transactions (including limit orders), and securities transactions where the underlying security is an equity, municipal, or corporate (i.e. option, future, warrant) pre-approved with the designated person(s) prior to any transaction for any accounts they exercise discretion over (see attached form Exhibit A). Action must be taken within five (5) business days or another preclearance will be required. Transactions in government securities do not require preclearance. (Please see attached addendum for Segall Bryant & Hamill.) F. Limitations on Initial and Subsequent Transactions. 1. A portfolio manager, or any member of his/her immediate family, shall not purchase/sell securities of an issuer for their personal account within seven (7) calendar days prior to or after a managed account they manage purchases/sells that issuer's same security. There is a DE MINIMIS exception for transactions involving a small number of shares of companies with very large market capitalization and high average daily trading volume. However, each trade should be analyzed to help ensure a client trade is not disallowed because of this rule to ensure client's interests are considered. 2. Access and Advisory Persons or any member of their immediate family, shall not purchase or sell a security on the same day there is a 6 pending transaction in a managed account. After a managed account has made an initial purchase of Securities of an issuer, an Access and Advisory Person of the Companies, or any member of his/her immediate family, shall not purchase or sell Securities of such issuer if the managed account is contemplating an additional purchase or a partial sale of such issuer's Securities, unless the trade meets the de minimis exception. However, in this case the portfolio managers employee/immediate family trades must be executed after their own client trades. If a manager violates this policy they may be disallowed from doing de minimis trades in their personal accounts for 5 days. G. Personal Dealing With Customers. Employees are prohibited from personally selling or purchasing securities directly or indirectly to or from a client account. 7 III. REPORTING REQUIREMENTS A. Quarterly Report. The Companies jointly undertake to take all reasonable and necessary steps to ensure that material, non-public information is never disseminated or made available to any persons other than Access and Advisory Persons. Therefore, only Access and Advisory Persons need to submit quarterly reports hereunder. Not later than ten (10) days after the end of each calendar quarter, each Access and Advisory Person shall submit a report which includes the following information with respect to transactions during calendar quarter in any Security in which such Access and Advisory Person has, or by reason of such transaction acquired, any direct or indirect beneficial ownership in the Security. Security includes all securities listed under Section VIII.R. including government securities, etc. even if not specifically included. 1. The date of the transaction, the title and the number of shares, and the principal amount of each Security involved; 2. The nature of the transaction (ie., purchase, sale, gift or any other type of acquisition or disposition); 3. The price at which the transaction was effected; and 4. The name of the broker, dealer, or bank with or through whom the transaction was effected. If no transactions have occurred during the period, the report shall so indicate. (A sample is attached as Exhibit B.) B. Limitation on Reporting Requirements. Notwithstanding the provisions of Section III.A., no Access Person shall be required to make a report: 1. With transactions effected for any account over which such person does not have any direct influence or control; or 2. If such person is not an "interested person" of a Client as defined in Section 2(a)(19) of the 1940 act and would be required to make such a report solely by reason of being a director of a Fund, except where 8 such director knows or, in the ordinary course of fulfilling his/her official duties as a Director of a Fund, should have known that during the 15-day period immediately preceding or after the date of the transaction in a security by the director, such Security is or was purchased or sold by a Fund or such purchase or sale by a Fund is or was considered by such Fund or the Companies. It is a disinterested director's actual or imputed knowledge at the time of his or her securities transaction which triggers the reporting obligation. Therefore, a disinterested director need only report a securities transaction when, at the time of that transaction, he or she knows, or should have known, of the investment company's trading activity or consideration of trading activity. 3. Where a report made to the Companies would duplicate information recorded pursuant to Rules 204-2(a)(12) Or 204-2(a)(13) under the Advisers Act. C. Reports of Violations. In addition to the quarterly reports required under this Code, Access and Advisory Persons shall report promptly any transaction which is, or might appear to be, in violation of this code. Such reports shall contain the information required in quarterly reports filed pursuant to Section III.A. D. Filing of Reports. All reports prepared pursuant to this Code shall be filed with the Chief Executive Officer of the Companies or his/her designee. E. Certification to General Counsel/Board of Trustees of Funds. Prior to February 1 of each year, the Companies shall prepare and deliver to the General Counsel a report which shall describe in detail violations of this code for the prior calendar year, unless such violations have previously been reported to the General Counsel. The Board of Trustees is to also receive a report detailing any material violations of the code and any sanctions imposed. The Board of Trustees is to also receive certification that procedures are in place to help prevent violations of the code by Access and Investment Personnel. F. Dissemination of Reports. The General Counsel shall have the right at any time to receive copies of any reports submitted pursuant to this Code. Such General Counsel shall keep all reports confidential except as disclosure thereof to the Boards of Directors of The Companies, or other appropriate persons as may be reasonably necessary to accomplish the purposes of this Code. 9 G. Outside Brokerage Accounts. All employees are required to have duplicate confirmations and statements from outside investment accounts sent to the Companies' Compliance Department. Within 10 days of employment, an employee is to provide a report of all their current holdings. It is prohibited for portfolio managers to transact for their personal account using a broker they use for fund or managed account transactions. This includes any account in which they have beneficial ownership. Employees are also required annually to disclose personal securities holdings if there are holdings other than those reflected on a traditional broker/dealer account (i.e. private placements, securities held in bank safe deposit boxes). On an annual basis, within 30 days of year-end, employees are to certify what has been reported to compliance by providing a report of holdings and brokerage accounts H. Initial Public Offerings (IPOs). Employees and their immediate family members are prohibited from purchasing IPOs of all securities (i.e. municipals and equities). I. Private Placements. Access and Advisory Persons are prohibited from purchasing private placements without express PRIOR APPROVAL of the Chief Executive Officer or his/her designee. J. Related Persons in Securities Business. All employees are required to report to the Compliance Department related persons, either by lineage or marriage, employed in the securities business, namely: spouse, parent, children, or siblings. 10 IV. OTHER POLICIES A. Gifts. Access and Advisory Persons and employees are not to accept gifts or gratuities from broker/dealers or vendors deemed excessive (over $100 or frequent in nature) which could impair or give the appearance of impropriety regarding their fiduciary responsibility to our clients. B. Service as a Director. Access and Advisory Persons are prohibited from serving on the boards of directors of publicly traded companies, absent prior authorization based upon a determination that the board service would be consistent with the interests of clients, including a Fund and its shareholders. Investment personnel serving as directors normally should be isolated from those making investment decisions through "Chinese Wall" or other procedures. C. Outside Business Activities. Employees are required to notify the Compliance Department in writing of any outside business activities, whether or not they are securities related. The Compliance Officer will consult with senior management regarding the allowance of such activity. Examples include being a board member of a non-profit organization, cosmetics sales agent, etc. 11 V. SUPERVISORY PROCEDURES The following supervisory procedures shall be implemented: A. Prevention of Insider Trading. To prevent Insider Trading, the Chief Executive Officer of the Companies or his/her designee, shall: 1. take appropriate measures to familiarize Access and Advisory Persons with the Code via training; 2. answer questions regarding the Code; 3. resolve issues of whether information received by an Insider is material and/or non-public; and 4. review and update the Code as necessary. 5. a. strive for a physical separation of the trading and research departments from those departments in possession of the sensitive information; b. take steps to restrict access to the information including computer passwords and the use of code names; and c. supervise any inter-department communication of the material, non-public information. B. Detection of Insider Trading. To detect Insider Trading, the Chief Executive Officer of the Companies or his/her designee(s), shall: 1. review the trading activity reports filed by each Access and Advisory Person; and 2. review the trading activity of Voyageur, SBH and Clifton, as applicable. 12 VI. ENFORCEMENT AND SANCTIONS A. General. Any Affiliated Person of the Companies who is found to have violated any provision of this Code including filing false or incomplete or untimely reports may be permanently dismissed, reduced in salary or position, temporarily suspended from employment, or sanctioned in such other manner as may be determined by the Boards of Directors of Voyageur, SBH, Clifton or DSS in their discretion. In determining sanctions to be imposed for violations of this Code, the Board of Directors may consider any factors deemed relevant, including without limitation: 1. the degree of willfulness of violation; 2. the severity of the violation; 3. the extent, if any, to which the violator profited or benefited from the violation; 4. the adverse effect, if any, on the Client(s); 5. the market value and liquidity of the class of Securities involved in the violation; 6. the prior violations of the Code, if any, by the violator; 7. the circumstances of discovery of the violation; and 8. if the violation involved the purchase or sale of Securities in violation of this Code, (a) the price at which the purchase or sale was made and (b) the violator's justification for making the purchase or sale, including the violator's tax situation, the extent of the appreciation or depreciation of the Securities involved, and the period the Securities have been held. B. Violations of Section II.F regarding Investment Companies: 1. At its election, a Fund may choose to treat a transaction prohibited under Section II.F of this Code as having been made for its account. Such an election may be made only by a majority vote of the directors of the Fund who are not Affiliated Persons of the Companies. Notice of an election under this Paragraph B.1 shall not be effective unless 13 given to the Companies within sixty (60) days after the Fund is notified of such transaction. In the event of a violation involving more than one Fund, recovery shall be allocated among the affected Funds in proportion to the relative net asset values of the Funds as of the date of the violation. A violator shall be obligated to pay the Fund any sums due to said Fund pursuant to Paragraph B.2 below due to a violation by a member of the immediate family of such violator. 2. If Securities purchased in violation of Section II.F. of this Code have been sold by the violator in a bona fide sale, the Fund shall be entitled to recover the profit made by the violator. If such Securities are still owned by the violator, or have been disposed of by such violator other than by a bone fide sale at the time notice of election is given by the Fund, the Fund shall be entitled to recover the difference between the cost of such Securities to the violator and the fair market value of such Securities on the date the Fund acquired such Securities. If the violation consists of a sale of Securities in violation of Section II.F. of this Code, the Fund shall be entitled to recover the difference between the net sale price per share received by the violator and the net sale price per share received by the Fund, multiplied by the number of shares sold by the violator. Each violation shall be treated individually, and no offsetting or netting of violations shall by permitted. 3. Knowledge on the part of the General counsel of a Fund of a transaction in violation of Section II.F. of this Code shall be deemed to be notice to the Fund under Paragraph VI.B.1 above. Knowledge on the part of a director or officer of a Fund who is an Affiliated Person of the Companies of a transaction in violation of this Code shall not be deemed to be notice under Paragraph VI.B.1. 4. If the Board of Directors of a Fund determines that a violation of this Code has caused financial detriment to such Fund, upon reasonable notice to the Companies, the Companies shall use its best efforts, including such legal action as may be required, to cause a person who has violated this Code to deliver to the Fund such Securities, or to pay to the Fund such sums, as the Fund shall declare to be due under this Section VI.B., provided that: 14 a. The Companies shall not be required to bring legal action if the amount recoverable would not be expected to exceed $2,500; b. In lieu of bringing a legal action against the violator, the Companies may elect to pay to the Fund such sums as the Fund shall declare to be due under this Section; and c. The Companies shall have no obligation to bring any legal action if the violator was not an Affiliated Person of The Companies. In lieu of the steps described in this Section VI(B) regarding the Funds, if one of the Companies is serving as an investment sub-adviser to the Fund, the Fund may elect to apply the terms of the Code of Ethics of its Investment Adviser. C. Rights of Alleged Violator. A person charged with a violation of this Code shall have the opportunity to appear before the Board of Directors as may have authority to impose sanctions pursuant to this Code, at which time such person shall have the opportunity, orally or in writing, to deny any and all charges, set forth mitigating circumstances, and set forth reasons why the sanctions for any violations should not be severe. D. Notification to General Counsel of Funds. The General Counsel of the Fund involved shall be advised promptly of the initiation and outcome of any enforcement actions hereunder. E. Delegation of Duties. The Board of Directors may delegate its enforcement duties under this Article to a special committee of the Board of Directors comprised of at least three persons; provided, however, that no director shall serve on such committee or participate in the deliberations of the Board of Directors hereunder who is charged with a violation of this Code. F. Non-Exclusivity of Sanctions. The imposition of sanctions hereunder by the Board of Directors of Voyageur, SBH and Clifton shall not preclude the imposition of additional sanctions by the Boards of Directors of the Funds and shall not be deemed a waiver of any rights by the Funds. In addition to sanctions which may be imposed by the Boards of Directors of Voyageur, SBH and Clifton persons who violate this Code may be subject to various penalties and sanctions including, for example, (i) injunctions; (ii) treble damages, (iii) disgorgement of profits; (iv) fines to the person who 15 committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited; and (v) jail sentences. The Code of Ethics adopted by the Companies is designed to promote the highest standards of conduct. The Code of Ethics gives the Companies responsibility for determining sanctions in circumstances where the violation relates to the conduct of an employee of the Companies. The Code of Ethics identifies a number of factors for consideration in determining sanctions including the degree of willfulness of the violation; the severity of the violation and the adverse effect, if any, of the violation. The Code of Ethics permits the Companies to consider mitigating or exculpatory factors regarding such violations. G. Potential Fines. The following are potential penalties for violation of the Code of Ethics. NATURE OF VIOLATION PENALTY ------------------- ------- Late quarterly report filing; or First Violation: written warning Failure to notify Compliance of new Second: $100.00 brokerage account Third: $200.00 Thereafter: Disciplinary action Failure to obtain pre-clearance or pre- First Violation1: written warning clearance obtained after trade date Second: $250.002 Third: $500.002 Thereafter: Disciplinary action Manager fails to put their trade last 5 day suspension of trading 16 VII. MISCELLANEOUS PROVISIONS A. Identification of Access and Advisory Persons. DFG shall, on behalf of Voyageur, SBH, and Clifton, identify all Access and Advisory Persons who are under a duty to make reports under Section IV.A. and shall inform such persons of such duty. B. Maintenance of Records. DFG shall, on behalf of Voyaguer, SBH, and Clifton maintain and make available records as required by Rule 17j-l(d). C. Effective Date. The effective date of this Code shall be April 1, 2000. D. Review and Approval. The Board of Trustees of a Fund shall review and approve this Code within six months of any material change to this Code. The Code will be filed as an exhibit to the registration statement of a Fund. 17 VIII. DEFINITIONS A. "Access Person" means any director, officer, general partner, or Advisory Person of "The Companies," any director or officer who in the ordinary course of his/her business makes, participates in, or obtains information regarding the purchase or sale of securities for a Fund or whose functions or duties as part of the ordinary course of his/her business relate to the making of any recommendation to a Fund regarding the purchase or sale of securities, i.e. analysts, portfolio managers. Those individuals deemed to be Access Persons will receive such notice. Any individuals who do not receive such notice but consider themselves Access Persons should contact the Chief Executive Officer or his/her designee. B. "Advisers Act" means the Investment Advisers Act of 1940, 15 U.S.C. ss. 80b-1 to 80b-21. C. "Advisory Person" means: 1. Any employee of the Companies (or of any company in a control relationship to the Companies) who, in connection with his/her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security, or whose functions or duties relate to the making of any recommendations with respect to such purchases or sales; and 2. Any natural person in a control relationship to the Companies who obtains information concerning recommendations made with regard to the purchase or sale of a security. This does not include those individuals who prepare or review public reports and who do not receive information about current recommendations. D. "Natural person versus person". A natural person is as an individual. A person can be as an entity such as a corporation, partnership, or individual person. E. "Affiliated Person" of another person means: 1. Any person directly or indirectly owning, controlling, or holding with power to vote, five percent (5%) or more of the outstanding voting securities of such other person; 18 2. Any person, five percent (5%) or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; 3. Any person directly or indirectly controlling, controlled by, or under common control with, such other person; 4. Any officer, director, partner, co-partner, or employee of such other person; 5. If such other person is as an investment company, and investment adviser thereof or any member of as an advisory board thereof; and 6. If such other person is as an unincorporated investment company not having a board of directors, the depositor thereof. F. "Associated Person" means any partner, officer, director, or branch manager of The Companies (or any person occupying a similar status or performing similar functions); any person directly or indirectly controlling, controlled by, or under common control with The Companies; or any employee of The Companies. G. "Beneficial Ownership" means the opportunity to profit directly or indirectly from a transaction. For example, a partnership, trust, corporation, investment club, contract arrangement, and understanding or a relationship. H. "Board of Directors" means the board of directors of a corporation or persons performing similar functions with respect to any organization, whether incorporated or unincorporated. I. "Control" shall have the meaning as that set forth in Section 2(a)(9) of the 1940 Act (power to exercise a controlling influence over the management or policies of a company unless such power is solely the result of as an official position with such company.) J. "DE MINIMIS EXCEPTION" is a transaction which is less than one percent (1%) of the daily trading volume of that security using a previous 5 day average. K. "Insider" means Voyageur, SBH, or Clifton or as an Associated Person of Voyageur, SBH, or Clifton or other affiliates, or any Affiliated Person thereof, and as a result is given access to material, non-public information. Examples of such Insiders include accountants, consultants, advisers, attorneys, bank lending officers, and the employees of such organizations. 19 L. "Insider Trading" means the use of material, non-public information to trade in a Security (whether or not one is as an Insider) or the communication of material, non-public information to others. Given the potential liability related to the Insider Training and Securities Fraud Enforcement Act of 1988, it is critical that all employees be familiar with this act. The act is very vague. This was done specifically to allow regulators flexibility in dealing with potential abusers. It is unlawful for any person to misuse, directly or indirectly, any material, non-public information (see definition below). Personnel in possession of such information may not be: a. purchasing or selling such securities for their own accounts, for accounts in which they have a beneficial interest, or over which they have the power, directly or indirectly, to make investment decisions (i.e. managed accounts); b. issuing research reports, recommendations or comments which could be construed as recommendations; or c. disclosing such information or any conclusions based thereon to any other person. As an offhand comment to a friend may be used unbeknownst to you by your friend to trade in securities and could result in substantial civil and criminal liability to you. Individuals needing this information to carry out professional responsibilities (i.e., compliance officer, legal counsel) must also treat this information confidentially. Penalties The penalties for insider trading are severe, for both the individual and the controlling persons (supervisors who may be held liable). The penalty which may be imposed on the person who committed a violation may be up to three times the profit gained or loss avoided by the transaction. The maximum jail term is ten years per violation. The penalty which may be imposed on the controlling person may be up to the greater of $1,000,000 or three times the profit gained or loss avoided. The maximum criminal fines are $1,000,000 per violation for individuals and $2,500,000 per violation for non-natural persons. 20 M. "Interested Persons". "Interested person" of another person means: 1. any Affiliated Person of such company, 2. any member of the immediate family of any natural person who is as an Affiliated Person of such company. 3. any interested person of any investment adviser of or principal underwriter for such company, 4. any person or partner or employee of any person who at any time since the beginning of the last two completed fiscal years of such company has acted as legal counsel for such company, 5. any broker or dealer registered under the Securities Exchange Act of 1934 or any Affiliated Person of such a broker or dealer, and 6. any natural person whom the Commission by order shall have determined to be as an interested person by reason of having had, at any time since the beginning of the last two completed fiscal years of such company, a material business or professional relationship with such company or with the principal executive officer of such company or with any other investment company having the same investment adviser or principal underwriter or with the principal executive officer of such other investment company: Provided that no person shall be deemed to be as an interested person of as an investment company solely by reason of (aa) his/her being a member of its board of directors or advisory board or as an owner of its securities, or (bb) his/her membership in the immediate family of any person specified in clause (aa) of this provision. N. "Material Non-Public Information" is any information which has not been made public and which a reasonable investor might consider important in making as an investment decision. Examples of the types of information that are likely to be deemed "material" include, but are not limited to: 1. a. Dividend increases or decreases; b. Earnings estimates or material changes in previously released earnings estimates; c. Significant expansion or curtailment of operations; 21 d. Significant increases or declines in revenue; e. Significant merger or acquisition proposals or agreements including tender offers; f. Significant new products or discoveries; g. Extraordinary borrowings; h. Major litigation; i. Liquidity problems; j. Extraordinary management developments; k. Purchase and sale of substantial assets; l. A valuable employee leaving or becoming seriously ill; and m. Change in pension plans (i.e. removal of assets from as an over-funded plan, or as an increase or decrease in future contributions). 2. For "non-public information" to be made public, it must be generally available through non-disclosure in a national business or financial wire service (i.e. Dow Jones or Reuter's), a national news service (AP or UPI), a national newspaper (i.e., Wall Street Journal), or public disseminated disclosure document (prospectus or proxy). O. "Member of immediate family" of a person includes such person's spouse, children under the age of twenty-five (25) years residing with such person, and any trust or estate in which such person or any other member of his/her immediate family has a substantial beneficial interest, or controls the investment decision, unless such person or any other member of his/her immediate family cannot control or participate in the investment decisions of such trust or estate. P. A "Managed Account" is as an account where continuous advice is given to a client or investments are made for a client based on the clients' individual needs. This service is provided to clients on both a discretionary and non-discretionary basis. The adviser offers this service to individuals, trusts, estates, corporations, pension and profit-sharing plans and investment companies. Account supervision is guided by the stated objectives of the client (i.e., maximum capital appreciation, growth, income or growth and income). Q. "Purchase or Sale of a Security" includes inter alia, the writing of as an option to purchase or sell a Security. 22 R. "Security" shall have the meaning set forth in Section 2(a)(36) of the 1940 Act. "Security" means any note, stock, treasury stock bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. It shall not include securities issued by the government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper, shares of registered open-end investment companies, or other securities which may not be purchased by the Fund or Funds of which a person is as an Access and Advisory Person because of investment limitations set forth in Registration Statements filed with the Securities and Exchange Commission; however, that for purposes of the reporting requirements of Article IV, ASecurity@ shall include securities issued by the Funds, and for purposes of the Insider Trading prohibition of Section II.A., "Security" shall include all securities set forth in Section 2(a)(36) of the 1940 Act. S. "Security being considered for purchase or sale" means that a recommendation to purchase or sell a security has been made and communicated in writing or orally and, with respect to the person making the recommendation, that such person seriously considers making such a recommendation. T. "1934 Act" means the Securities Exchange Act of 1934, 15 U.S.C. ss. 78a to 78kk. U. "1940 Act" means the Investment Company Act of 1940, 15 U.S.C. ss. 80a-1 to 80a-64. 23 Exhibit A-1 - Voyageur PRECLEARANCE FORM APPROVERS Equities Primary: Jim King Secondary: Pat Coleman Private Placements: Mike Lee Frank Tonnemaker Frank Tonnemaker Suzanne Weber (Chicago) John Taft John Taft David Cox (Chicago) Nancy Scinto (Chicago) Municipals Primary: Steve Eldredge Secondary: Frank Tonnemaker David Cox (Chicago) Pat Coleman John Taft Nancy Scinto (Chicago) Suzanne Weber (Chicago)
You must also obtain preclearance from an appropriate approver for corporates, warrants, rights, options, futures, closed-end mutual funds, gifts given and private placements. Preapproval is not required for government securities transactions or open-end mutual funds. TRANSACTION DETAILS -------------------------------------- -------------------------------- ------------ Signature of Access or Advisory Person Print Name Date I would like to: Purchase ______ units of the following security: Sell _______________________________________________________ Expected Trade Date:_______________ I will use the following broker/dealer: __________________________________________________. This is a limit order. (If not exercised within 5 days, a new preclearance form must be filed.)
APPROVAL You: Can Cannot effect this transaction. (Add comments or conditions below, Reason (if denied): if any) ------------------------------------------------------------------------ ------------------------------------------------------------------------ ----------------------------------- ------------------------------- Approval Date If an equity trade (Mpls.), must be signed by Jim King or Mike Lee. In their absence, anyone else signing acknowledges that they have checked with Steve Potvin and Jim King, Mike Lee or Steve Potvin. Please note: * Please make a copy for your files. * It is your responsibility to send this form to the Compliance Department as quickly as possible after approval is received. 24 Exhibit A-2 - Clifton PRECLEARANCE FORM APPROVERS ROSEMARY JANOUSEK PRIVATE PLACEMENTS: RICK BALLSRUD ROSEMARY JANOUSEK JACK HANSEN TOM LEE YOU MUST ALSO OBTAIN PRECLEARANCE FROM AN APPROPRIATE APPROVER FOR CORPORATES, WARRANTS, RIGHTS, OPTIONS, FUTURES, CLOSED-END MUTUAL FUNDS, GIFTS GIVEN AND PRIVATE PLACEMENTS. PREAPPROVAL IS NOT REQUIRED FOR GOVERNMENT SECURITIES TRANSACTIONS OR OPEN-END MUTUAL FUNDS. TRANSACTION DETAILS -------------------------------------- ----------------------------- ------------- SIGNATURE OF ACCESS OR ADVISORY PERSON PRINT NAME DATE I would like to: Purchase ______ units of the following security:_______________________ Sell _________________________________________________________________ Expected Trade Date: ____________________ I will use the following broker/dealer: _________________________________________________. This is a limit order. (If not exercised within 5 days, a new preclearance form must be filed.)
APPROVAL You: Can Cannot effect this transaction. (Add comments or conditions below, Reason (if denied): if any) -------------------------------------------------------------------------- -------------------------------------------------------------------------- ------------------------------------- ------------------------------- Approval Date PLEASE NOTE: * PLEASE MAKE A COPY FOR YOUR FILES. * IT IS THE RESPONSIBILITY OF THE ACCESS OR ADVISORY PERSON TO SEND THIS FORM TO THE COMPLIANCE DEPARTMENT AFTER APPROVAL IS RECEIVED. 25 Exhibit A-3 - SBH PRECLEARANCE FORM APPROVERS JOHN GARNISH PRIVATE PLACEMENTS: CHERYL WOODCOCK C. ALFRED BRYANT GREG HOSBEIN RALPH SEGALL YOU MUST ALSO OBTAIN PRECLEARANCE FROM AN APPROPRIATE APPROVER FOR CORPORATES, WARRANTS, RIGHTS, OPTIONS, FUTURES, CLOSED-END MUTUAL FUNDS AND GIFTS GIVEN AND PRIVATE PLACEMENTS. PREAPPROVAL IS NOT REQUIRED FOR GOVERNMENT SECURITIES TRANSACTIONS OR OPEN-END MUTUAL FUNDS. TRANSACTION DETAILS -------------------------------------- ----------------------------- ------------- SIGNATURE OF ACCESS OR ADVISORY PERSON PRINT NAME DATE I would like to: Purchase ______ units of the following security:_______________________ Sell _________________________________________________________________ Expected Trade Date: ____________________ I will use the following broker/dealer: _________________________________________________. This is a limit order. (If not exercised within 5 days, a new preclearance form must be filed.)
APPROVAL You: Can Cannot effect this transaction. (Add comments or conditions below, Reason (if denied): if any) -------------------------------------------------------------------------- -------------------------------------------------------------------------- ------------------------------------- ------------------------------- Approval Date PLEASE NOTE: * PLEASE MAKE A COPY FOR YOUR FILES. * IT IS THE RESPONSIBILITY OF THE ACCESS OR ADVISORY PERSON TO SEND THIS FORM TO THE COMPLIANCE DEPARTMENT AFTER APPROVAL IS RECEIVED. 26 Exhibit A-4 - DSA PRECLEARANCE FORM APPROVERS GERRY KRAUT PRIVATE PLACEMENTS: MARC KOZBERG GERRY KRAUT JIM POTTER YOU MUST ALSO OBTAIN PRECLEARANCE FROM AN APPROPRIATE APPROVER FOR CORPORATES, WARRANTS, RIGHTS, OPTIONS, FUTURES, CLOSED-END MUTUAL FUNDS AND GIFTS GIVEN AND PRIVATE PLACEMENTS. PREAPPROVAL IS NOT REQUIRED FOR GOVERNMENT SECURITIES TRANSACTIONS OR OPEN-END MUTUAL FUNDS. MARC KOZBERG AND JIM POTTER ARE REQUIRED TO PRE-CLEAR TRANSACTIONS THROUGH GERRY KRAUT (IN GERRY'S ABSENCE MARC AND JIM MAY PRECLEAR THROUGH EACH OTHER). TRANSACTION DETAILS -------------------------------------- ----------------------------- ------------- SIGNATURE OF ACCESS OR ADVISORY PERSON PRINT NAME DATE I would like to: Purchase ______ units of the following security:_______________________ Sell _________________________________________________________________ Expected Trade Date: ____________________ I will use the following broker/dealer: _________________________________________________. This is a limit order. (If not exercised within 5 days, a new preclearance form must be filed.)
APPROVAL You: Can Cannot effect this transaction. (Add comments or conditions below, Reason (if denied): if any) -------------------------------------------------------------------------- -------------------------------------------------------------------------- ------------------------------------- ------------------------------- Approval Date PLEASE NOTE: * PLEASE MAKE A COPY FOR YOUR FILES. * IT IS THE RESPONSIBILITY OF THE ACCESS OR ADVISORY PERSON TO SEND THIS FORM TO THE COMPLIANCE DEPARTMENT AFTER APPROVAL IS RECEIVED. 27 Exhibit B REPORT PURSUANT TO SECTION III OF THE CODE OF ETHICS FOR DOUGHERTY FINANCIAL GROUP LLC AND ITS AFFILIATES QUARTER ENDED __________ Instructions: 1. Not later than ten (10) days after the end of each calendar quarter, each Person shall submit this Report, as provided by the Code of Ethics (the "Code"). The Code should be reviewed before completing the Report; terms defined in the Code have the same meanings in this Report. 2. If no reportable transactions have occurred during the period, put and "X" in the following box [ ] and skip to the signature line. 3. This Report may contain a statement that it shall not be construed as an admission by the person making the Report that he has any direct or indirect beneficial ownership in the Security to which the Report relates. 4. If you must file this Report, and transactions have occurred during the period, set forth the following information with respect to the transactions. NATURE OF PRICE PER SHARE/ INSTITUTION TRANSACTION UNIT AT WHICH THROUGH WHICH NAME OF NUMBER OF (i.e. Buy, TRANSACTION TRANSACTION TRANSACTION ISSUER/TITLE SHARES/UNITS SELL OTHER DATE WAS EFFECTED WAS EFFECTED - ------------ ------------ ---------- ---- ------------ ------------
(If you need additional space, please attach additional pages.) 5. List below any brokerage accounts opened during the quarter. 6. Questions regarding the completion of this Report may be directed to either Pamela K. Ziermann at (612) 376-4021 or Thomas J. Abood at (612) 376-7118. The answers to the foregoing are true and correct to the best of my information and belief. Dated ------------------- ---------------------------------------------- Signature of Person Filing Report ---------------------------------------------- Printed Name 28 SEGALL BRYANT & HAMILL ADDENDUM TO CODE OF ETHICS General Rules (1) All transactions in bonds, common stocks, convertible securities, stock options and stock index options are to be executed through SBH'S Trading Department. (Specific brokers may be designated if you so choose.) (2) All employees must have as an account(s) on the client accounting system. This account should consist of all securities in which the employee has a controlling interest, regardless of the name under which the securities are held. Securities held under the name of as an officer's spouse, minor children, or other dependents residing in the same household should always be recorded on the client accounting system. Rare exceptions to this rule may occur in such securities. These exceptions must be approved in advance by the Compliance Department. (3) If a trade is not done through the SBH trading desk, a pre-clearance form must be used before the trade is executed. * The penalties described herein are in addition to the option of disgorgement described in the Code of Ethics. * The penalties described in this section are $750.00 and $1,500.00 for Second and Third Violations of Portfolio Managers. 29 EX-99.B.P.VII 8 0008.txt CODE OF ETHICS - NATIONAL ASSET MANAGEMENT NATIONAL ASSET MANAGEMENT CODE OF ETHICS RESPONSIBILITY It is the responsibility of all supervisory personnel to ensure that National Asset Management conducts its business with the highest level of ethical standards and in keeping with its fiduciary duties to its clients. DUTY TO CLIENTS National Asset Management has a duty to exercise its authority and responsibility for the benefit of its clients, to place the interests of its clients first, and to refrain from having outside interests that conflict with the interests of its clients. National Asset Management must avoid any circumstances that might adversely affect or appear to affect its duty of complete loyalty to its clients. PROHIBITED ACTS 1. Employing any device, scheme or artifice to defraud; 2. Making any untrue statement of a material fact; 3. Omitting to state a material fact necessary in order to make a statement, in light of the circumstances under which it is made, not misleading; 4. Engaging in any fraudulent or deceitful act, practice or course of business; or, 5. Engaging in any manipulative practices. CONFLICTS OF INTEREST National Asset Management has a duty to disclose potential and actual conflicts of interest to our clients. All Investment Advisor Representatives (IAR) and solicitors have a duty to report potential and actual conflicts of interest to the Company. Gifts (other than de minimis gifts, which are usually defined as having a value under $100.00) should not be accepted from persons or entities doing business with the Company. All Access Personnel must be pre-cleared by the Compliance Officer before accepting a directorship at any public company. USE OF DISCLAIMERS National Asset Management shall not attempt to limit liability for willful misconduct or gross negligence through the use of disclaimers. SUITABILITY National Asset Management shall only recommend those investments that it has a reasonable basis for believing are suitable for a client, based upon the client's particular situation and circumstances. In addition, clients should be instructed to immediately notify National Asset Management of any significant changes in their situation or circumstances so that National Asset Management can respond appropriately. DUTY TO SUPERVISE -- ADVISERS ACT SECTION 203(e)(5) National Asset Management is responsible for ensuring adequate supervision over the activities of all persons who act on its behalf. Specific duties include, but are not limited to: 1. Establishing procedures that could be reasonably expected to prevent and detect violations of the law by its advisory personnel; 2. Analyzing its operations and creating a system of controls to ensure compliance with applicable securities laws; 3. Ensuring that all advisory personnel fully understand the Company's policies and procedures; and, 4. Establishing a review system designed to provide reasonable assurance that National Asset Management's policies and procedures are effective and are being followed. On an annual basis, the compliance officer, CEO and COO will review all compliance procedures and violations with further reporting to the principals of the organization. PERSONAL SECURITY TRANSACTIONS National Asset Management's procedures governing personal security transactions are covered in Section VI and Appendix A of the compliance manual (which are incorporated herein by reference). CERTIFICATION Each Access Person will be required to certify annually the he or she has read and understood this Code of Ethics and Compliance Manual and will abide by it. Each Access Person will further certify that he or she has disclosed or reported all personal securities transactions required to be disclosed or reported under the Code of Ethics. A form of such certification is located in Appendix A of the compliance manual. 2 VI. FAIR TREATMENT OF CLIENTS A. PERSONAL TRANSACTIONS * Trading ahead of client's accounts is strictly prohibited by NAM. * Prevention The EMG distributes a weekly-restricted list to all access personnel. The list includes all stocks NAM is currently buying/selling or reviewing for buy/sale. Options in the securities are restricted as well. The weekly list is maintained in the following directory: O:\Equity\Weekly Minutes. * Personal Trading All personal transactions (excluding exempt securities) must be orally cleared through the compliance officer prior to execution. Trading authorization extends through the close of business on the day authorization is granted. After the trade is executed, a pre-clearance request form is completed and filed with the compliance officer. * Documentation Each access person must submit an Initial Holdings report with compliance officer within ten days of becoming an access person (or for persons already designated as an access person prior to September 1, 2000). A copy of the form is located in Appendix A. Each access person will also submit to the compliance officer an annual holdings report no later than thirty days after the end of the calendar year. A personal transaction statement must be completed by all access personnel on a quarterly basis. It includes, personal transactions and as well as all transactions for immediate family members and those accounts in which one has a beneficial ownership. All transactions must be reported (except excluded transactions). The compliance officer will distribute the personal transaction form prior to the calendar quarter end. The form is completed and returned to the compliance officer no later than the 10th business day after the quarter end. The compliance officer will review the initial holdings report, annual report and quarterly transaction report and compare the reports with the pre-clearance authorizations as appropriate. * A copy of National Asset Management's Personal Trading Policy, forms and a lof access personnel are located in Appendix A. 3 NATIONAL ASSET MANAGEMENT PERSONAL TRANSACTION PROCEDURES PRE-CLEARANCE OF PERSONAL TRANSACTIONS WHO IS INVOLVED: Principals Portfolio Managers Traders Equity/Fixed Income Analysts Managed Account Group Personnel Relationship Managers WHAT IS CLEARED: Stock B/S, Closed-end Mutual Fund B/S, Any Option B/S, Private Placement B/S, IPO Purchases EXEMPT SECURITIES: Open-end Mutual Fund B/S, US Governments B/S, Corporate/Municipal Bond B/S HOW DOES ONE CLEAR: Review the Restricte List sent out by the Equity Group on a weekly basis. That list will also include those stocks that NAM is considering for B/S. If a stock is one the lsit, check with trading to ensure completion before you obtain oral approval from the compliance officer. Once you have completed your transaction, complete the "Preclearance Request" and return to the compliance officer. WHAT IS THE TIME FRAME: 15 calendar days before or after the equity team completes buys/sales. QUARTERLY REPORTING OF PERSONAL TRANSACTIONS WHO IS INVOLVED: Principals Portfolio Managers Traders Equity/Fixed Income Analysts Managed Account Group Personnel Relationship Managers WHAT IS REPORTABLE: Stock/Option B/S, Closed-end Mutual Fund B/S, Corporate/Municipal Bond B/S, Private Placement B/S EXEMPT SECURITIES: Dividend reinvestments on mutual funds, US Government B/S, Open-end Mutual Fund B/S HOW DO I REPORT: Complete "Personal Transaction Report." WHEN DO I REPORT: Within 10 days after the end of the quarter. FOR THE PURPOSES OF PRE-CLEARING AND REPORTING TRANSACTIONS, ONE IS REQUIRED TO REPORT ANY TRANSACTION IN WHICH YOU HAVE A DIRECT OR INDIRECT "BENEFICIAL OWNERSHIP." THIS WOULD INCLUDE ACCOUNTS OF IMMEDIATE FAMILY MEMBERS IN THE SAME HOUSEHOLD AND OTHER ACCOUNTS OVER WHICH THE ACCESS PERSON HAS INFLUENCE OR CONTROL. 4 NATIONAL ASSET MANAGEMENT CORPORATION SECURITIES TRANSACTION REPORT FOR THE CALENDAR QUARTER ENDED JUNE 30, 2000 Date:_____________ During the quarter referred to above, the following transactions were effected for my "personal accounts" (as defined in the Code of Ethics of Investment Companies) which are required to be reported pursuant to the Code of Ethics for Investment Advisors. (IF NO TRANSACTIONS TOOK PLACE, WRITE "NONE REPORTABLE"). Nature of Security Number of Dollar Broker,Dealer, Transaction (Interest Date Shares or Amount Bank Through (Buy, Sale, rate & of Principal of Whom etc) Maturity) Transaction Amount Price Transaction Effected - ----------- --------- ----------- --------- ----- ----------- -------------- - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
This report excludes (i) transactions with respect to which I had no direct or indirect influence or control, (ii) other transactions not required to be reported, and (iii) is not an admission that I have any direct or indirect beneficial ownership in the securities listed above. * Transactions that are asterisked indicate transactions in a security where I knew at the time of the transaction or, in the ordinary course of fulfilling my official duties as an access person, should have known that during the 15 day period immediately preceding or after the date of the transaction, such security was purchased or sold, or such security was being considered for purchase or sale, by National Asset Management. Signature:______________________________ Print:_________________________________ 5 NATIONAL ASSET MANAGEMENT CORPORATION PRE-CLEARANCE REQUEST The following lists the transactions which I have made and in which I will have a direct or indirect beneficial interest. PURCHASE/SALE TITLE OF SECURITY QUANTITY - ------------- ----------------- -------- Date:_________________________________ Signature:______________________________ Print:_________________________________ Approved By:___________________________ (Compliance Officer) Effective Date:__________________________ (Trading Day) 6 NATIONAL ASSET MANAGEMENT HOLDINGS REPORT For the Year/Period Ended __________________________ (month/day/year) [ ] Check here if this is an Initial Holdings Report As of the calendar year/period referred to above, I have a direct or indirect beneficial ownership interest in the securities listed below which are required to be reported pursuant to the Code of Ethics of National Asset Management: SECURITY DESCRIPTION NUMBER OF SHARES PRINCIPAL AMOUNT - -------------------- ---------------- ---------------- The name of any broker, dealer or bank with whom I maintain an account in which my securities are held for my direct of indirect benefit are as follows: THIS REPORT (i) EXCLUDES TRANSACTIONS WITH RESPECT TO WHICH I HAD NO DIRECT OR INDIRECT INFLUENCE OR CONTROL, (ii) EXCLUDES OTHER TRANSACTIONS NOT REQUIRED TO BE REPORTED, AND (iii) IS NOT AN ADMISSION THAT I HAVE OR HAD ANY DIRECT OR INDIRECT BENEFICIAL OWNERSHIP IN THE SECURITIES LISTED ABOVE. Date:____________________ Signature:_________________________________ Print Name:________________________________ 7 NATIONAL ASSET MANAGEMENT ANNUAL CERTIFICATE Pursuant to the requirements of the Code of Ethics of National Asset Management, the undersigned hereby certifies as follows: 1. I have read the Company's Code of Ethics and Compliance Manual. 2. I understand the Code of Ethics and Compliance Manual and acknowledge that I am subject to it. 3. Since the date of the last Annual Certificate (if any) given pursuant to the Code of Ethics and Compliance Manual, I have reported all personal securities transactions and provided any securities holdings reports required to be reported under the requirements of the Code of Ethics and the Compliance Manual. Date:__________________ Signature:______________________________________ Print Name:____________________________________ 8 NATIONAL ASSET MANAGEMENT ANNUAL ISSUES REPORT AND CERTIFICATION PURSUANT TO RULE 17j-1 The undersigned, Catherine Stodghill, in her capacity as Compliance Officer of National Asset Management (NAM) hereby certifies the following: 1. NAM has adopted a Code of Ethics pursuant to, and in compliance with, Rule 17j-1 under the Investment Company Act of 1940; 2. NAM has adopted procedures reasonably necessary to prevent its access persons from violating its Code; 3. NAM's Code contains provisions reasonably necessary to prevent access persons from violating Rule 17j-1(b); 4. In accordance with Rule 17j-1, NAM has submitted its Code to the Funds' Board of Trustees for approval. 5. There are no issues arising under the Code to report. Witness my hand this 9th day of August, 2000 ____________________________________ Signature ____________________________________ Printed Name Catherine Stodghill ____________________________________ Title Principal 9 -----END PRIVACY-ENHANCED MESSAGE-----