-----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, WRruWMdDTj1Z5bA+ApVWVZb9eh0zR8gtDw/8FYCTJH4sU/gm3D/hJ5bvtJe8LLS4 eSC+qjG7s6yax8yXe2UXzQ== 0000930413-06-001451.txt : 20060227 0000930413-06-001451.hdr.sgml : 20060227 20060227173152 ACCESSION NUMBER: 0000930413-06-001451 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20060227 DATE AS OF CHANGE: 20060227 EFFECTIVENESS DATE: 20060228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAZARD FUNDS INC CENTRAL INDEX KEY: 0000874964 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-40682 FILM NUMBER: 06647785 BUSINESS ADDRESS: STREET 1: STATE STREET BANK & TRUST CO STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 2126326000 MAIL ADDRESS: STREET 1: STATE STREET BANK & TRUST CO STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAZARD FUNDS INC CENTRAL INDEX KEY: 0000874964 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06312 FILM NUMBER: 06647786 BUSINESS ADDRESS: STREET 1: STATE STREET BANK & TRUST CO STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 2126326000 MAIL ADDRESS: STREET 1: STATE STREET BANK & TRUST CO STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 0000874964 S000010270 Lazard U.S. Small Cap Equity Growth Portfolio C000028372 Open Shares C000028373 Institutional Shares 485BPOS 1 c40137_485bpos.txt Securities Act File No. 33-40682 Investment Company Act File No. 811-06312 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ Post-Effective Amendment No. 38 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ Amendment No. 38 /X/ (Check appropriate box or boxes) THE LAZARD FUNDS, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) (212) 632-6000 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, including Area Code) 30 Rockefeller Plaza, New York, New York 10112 - -------------------------------------------------------------------------------- (Address of Principal Executive: Number, Street, City, State, Zip Code) Nathan A. Paul, Esq. 30 Rockefeller Plaza New York, New York 10112 (Name and Address of Agent for Services) copy to: Stuart H. Coleman, Esq. Janna Manes, Esq. Stroock & Stroock & Lavan LLP 180 Maiden Lane New York, New York 10038-4982 It is proposed that this filing will become effective (check appropriate box) |_| immediately upon filing pursuant to paragraph (b) |X| on February 28, 2006 pursuant to paragraph (b) |_| 60 days after filing pursuant to paragraph (a) (1) |_| on (DATE) pursuant to paragraph (a) (1) |_| 75 days after filing pursuant to paragraph (a) (2) |_| on (DATE) pursuant to paragraph (a) (2) 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. Prospectus Lazard Funds Lazard U.S. Small Cap Equity Growth Portfolio February 28, 2006 As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved the shares described in this Prospectus or determined whether this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. [LOGO] PRIVACY NOTICE REGARDING SHAREHOLDER FINANCIAL INFORMATION The Lazard Funds, Inc. (the "Fund") recognizes and appreciates the importance of respecting the privacy of our shareholders. Our shareholders' trust is our most important asset, and we are committed to safeguarding against the unauthorized use of, and access to, shareholder information. This Privacy Notice explains our current policies and practices with respect to non-public personal information of our prospective, current and former shareholders. In order to adequately service its shareholders, the Fund regularly collects certain non-public personal information about its shareholders. We limit the collection of information to the minimum amount required to deliver useful products and superior service to our shareholders, to comply with legal requirements and to support our business needs. We may collect non-public personal information about you from the following sources: o Information we receive from you on applications, questionnaires or other forms, including, but not limited to, your name, address, social security or other tax identification number, age, employment information, assets owned and income. o Information about your transactions with us, our affiliates or others, such as your account balance and holdings, payment history and transaction information. o Information we may receive from our due diligence, such as your creditworthiness and your credit history. o Information obtained from our communications and correspondence with you. The Fund does not disclose any non-public personal information about its shareholders or former shareholders to any third party, except as required by law. The Fund may, however, disclose such non-public personal information to its affiliates in order to provide products or services to you or to support our business needs. In order to maintain the confidentiality of such information, we restrict access to non-public information about our shareholders to those employees who need to know that information. We maintain physical, electronic and procedural safeguards to guard the non-public personal information of our shareholders and former shareholders. Please note that the Fund will treat your information as confidential, as described above. It is not necessary for you to respond to this notice or to separately request confidentiality. TABLE OF CONTENTS - -------------------------------------------------------------------------------- PAGE ---------------------------------------------- 1 OVERVIEW ---------------------------------------------- CAREFULLY REVIEW THIS ---------------------------------------------- IMPORTANT SECTION FOR INFOR- 2 INVESTMENT OBJECTIVE, STRATEGIES, MATION ON THE PORTFOLIO'S RISK/RETURN AND EXPENSES INVESTMENT OBJECTIVE, ---------------------------------------------- STRATEGIES, RISKS, PAST 2 Lazard U.S. Small Cap Equity Growth PERFORMANCE AND FEES. Portfolio ---------------------------------------------- REVIEW THIS SECTION FOR 4 FUND MANAGEMENT DETAILS ON THE PEOPLE AND ---------------------------------------------- ORGANIZATIONS WHO OVERSEE THE 4 Investment Manager PORTFOLIO. 4 Principal Portfolio Managers 4 Administrator 4 Distributor 4 Custodian ---------------------------------------------- REVIEW THIS SECTION FOR 4 SHAREHOLDER INFORMATION DETAILS ON HOW SHARES ARE ---------------------------------------------- VALUED, HOW TO PURCHASE, SELL 4 General AND EXCHANGE SHARES, RELATED 5 How to Buy Shares CHARGES AND PAYMENTS OF 7 Distribution and Servicing Arrangements DIVIDENDS AND DISTRIBUTIONS. 7 How to Sell Shares 8 Investor Services 8 General Policies 8 Account Policies, Dividends and Taxes ---------------------------------------------- 10 PERFORMANCE INFORMATION FOR RELATED ACCOUNTS ---------------------------------------------- ---------------------------------------------- WHERE TO LEARN MORE ABOUT THE BACK COVER PORTFOLIO. ---------------------------------------------- - -------------------------------------------------------------------------------- LAZARD ASSET MANAGEMENT LLC SERVES AS THE PORTFOLIO'S INVESTMENT MANAGER. - -------------------------------------------------------------------------------- OVERVIEW - -------------------------------------------------------------------------------- The Portfolio The Lazard Funds, Inc. (the "Fund") consists of twelve separate Portfolios, one of which is being offered through this Prospectus. Because you could lose money by investing in the Portfolio, be sure to read all risk disclosures carefully before investing. You should be aware that the Portfolio: o is not a bank deposit o is not guaranteed, endorsed or insured by any bank, financial institution or government entity, such as the Federal Deposit Insurance Corporation o is not guaranteed to achieve its stated goals The Portfolio offers Institutional Shares and Open Shares, which have different investment minimums and different expense ratios. INFORMATION ON THE PORTFOLIO'S RECENT STRATEGIES AND HOLDINGS WILL BE AVAILABLE IN ITS ANNUAL/SEMI-ANNUAL REPORT (SEE BACK COVER). The Portfolio invests primarily in equity securities, including common stocks, preferred stocks and convertible securities of small cap U.S. companies. The Portfolio's investment manager, Lazard Asset Management LLC (the "Investment Manager"), seeks to identify undervalued securities using a relative growth strategy and focuses on individual stock selection rather than on general stock market trends. The Portfolio has adopted a policy to invest at least 80% of its assets in specified securities appropriate to its name and to provide its shareholders with at least 60 days' prior notice of any change with respect to this policy. Who May Want to Invest? Consider investing in the Portfolio if you are: o pursuing a long-term goal such as retirement o looking to add an equity component to your investment portfolio o willing to accept the higher risks of investing in the stock market in exchange for potentially higher long-term returns The Portfolio may not be appropriate if you are: o pursuing a short-term goal or investing emergency reserves o uncomfortable with an investment that will fluctuate in value 1 INVESTMENT OBJECTIVE, STRATEGIES, RISK/RETURN AND EXPENSES - -------------------------------------------------------------------------------- LAZARD U.S. SMALL CAP EQUITY GROWTH PORTFOLIO TICKER SYMBOL |_| (Institutional) |_| (Open) INVESTMENT OBJECTIVE The Portfolio seeks long-term capital appreciation. PRINCIPAL INVESTMENT The Portfolio invests primarily in equity STRATEGIES securities, principally common stocks, of small cap U.S. companies that the Investment Manager identifies using a relative growth strategy. The Investment Manager follows a bottom-up, fundamental approach to stock selection, seeking to invest in companies that exhibit substantial growth opportunities, strong business models, solid management teams and the potential for earnings surprises, which the Investment Manager believes may produce superior long-term results. The Investment Manager uses a relative valuation strategy to determine the appropriate price to purchase or sell securities. The Fund emphasizes smaller companies positioned in new or emerging industries where the Investment Manager believes there is opportunity for significant growth. These companies may include relatively new or unseasoned companies in their early stage of development. In many instances, a company may be in an industry segment that is small but could become much larger as it matures, so that not only does the company have potential for growth but the market opportunity may be expanding as well. The Investment Manager considers "small cap companies" for the Portfolio to be those companies that, at the time of initial purchase by the Portfolio, have market capitalizations generally in the range of companies included in the Russell 2000(R) Growth Index (ranging from approximately $900 million to $372 billion as of December 31, 2005). Under normal circumstances, the Portfolio invests at least 80% of its assets in equity securities of small cap U.S. companies. These securities generally have, in the Investment Manager's opinion, one or more of the following characteristics: o improving operating trends and profitability o superior earnings and sales growth opportunity o attractive relative valuation The Portfolio may invest up to 20% of its assets in equity securities of larger U.S. companies. The Portfolio may engage, to a limited extent, in various investment techniques, such as lending portfolio securities. Under adverse market conditions, the Portfolio could invest some or all of its assets in money market securities. The Portfolio might do this to seek to avoid or mitigate losses, but it may result in the Portfolio not achieving its investment objective. PRINCIPAL INVESTMENT RISKS While stocks have historically been a leading choice of long-term investors, they do fluctuate in price, often based on factors unrelated to the issuer's value. Small cap companies carry additional risks because their earnings tend to be less predictable, their share prices more volatile and their securities less liquid than larger, more established companies. In addition, small companies may lack the management experience, financial resources, product diversification and competitive strength of larger companies. Growth companies often have relatively higher price-to-earnings, price-to-book and price-to-sales ratios and may be more volatile than value stocks. 2 The value of your investment in the Portfolio will fluctuate, which means you could lose money. The tendency of shares of smaller companies to trade less frequently than those of larger companies can have an adverse effect on the pricing of these securities and on the ability to sell these securities when the Investment Manager deems it appropriate. Because the Portfolio will invest in a smaller number of issuers than other, more diversified investment portfolios, the Portfolio's net asset value may be relatively more susceptible to adverse effects from any single corporate, economic, market, political or regulatory occurrence than if the Portfolio's investments consisted of a larger number of securities. The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions. When the Portfolio lends securities, there is a risk that the loaned securities may not be returned during normal settlement periods if the borrower defaults. PERFORMANCE BAR CHART AND Because the Portfolio had not commenced investment TABLE operations prior to the date of this Prospectus, no performance returns are presented in this part of the Prospectus. Annual performance returns provide some indication of the risks of investing in the Portfolio by showing changes in performance from year to year. Comparison of Portfolio performance to an appropriate index indicates how the Portfolio's average annual returns compare with those of a broad measure of market performance. 3 FEES AND EXPENSES As an investor, you pay certain fees and expenses in connection with buying and holding Portfolio shares. The accompanying table illustrates those fees and expenses. Keep in mind that the Portfolio has no sales charge (load). Shareholder transaction fees are paid from your account. Annual portfolio operating expenses are paid out of Portfolio assets and are reflected in the share price. INSTITUTIONAL OPEN SHARES SHARES - -------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION FEES Maximum Redemption Fee (as a % of amount redeemed) CHARGED ONLY WHEN SELLING OR EXCHANGING SHARES YOU HAVE OWNED FOR 30 DAYS OR LESS. 1.00% 1.00% - -------------------------------------------------------------------------------- ANNUAL PORTFOLIO OPERATING EXPENSES - -------------------------------------------------------------------------------- Management Fees 1.00% 1.00% - -------------------------------------------------------------------------------- Distribution and Service (12b-1) Fees None .25% - -------------------------------------------------------------------------------- Other Expenses* .25% .30% - -------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses 1.25% 1.55% - -------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement** --% --% - -------------------------------------------------------------------------------- Net Expenses** 1.25% 1.55% - -------------------------------------------------------------------------------- * "Other Expenses" are based on estimated amounts for the current fiscal year. ** Reflects a contractual obligation by the Investment Manager to waive its fee and, if necessary, to reimburse the Portfolio through December 31, 2006, to the extent Total Annual Portfolio Operating Expenses exceed 1.25% and 1.55% of the average daily net assets of the Portfolio's Institutional Shares and Open Shares, respectively. EXPENSE EXAMPLE Use the accompanying table to compare the Portfolio's fees and expenses with those of other funds. It illustrates the amount of fees and expenses you would pay, assuming the following: o $10,000 initial investment o 5% annual return each year o redemption at the end of each period o no changes in operating expenses, except for the first year of the periods reflected in the table, which is based on the net expenses pursuant to the contractual agreement. Because this example is hypothetical and for comparison only, your actual costs may be higher or lower. LAZARD U.S. SMALL CAP EQUITY 1 3 GROWTH PORTFOLIO YEAR YEARS INSTITUTIONAL SHARES $127 $397 - -------------------------------------------------------------------------------- OPEN SHARES $158 $490 - -------------------------------------------------------------------------------- 4 FUND MANAGEMENT - -------------------------------------------------------------------------------- INVESTMENT MANAGER Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, New York 10112-6300, serves as the Investment Manager of the Portfolio. The Investment Manager provides day-to-day management of the Portfolio's investments and assists in the overall management of the Fund's affairs. The Investment Manager and its global affiliates provide investment management services to client discretionary accounts with assets totaling approximately $78 billion as of December 31, 2005. Its clients are both individuals and institutions, some of whose accounts have investment policies similar to those of the Portfolio. The Fund has agreed to pay the Investment Manager an investment management fee at an annual rate of 1.00% of the Portfolio's average daily net assets. The investment management fees are accrued daily and paid monthly. PRINCIPAL PORTFOLIO MANAGERS The Portfolio is managed on a team basis, with each team member involved at all levels of the investment process. Kip Knelman and James P. Tatera are jointly and primarily responsible for the day-to-day management of the assets of the Portfolio. Messrs. Knelman and Tatera joined the Investment Manager in February 2005 when the Investment Manager acquired substantially all of the assets of Knelman Asset Management Group, LLC ("Knelman"). BIOGRAPHICAL INFORMATION OF PRINCIPAL PORTFOLIO MANAGERS I.P. "KIP" KNELMAN. Mr. Knelman, a Director of the Investment Manager, is a portfolio manager on the U.S. Equity Growth and U.S. Small Cap Equity Growth teams. Prior to joining the Investment Manager, Mr. Knelman was Senior Managing Partner of Knelman. From 1979 to 1998, he held various positions at Investment Advisers, Inc, including President and Chief Executive Officer. Mr. Knelman has also served as a board member of Lloyd's Bank/TSB Asset Management Group and began his career in the investment field with Kidder, Peabody and Company. JAMES P. TATERA. Mr. Tatera, a Senior Vice President of the Investment Manager, is a portfolio manager on the U.S. Equity Growth and U.S. Small Cap Equity Growth teams. Prior to joining the Investment Manager, Mr. Tatera was a Managing Partner and Chief Investment Officer of Knelman. Prior to joining Knelman, Mr. Tatera was Senior Vice President and Chief Equity Officer of Advantus Capital Management. He is a Chartered Financial Analyst Charterholder. Additional information about the portfolio managers' compensation, other accounts managed by the portfolio managers and the portfolio managers' ownership of shares of the Portfolio is contained in the Fund's Statement of Additional Information ("SAI"). ADMINISTRATOR State Street Bank and Trust Company ("State Street"), located at One Lincoln Street, Boston, Massachusetts 02111, serves as the Portfolio's administrator. DISTRIBUTOR Lazard Asset Management Securities LLC (the "Distributor") acts as distributor for the Fund's shares. CUSTODIAN State Street acts as custodian of the Portfolio's investments. State Street may enter into subcustodial arrangements on behalf of the Portfolio for the holding of foreign securities. SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- GENERAL - -------------------------------------------------------------------------------- Portfolio shares are sold and redeemed, without a sales charge, on a continuous basis at the net asset value per share ("NAV") next determined after an order in proper form is received by the Fund's Transfer Agent, Boston Financial Data Services, Inc., or another authorized entity. The Fund will determine the net asset value of Portfolio shares as of the close of regular session trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time). The New York Stock Exchange is closed on certain national holidays listed in the Fund's SAI. The Fund values equity securities for which market quotations are readily available at market value. Securities and other assets for which current market quotations are not readily available are valued at fair value as determined in good faith in accordance with procedures approved by the Board of Directors. If events materially affecting the value of securities occur between the close of the exchange or market on which the security is principally traded and the time when the Portfolio's NAV is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board of Directors. The effect of using fair value pricing is that the NAV of the Portfolio will reflect the affected securities' values as determined in the judgment of the Board of Directors or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from the most recent closing price of a security and from the prices used by other investment companies to calculate their portfolios' net asset values. Foreign securities may trade on days when the Portfolio is not open for business, thus affecting the value of the Portfolio's assets on days when Portfolio shareholders may not be able to buy or sell Portfolio shares. 5 SHAREHOLDER INFORMATION (CONTINUED) - -------------------------------------------------------------------------------- MINIMUM INVESTMENT All purchases made by check should be in U.S. Dollars and made payable to "The Lazard Funds, Inc." Third party checks will not be accepted. The Fund will not accept cash or cash equivalents (such as currency, money orders or travelers checks) for the purchase of Portfolio shares. Please note the following minimums in effect for initial investments: Institutional Shares $ 1,000,000 - -------------------------------------------------------------------------------- Open Shares $ 10,000 - -------------------------------------------------------------------------------- IRA Rollover/Transfer (Open Shares only) $ 10,000 - -------------------------------------------------------------------------------- There are no subsequent investment minimums. HOW TO BUY SHARES - -------------------------------------------------------------------------------- THROUGH THE TRANSFER AGENT: Shareholders who do not execute trades through a brokerage account should submit their purchase requests to the Transfer Agent by telephone or mail, as follows: INITIAL PURCHASE BY MAIL 1. Complete a Purchase Application. Indicate the services to be used. 2. Mail the Purchase Application and a check for $10,000 or more for Open Shares, or $1,000,000 or more for Institutional Shares, payable to "The Lazard Funds, Inc." to: The Lazard Funds, Inc. P.O. Box 8514 Boston, Massachusetts 02266-8514 Attention: (Name of Portfolio and Class of Shares) BY WIRE 1. Call (800) 986-3455 toll-free from any state and provide the following: o the Portfolio and Class of shares to be invested in o name(s) in which shares are to be registered o address o social security or tax identification number o dividend payment election o amount to be wired o name of the wiring bank, and o name and telephone number of the person to be contacted in connection with the order. An account number will then be assigned. 2. Instruct the wiring bank to transmit the specified amount in federal funds, giving the wiring bank the account name(s) and assigned account number, to State Street: ABA #: 011000028 State Street Bank and Trust Company Boston, Massachusetts Custody and Shareholder Services Division DDA 9905-2375 Attention: (Name of Portfolio and Class of Shares) The Lazard Funds, Inc. Shareholder's Name and Account Number 3. Complete a Purchase Application. Indicate the services to be used. Mail the Purchase Application to the address set forth in Item 2 under "Initial Purchase--By Mail" above. ADDITIONAL PURCHASES BY MAIL 1. Make a check payable to "The Lazard Funds, Inc." Write the shareholder's account number on the check. 2. Mail the check and the detachable stub from the Statement of Account (or a letter providing the account number) to the address set forth in Item 2 under "Initial Purchase--By Mail" above. BY WIRE Instruct the wiring bank to transmit the specified amount in federal funds to State Street, as instructed in Item 2 under "Initial Purchase--By Wire" above. 6 SHAREHOLDER INFORMATION (CONTINUED) - -------------------------------------------------------------------------------- THROUGH A LAZARD BROKERAGE ACCOUNT Shareholders who have a brokerage account with Lazard Capital Markets LLC ("Lazard") should contact their account representative for specific instructions on how to purchase Portfolio shares. PURCHASES THROUGH THE AUTOMATIC INVESTMENT PLAN (OPEN SHARES ONLY) Investors may participate in the Automatic Investment Plan by purchasing Open Shares of the Portfolio at regular intervals selected by the investor. The Automatic Investment Plan enables an investor to make regularly scheduled investments and may provide investors with a convenient way to invest for long-term financial goals. An account must be opened with a minimum investment of $10,000. To obtain an Automatic Investment Plan application, call the Fund at (800) 823-6300. INDIVIDUAL RETIREMENT ACCOUNTS (OPEN SHARES ONLY) The Fund may be used as an investment for IRAs. Completion of a Lazard Funds IRA application is required. For a Direct IRA Account (an account other than an IRA rollover) a $5 establishment fee and a $12 annual maintenance and custody fee is payable to State Street for each IRA Fund account; in addition, a $10 termination fee will be charged and paid to State Street when the account is closed. For more information on IRAs, call the Fund at (800) 823-6300. MARKET TIMING/EXCESSIVE TRADING The Portfolio is intended to be a long-term investment vehicle and is not designed to provide investors with a means of speculating on short-term market movements. Excessive trading, market timing or other abusive trading practices may disrupt investment management strategies and harm performance and may create increased transaction and administrative costs that must be borne by the Portfolio and its shareholders, including those not engaged in such activity. In addition, such activity may dilute the value of Portfolio shares held by long-term investors. The Fund's Board of Directors has approved policies and procedures with respect to frequent purchases and redemptions of Portfolio shares that are intended to discourage and prevent these practices, including regular monitoring of trading activity in Portfolio shares. The Fund will not knowingly accommodate excessive trading, market timing or other abusive trading practices. To discourage attempts to arbitrage pricing of international securities (among other reasons), the Board has adopted policies and procedures providing that if events materially affecting the value of securities occur between the close of the exchange or market on which the security is principally traded and the time when the Portfolio's NAV is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board. See "Shareholder Information--General." The Fund's and the Investment Manager's codes of ethics in respect of personal trading contain limitations on trading in Portfolio shares. The Portfolio reserves the right to refuse, with or without notice, any purchase or exchange request that could adversely affect the Portfolio, its operations or its shareholders, including those requests from any individual or group who, in the Fund's view, is likely to engage in excessive trading, market timing or other abusive trading practices, and where a particular account appears to be engaged in abusive trading practices, the Fund will seek to restrict future purchases of Portfolio shares by that account or may temporarily or permanently terminate the availability of the exchange privilege, or reject in whole or part any exchange request, with respect to such investor's account. Multiple accounts under common ownership or control may be considered one account for purposes of determining a pattern of excessive trading practices. An investor who makes more than six exchanges with the Portfolio during any twelve-month period, or who makes exchanges that appear to coincide with a market timing strategy, may be deemed to be engaged in excessive trading. The Portfolio deducts a 1.00% redemption fee on sales of shares owned for 30 days or less (not charged on shares acquired through reinvestment of dividends or distributions), except that no redemption fee will be charged with respect to shares purchased through certain omnibus account and other service arrangements established by certain brokers and other financial intermediaries and approved by the Distributor. See "Shareholder Information--How to Sell Shares--Redemption Fee" below. As described below, the Fund may take up to seven days to pay redemption proceeds. This may occur when, among other circumstances, the investor redeeming shares is engaged in excessive trading. The Fund's policy on abusive trading practices does not apply to automatic investment or automatic exchange privileges. All of the policies described in the first paragraph of this section apply uniformly to all Portfolio accounts. However, while the Fund and the Investment Manager will take reasonable steps to prevent trading practices deemed to be harmful to the Portfolio by monitoring Portfolio share trading activity, they may not be able to prevent or identify such trading. The Fund's ability to monitor, and impose restrictions on, trading conducted through certain financial intermediaries or omnibus accounts may be severely limited due to the lack of access by the Fund or its service providers to information about such trading activity. If the Fund is not able to prevent abusive trading practices, such trading may disrupt investment strategies, harm performance and increase costs to all Portfolio investors, including those not engaged in such activity. See the first paragraph in this section. 7 SHAREHOLDER INFORMATION (CONTINUED) - -------------------------------------------------------------------------------- DISTRIBUTION AND SERVICING ARRANGEMENTS (OPEN SHARES ONLY) The Fund has adopted a plan under rule 12b-1 that allows the Portfolio to pay the Distributor a fee, at the annual rate of .25% of the value of the average daily net assets of the Portfolio's Open Shares, for distribution and services provided to holders of Open Shares. Because these fees are paid out of the Portfolio's assets on an on-going basis, over time these recurring fees may cost shareholders more than paying other types of sales charges. Third parties may receive payments pursuant to the Fund's 12b-1 plan and/or from the Investment Manager or its affiliates in connection with their offering of Portfolio shares to their customers and/or for providing shareholder servicing, distribution or other services. The receipt of such payments could create an incentive for the third party to offer the Portfolio instead of other mutual funds where such payments are not received. Consult your financial representative or institution for further information. HOW TO SELL SHARES - -------------------------------------------------------------------------------- GENERAL Checks for sale proceeds ordinarily will be mailed within seven days. Where the shares to be sold have been purchased by check or through the Automatic Investment Plan, the sale proceeds, net of applicable redemption fee, will be transmitted to you promptly upon bank clearance of your purchase check, which may take up to 15 calendar days. Redemption requests may also be satisfied, in whole or in part, through a redemption-in-kind (a payment in portfolio securities instead of cash). REDEMPTION FEE The Portfolio will impose a redemption fee equal to 1.00% of the NAV of Portfolio shares acquired by purchase or exchange and redeemed or exchanged within 30 days after such shares were acquired. This fee will be calculated based on the shares' NAV at redemption and deducted from the redemption proceeds. The fee will be retained by the Portfolio and used primarily to offset the transaction costs that short-term trading imposes on the Portfolio and its remaining shareholders. The redemption fee will not apply to shares acquired through the reinvestment of dividends or distributions. For purposes of calculating the 30-day holding period, the Fund will first redeem shares acquired through the reinvestment of dividends or distributions and then will employ the "first in, first out" method, which assumes that the shares redeemed or exchanged are the ones held the longest. In addition, no redemption fee will be charged on the redemption or exchange of shares purchased through certain omnibus account and other service arrangements established by certain brokers and other financial intermediaries and approved by the Distributor. The redemption fee may be waived, modified or terminated at any time, or from time to time. SELLING SHARES THROUGH THE TRANSFER AGENT: Shareholders who do not execute trades through a brokerage account should submit their sale requests to the Transfer Agent by telephone or mail, as follows: BY TELEPHONE: A shareholder may redeem shares by calling the Transfer Agent. To redeem shares by telephone, the shareholder must have properly completed and submitted to the Transfer Agent either a Purchase Application authorizing such redemption or a Telephone Redemption Authorization Form. To place a redemption request, or to have telephone redemption privileges added to your account, please call the Transfer Agent's toll-free number, (800) 986-3455. In order to confirm that telephone instructions for redemptions are genuine, the Fund has established reasonable procedures to be employed by the Fund and the Transfer Agent, including the requirement that a form of personal identification be provided. BY MAIL: 1. Write a letter of instruction to the Fund. Indicate the dollar amount or number of shares to be sold, the Portfolio and Class, the shareholder's account number, and social security or taxpayer identification number. 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the account, all must sign. 3. If shares to be sold have a value of $50,000 or more, the signature(s) must be guaranteed by a domestic bank, savings and loan institution, domes- tic credit union, member bank of the Federal Reserve System, broker-dealer, registered securities association or clearing agency, or other participant in a signature guarantee program. SIGNATURE GUARANTEES BY A NOTARY PUBLIC ARE NOT ACCEPTABLE. Further documentation may be requested to evidence the authority of the person or entity making the redemption request. In addition, all redemption requests that include instructions for redemption proceeds to be sent somewhere other than the address on file must be signature guaranteed. 4. Mail the letter to the Transfer Agent at the following address: The Lazard Funds, Inc. P.O. Box 8514 Boston, Massachusetts 02266-8514 Attention: (Name of Portfolio and Class of Shares) THROUGH A LAZARD BROKERAGE ACCOUNT: Shareholders who have a brokerage account with Lazard should contact their account representative for specific instructions on how to sell Portfolio shares. 8 SHAREHOLDER INFORMATION (CONTINUED) - -------------------------------------------------------------------------------- INVESTOR SERVICES - -------------------------------------------------------------------------------- AUTOMATIC REINVESTMENT PLAN allows your dividends and capital gain distributions to be reinvested in additional shares of the Portfolio or another Portfolio of the Fund. AUTOMATIC INVESTMENTS allows you to purchase Open Shares through automatic deductions from a designated bank account. EXCHANGE PRIVILEGE allows you to exchange shares of one Portfolio of the Fund that have been held for seven days or more for shares of the same Class of another Portfolio of the Fund in an identically registered account. Shares will be exchanged at the next determined NAV, subject to any applicable redemption fee. There is no other cost associated with this service. All exchanges are subject to the minimum initial investment requirements. A shareholder may exchange shares by writing or calling the Transfer Agent. To exchange shares by telephone, the shareholder must have properly completed and submitted to the Transfer Agent either a Purchase Application authorizing such exchanges or a signed letter requesting that the exchange privilege be added to the account. The Transfer Agent's toll-free number for exchanges is (800) 986-3455. In order to confirm that telephone instructions for exchanges are genuine, the Fund has established reasonable procedures to be employed by the Fund and the Transfer Agent, including the requirement that a form of personal identification be provided. The Fund reserves the right to limit the number of times shares may be exchanged between Portfolios of the Fund, to reject any telephone exchange order, or to otherwise modify or discontinue the exchange privilege at any time. If an exchange request is refused, the Fund will take no other action with respect to the shares until it receives further instructions from the investor. See "Shareholder Information--How to Buy Shares--Market Timing/Excessive Trading" for more information about restrictions on exchanges. GENERAL POLICIES - -------------------------------------------------------------------------------- In addition to the policies described above, the Fund reserves the right to: o redeem an account, with notice, if the value of the account falls below $1,000 due to redemptions o convert Institutional Shares held by a shareholder whose account is less than $1,000,000 to Open Shares, upon written notice to the shareholder o suspend redemptions or postpone payments when the NYSE is closed for any reason other than its usual weekend or holiday closings or when trading is restricted by the Securities and Exchange Commission (the "SEC") o change or waive the required minimum investment amounts o delay sending out redemption proceeds for up to seven days (this usually applies to very large redemptions received without notice, excessive trading, or during unusual market conditions) o make a redemption-in-kind (a payment in portfolio securities instead of in cash) if it is determined that a redemption is too large and/or may cause harm to the Portfolio and its shareholders Also in addition to the policies described above, the Fund may refuse or restrict purchase or exchange requests for Portfolio shares by any person or group if, in the judgment of the Fund's management: o the Portfolio would be unable to invest the money effectively in accordance with its investment objective and policies or could otherwise be adversely affected o if the Portfolio receives or anticipates receiving simultaneous orders that may significantly affect the Portfolio (e.g., amounts equal to 1% or more of the Portfolio's total assets) ACCOUNT POLICIES, DIVIDENDS AND TAXES - -------------------------------------------------------------------------------- ACCOUNT STATEMENTS You will receive quarterly statements detailing your account activity. All investors will also receive an annual statement detailing the tax characteristics of any dividends and distributions that you have received in your account. You will also receive confirmations after each trade executed in your account. To reduce expenses, only one copy of the most recent annual and semi-annual reports of the Fund may be mailed to your household, even if you have more than one account with the Fund. Call the Transfer Agent at the telephone number listed on the inside back cover if you need additional copies of annual or semi-annual reports or account information. DIVIDENDS AND DISTRIBUTIONS Income dividends are normally declared and paid annually, but may be declared and paid more frequently. Net capital gains, if any, are normally distributed annually but may be distributed more frequently. Capital gain distributions estimates may be available prior to payment and may be obtained by calling (800) 823-6300 or going to the Fund's website at www.LazardNet.com. Dividends and distributions of the Portfolio will be invested in additional shares of the same Class of the Portfolio at the NAV on the ex-dividend date, and credited to the shareholder's account on the payment date or, at 9 SHAREHOLDER INFORMATION (CONCLUDED) - -------------------------------------------------------------------------------- the shareholder's election, paid in cash. Each share Class of the Portfolio will generate a different dividend because each has different expenses. Dividend checks and account statements will be mailed approximately two business days after the payment date. TAX INFORMATION Please be aware that the following tax information is general and refers to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), which are in effect as of the date of this Prospectus. You should consult a tax adviser about the status of your distributions from the Portfolio. All dividends and short-term capital gains distributions are generally taxable to you as ordinary income, whether you receive the distribution in cash or reinvest it in additional shares. An exchange of the Portfolio's shares for shares of another Portfolio of the Fund will be treated as a sale of the Portfolio's shares, and any gain on the transaction may be subject to income taxes. Keep in mind that distributions may be taxable to you at different rates which depend on the length of time the Portfolio held the applicable investment, not the length of time that you held your Portfolio shares. The tax status of any distribution is the same regardless of how long you have been in the Portfolio and whether you reinvest your distributions or take them in cash. High portfolio turnover and more volatile markets can result in taxable distributions to shareholders, regardless of whether their shares increased in value. When you do sell your Portfolio shares, a taxable capital gain or loss may be realized, except for IRA or other tax-deferred accounts. Federal law requires the Portfolio to withhold taxes on distributions paid to shareholders who: o fail to provide a social security number or taxpayer identification number o fail to certify that their social security number or tax- payer identification number is correct o fail to certify that they are exempt from withholding 10 PERFORMANCE INFORMATION FOR RELATED ACCOUNTS - -------------------------------------------------------------------------------- LAZARD U.S. SMALL CAP EQUITY GROWTH COMPOSITE THIS IS NOT THE PORTFOLIO'S PERFORMANCE Lazard U.S. Small Cap Equity Growth Portfolio had not commenced operations prior to the date of this Prospectus and, therefore, does not have its own performance record. However, the Portfolio's investment objective, policies and strategies are substantially similar to those used by the Investment Manager in advising certain discretionary accounts (the "Other Accounts"). The chart below shows the historical investment performance for a composite (the "U.S. Small Cap Equity Growth Composite") of the Other Accounts and for the Portfolio's benchmark index. The U.S. Small Cap Equity Growth Composite should not be interpreted as indicative of the Portfolio's future performance. Annual Total Returns for the Year Ended December 31, ================================================================================ 2003 2004 2005 - -------------------------------------------------------------------------------- U.S. SMALL CAP EQUITY GROWTH COMPOSITE 51.5% 11.7% 10.1% - -------------------------------------------------------------------------------- RUSSELL 2000(R) GROWTH INDEX* 48.5% 14.3% 4.2% - -------------------------------------------------------------------------------- Average Annual Total Returns (for the periods ended December 31, 2005)
========================================================================================= INCEPTION DATE ONE YEAR THREE YEARS - ----------------------------------------------------------------------------------------- U.S. SMALL CAP EQUITY GROWTH COMPOSITE 1/1/03 10.1% 23.0% - ----------------------------------------------------------------------------------------- RUSSELL 2000(R) GROWTH INDEX* N/A 4.2% 20.9% - -----------------------------------------------------------------------------------------
- ---------- * The Russell 2000(R) Growth Index is an unmanaged index which measures the performance of those Russell 2000 companies (the 2,000 smallest companies in the Russell 3000 Index, which consists of the 3,000 largest U.S. companies by capitalization) with higher price-to-book ratios and higher forecasted growth values. Certain Other Accounts may not be subject to certain investment limitations, diversification requirements and other restrictions imposed by the Investment Company Act of 1940, as amended, and the Code which, if applicable, may have adversely affected the performance of the U.S. Small Cap Equity Growth Composite. The performance results of the U.S. Small Cap Equity Growth Composite reflect actual fees charged to the Other Accounts. However, the performance of Other Accounts typically only reflects deduction for advisory fees, while the Portfolio, in addition to an advisory fee, also bears fees to other service providers and operational expenses and its Open Shares bear distribution and servicing fees. The U.S. Small Cap Equity Growth Composite performance would have been lower than that shown above if the Other Accounts had been subject to the fees and expenses of the Portfolio. Additionally, although it is anticipated that the Portfolio and the Other Accounts will hold similar securities, their investment results are expected to differ. In particular, differences in asset size and cash flows may result in different securities selections, differences in the relative weightings of securities or differences in the prices paid for particular portfolio holdings. The returns of the U.S. Small Cap Equity Growth Composite are dollar-weighted based upon beginning period market values. This calculation methodology differs from guidelines of the Securities and Exchange Commission (the "SEC") for calculating performance of mutual funds. 11 For more information about the Portfolio, the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS (REPORTS): The Fund's annual and semi-annual reports to shareholders contain additional information on the Portfolio's investments. In the annual report, you will find a broad discussion of the market conditions and investments strategies that significantly affected the Portfolio's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed information about the Portfolio, including its operations and investment policies. It is incorporated by reference and is legally considered a part of this Prospectus. DISCLOSURE OF PORTFOLIO HOLDINGS The Portfolio will publicly disclose its portfolio holdings on a calendar quarter-end basis on its website accessible from http://www.lazardnet.com/lam/us/lazardfunds.shtml, approximately 14 days after such quarter end. The information will remain accessible until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information was current. A description of the Fund's policies and procedures with respect to the disclosure of the Portfolio's portfolio holdings is available in the Fund's SAI. - -------------------------------------------------------------------------------- You can get a free copy of the Reports and the SAI at http://www.LazardNet.com, or request the Reports and the SAI and other information and discuss your questions about the Portfolio, by contacting the Fund at: The Lazard Funds, Inc. 30 Rockefeller Plaza New York, New York 10112-6300 Telephone: (800) 823-6300 http://www.LazardNet.com - -------------------------------------------------------------------------------- You also can review the Reports and the SAI at the Public Reference Room of the SEC in Washington, D.C. For information, call (202) 551-5850. You can get text-only copies: o After paying a duplicating fee, by writing the Public Reference Branch of the SEC, 100 F Street NE, Room 1580, Washington, D.C. 20549-0102, or by e-mail request to publicinfo@sec.gov. o Free from the SEC's Website at http://www.sec.gov. Investment Company Act file no. 811-06312 - -------------------------------------------------------------------------------- INVESTMENT MANAGER TRANSFER AGENT AND Lazard Asset Management LLC DIVIDEND DISBURSING AGENT 30 Rockefeller Plaza Boston Financial Data Services, Inc. New York, New York 10112-6300 P.O. Box 8514 Telephone: (800) 823-6300 Boston, Massachusetts 02266-8514 Telephone: (800) 986-3455 DISTRIBUTOR Lazard Asset Management Securities LLC INDEPENDENT REGISTERED PUBLIC 30 Rockefeller Plaza ACCOUNTING FIRM New York, New York 10112-6300 Anchin, Block & Anchin LLP 1375 Broadway CUSTODIAN New York, New York 10018 State Street Bank and Trust Company http://www.anchin.com One Lincoln Street Boston, Massachusetts 02111 LEGAL COUNSEL Stroock & Stroock & Lavan LLP 180 Maiden Lane New York, New York 10038-4982 http://www.stroock.com (C) 2006 The Lazard Funds, Inc. and Lazard Asset Management Securities LLC No person has been authorized to give any information or to make any representations not contained in this Prospectus, and information or representations not contained herein must not be relied upon as having been authorized by the Fund or the Distributor. This Prospectus does not constitute an offer of any security other than the registered securities to which it relates or an offer to any person in any jurisdiction where such offer would be unlawful. [LOGO] The Lazard Funds, Inc. 30 Rockefeller Plaza Tel 800-823-6300 New York, NY 10112- 6300 www.LazardNet.com M F 2 3 1 0 2 THE LAZARD FUNDS, INC. 30 Rockefeller Plaza New York, New York 10112-6300 (800) 823-6300 STATEMENT OF ADDITIONAL INFORMATION FEBRUARY 28, 2006 The Lazard Funds, Inc. (the "Fund") is a no-load, open-end management investment company known as a mutual fund. This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the current Prospectuses of the Fund, dated September 30, 2005 for Lazard U.S. Equity Value Portfolio and Lazard International Strategic Equity Portfolio; February 28, 2006 for Lazard U.S. Small Cap Equity Growth Portfolio; and May 1, 2005, for the other Portfolios, as each may be revised from time to time, relating to the following twelve portfolios (individually, a "Portfolio" and collectively, the "Portfolios"): Lazard Equity Portfolio Lazard U.S. Equity Value Portfolio Lazard U.S. Strategic Equity Portfolio Lazard Mid Cap Portfolio Lazard Small Cap Portfolio Lazard U.S. Small Cap Equity Growth Portfolio Lazard International Equity Portfolio Lazard International Equity Select Portfolio Lazard International Strategic Equity Portfolio Lazard International Small Cap Portfolio Lazard Emerging Markets Portfolio Lazard High Yield Portfolio Each Portfolio currently offers two classes of shares--Institutional Shares and Open Shares. Institutional Shares and Open Shares are identical, except as to minimum investment requirements and the services offered to and expenses borne by each Class. To obtain a copy of the Fund's Prospectuses, please write or call the Fund at the address and telephone number above. The Fund's most recent Annual Report and Semi-Annual Report to Shareholders are separate documents supplied with this Statement of Additional Information, and the financial statements, accompanying notes and report of independent registered public accounting firm appearing in the Annual Report are incorporated by reference into this Statement of Additional Information. - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page - -------------------------------------------------------------------------------- Description of the Fund and Portfolios.........................................1 Investment Restrictions.......................................................20 Management....................................................................23 Determination of Net Asset Value..............................................37 Portfolio Transactions........................................................38 How to Buy and How to Sell Shares.............................................42 Distribution and Servicing Plan (Open Shares Only)............................44 Dividends and Distributions...................................................45 Taxation......................................................................46 Additional Information About the Fund and Portfolios..........................49 Counsel and Independent Registered Public Accounting Firm.....................59 Appendix......................................................................60 DESCRIPTION OF THE FUND AND PORTFOLIOS The Fund is a Maryland corporation organized on May 17, 1991. Each Portfolio is a separate series of the Fund, an open-end management investment company, known as a mutual fund. Each Portfolio is a diversified investment company, which means that, with respect to 75% of its total assets, the Portfolio will not invest more than 5% of its total assets in the securities of any single issuer nor hold more than 10% of the outstanding voting securities of any single issuer. Lazard Asset Management LLC serves as the investment manager (the "Investment Manager") to each of the Portfolios. Lazard Asset Management Securities LLC (the "Distributor") is the distributor of each Portfolio's shares. CERTAIN PORTFOLIO SECURITIES The following information supplements and should be read in conjunction with the Fund's Prospectuses. DEPOSITARY RECEIPTS. (All Portfolios, except Small Cap Portfolio) Each Portfolio may invest in the securities of foreign issuers in the form of American Depositary Receipts and American Depositary Shares (collectively, "ADRs") and Global Depositary Receipts and Global Depositary Shares (collectively, "GDRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. GDRs are receipts issued outside the United States, typically by non-United States banks and trust companies, that evidence ownership of either foreign or domestic securities. Generally, ADRs in registered form are designed for use in the United States securities markets and GDRs in bearer form are designed for use outside the United States. These securities may be purchased through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary. A depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities, and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL ENTITIES. (All Portfolios, except Small Cap Portfolio) Each Portfolio may invest in obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions, agencies or instrumentalities that are determined by the Investment Manager to be of comparable quality to the other obligations in which the Portfolio may invest. Such securities also include debt obligations of supranational entities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Coal and Steel Community, the Asian Development Bank and the InterAmerican Development Bank. FOREIGN SECURITIES. (All Portfolios, except Small Cap Portfolio) Each Portfolio may invest in non-U.S. securities as described in the Portfolio's Prospectus. FIXED-INCOME SECURITIES. (All Portfolios) Each fixed-income Portfolio may invest in fixed-income securities as described in the Prospectus. In addition, Equity, U.S. Equity Value and U.S. Strategic Equity Portfolios each may invest up to 20% of its assets in U.S. Government securities and investment grade debt obligations of U.S. corporations; Mid Cap, Small Cap and International Small Cap Portfolios may each invest up to 20% of its assets in investment grade debt securities; and International Equity, International Equity Select and International Strategic Equity Portfolios may each invest up to 20% of its assets in investment grade fixed-income securities and short-term money market instruments. CONVERTIBLE SECURITIES. (All Portfolios) Convertible securities may be converted at either a stated price or stated rate into underlying shares of common stock. Convertible securities have characteristics similar to both fixed-income and equity securities. Convertible securities generally are subordinated to other similar but non-convertible securities of the same issuer, although convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. Because of the subordination feature, however, convertible securities typically have lower ratings than similar non-convertible securities. Although to a lesser extent than with fixed-income securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock. A unique feature of convertible securities is that as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. Convertible securities provide for a stable stream of income with generally higher yields than common stocks, but there can be no assurance of current income because the issuers of the convertible securities may default on their obligations. A convertible security, in addition to providing fixed income, offers the potential for capital appreciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. There can be no assurance of capital appreciation, however, because securities prices fluctuate. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality because of the potential for capital appreciation. WARRANTS. (All Portfolios) A warrant is a form of derivative that gives the holder the right to subscribe to a specified amount of the issuing corporation's capital stock at a set price for a specified period of time. A Portfolio may invest up to 5% of its total assets in warrants, except that this limitation does not apply to warrants purchased by the Portfolio that are sold in units with, or attached to, other securities. PARTICIPATION INTERESTS. (All Portfolios) Each Portfolio may purchase from financial institutions participation interests in securities in which the Portfolio may invest. Each Portfolio may invest in corporate obligations denominated in U.S. or (except Equity and Small Cap Portfolios) foreign currencies that are originated, negotiated and structured by a syndicate of 2 lenders ("Co-Lenders") consisting of commercial banks, thrift institutions, insurance companies, financial companies or other financial institutions one or more of which administers the security on behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third parties called "Participants." Each Portfolio may invest in such securities either by participating as a Co-Lender at origination or by acquiring an interest in the security from a Co-Lender or a Participant (collectively, "participation interests"). Co-Lenders and Participants interposed between the Portfolio and the corporate borrower (the "Borrower"), together with Agent Banks, are referred to herein as "Intermediate Participants." Each Portfolio also may purchase a participation interest in a portion of the rights of an Intermediate Participant, which would not establish any direct relationship between the Fund, on behalf of the Portfolio, and the Borrower. A participation interest gives the Portfolio an undivided interest in the security in the proportion that the Portfolio's participation interest bears to the total principal amount of the security. These instruments may have fixed, floating or variable rates of interest with remaining maturities of 13 months or less. If the participation interest is unrated, or has been given a rating below that which is permissible for purchase by the Portfolio, the participation interest will be collateralized by U.S. Government securities, or, in the case of unrated participation interests, the Investment Manager must have determined that the instrument is of comparable quality to those instruments in which the Portfolio may invest. The Portfolio would be required to rely on the Intermediate Participant that sold the participation interest not only for the enforcement of the Portfolio's rights against the Borrower, but also for the receipt and processing of payments due to the Portfolio under the security. Because it may be necessary to assert through an Intermediate Participant such rights as may exist against the Borrower, if the Borrower fails to pay principal and interest when due the Portfolio may be subject to delays, expenses and risks that are greater than those that would be involved if the Portfolio were to enforce its rights directly against the Borrower. Moreover, under the terms of a participation interest, the Portfolio may be regarded as a creditor of the Intermediate Participant (rather than of the Borrower), so that the Portfolio also may be subject to the risk that the Intermediate Participant may become insolvent. Similar risks may arise with respect to the Agent Bank if, for example, assets held by the Agent Bank for the benefit of the Portfolio were determined by the appropriate regulatory authority or court to be subject to the claims of the Agent Bank's creditors. In such case, the Portfolio might incur certain costs and delays in realizing payment in connection with the participation interest or suffer a loss of principal and/or interest. Further, in the event of the bankruptcy or insolvency of the Borrower, the obligation of the Borrower to repay the loan may be subject to certain defenses that can be asserted by such Borrower as a result of improper conduct by the Agent Bank or Intermediate Participant. VARIABLE AND FLOATING RATE SECURITIES. (All Portfolios) Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as a change in the prime rate. Each Portfolio may invest in floating rate debt instruments ("floaters"). The interest rate on a floater is a variable rate which is tied to another interest rate, such as a money-market index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. Because of the interest rate reset feature, floaters provide the Portfolio with a certain degree of protection against rises in interest rates, although the Portfolio will participate in any declines in interest rates as well. Each Portfolio also may invest in inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed or inversely to a multiple of the applicable index. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality. 3 MUNICIPAL OBLIGATIONS. (High Yield Portfolio) Municipal obligations are debt obligations issued by states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, or multi-state agencies or authorities, to obtain funds for various public purposes, and include certain industrial development bonds issued by or on behalf of public authorities. Municipal obligations are classified as general obligation bonds, revenue bonds and notes. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable from the revenue derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source, but not from the general taxing power. Industrial development bonds, in most cases, are revenue bonds and generally do not carry the pledge of the credit of the issuing municipality, but generally are guaranteed by the corporate entity on whose behalf they are issued. Notes are short-term instruments which are obligations of the issuing municipalities or agencies and are sold in anticipation of a bond sale, collection of taxes or receipt of other revenues. Municipal obligations include municipal lease/purchase agreements which are similar to installment purchase contracts for property or equipment issued by municipalities. Municipal obligations bear fixed, floating or variable rates of interest which are determined in some instances by formulas under which the municipal obligation's interest rate will change directly or inversely to changes in interest rates or an index, or multiples thereof, in many cases subject to a maximum and minimum. Certain municipal obligations are subject to redemption at a date earlier than their stated maturity pursuant to call options, which may be separated from the related municipal obligations and purchased and sold separately. High Yield Portfolio also may acquire call options on specific municipal obligations. The Portfolio generally would purchase these call options to protect it from the issuer of the related municipal obligation redeeming, or other holder of the call option from calling away, the municipal obligation before maturity. While, in general, municipal obligations are tax exempt securities having relatively low yields as compared to taxable, non-municipal obligations of similar quality, certain municipal obligations are taxable obligations offering yields comparable to, and in some cases greater than, the yields available on other permissible Portfolio investments. Dividends received by shareholders on Portfolio shares which are attributable to interest income received by the Portfolio from municipal obligations generally will be subject to federal income tax. High Yield Portfolio may invest in municipal obligations, the ratings of which correspond with the ratings of other permissible Portfolio investments. The Portfolio currently intends to invest no more than 25% of its assets in municipal obligations. However, this percentage may be varied from time to time without shareholder approval. ZERO COUPON, PAY-IN-KIND AND STEP UP SECURITIES. (High Yield Portfolio) High Yield Portfolio may invest in zero coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have been stripped of their unmatured interest coupons, the coupons themselves and receipts or certificates representing interests in such stripped debt obligations and coupons. Zero coupon securities also are issued by corporations and financial institutions which constitute a proportionate ownership of the issuer's pool of underlying U.S. Treasury securities. A zero coupon security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The Portfolio may invest in pay-in-kind bonds which are bonds which generally pay interest through the issuance of additional bonds. High Yield Portfolio also may purchase step up coupon bonds which are debt securities which typically do not pay interest for a specified period of time and then pay interest at a series of different rates. The market prices of these securities generally are more volatile and are likely to respond to a greater degree to changes in interest rates than the market prices of securities that pay interest periodically having similar maturities and credit qualities. In addition, unlike bonds that pay interest throughout the period to maturity, the Portfolio will realize no cash until the cash payment date unless a portion of such securities are sold and, if the issuer defaults, the Portfolio may obtain no return at all on its investment. Federal income tax law requires the holder of a zero coupon security or of certain pay-in-kind or step up bonds to accrue income 4 with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income taxes, High Yield Portfolio may be required to distribute such income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. MORTGAGE-RELATED SECURITIES. (High Yield Portfolio and, to a limited extent, Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap and U.S. Small Cap Equity Growth Portfolios) Mortgage-related securities are a form of derivative collateralized by pools of commercial or residential mortgages. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations. These securities may include complex instruments such as collateralized mortgage obligations and stripped mortgage-backed securities, mortgage pass-through securities, interests in real estate mortgage investment conduits ("REMICs"), adjustable rate mortgages, real estate investment trusts or other kinds of mortgage-backed securities, including those with fixed, floating and variable interest rates, those with interest rates based on multiples of changes in a specified index of interest rates and those with interest rates that change inversely to changes in interest rates, as well as those that do not bear interest. RESIDENTIAL MORTGAGE-RELATED SECURITIES. Each of these Portfolios may invest in mortgage-related securities representing participation interests in pools of one- to four-family residential mortgage loans issued by governmental agencies or instrumentalities, such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by private entities. Similar to commercial mortgage-related securities, residential mortgage-related securities have been issued using a variety of structures, including multi-class structures featuring senior and subordinated classes. Mortgage-related securities issued by GNMA include GNMA Mortgage Pass-Through Certificates (also know as "Ginnie Maes") which are guaranteed as to the timely payment of principal and interest by GNMA and such guarantee is backed by the full faith and credit of the United States. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. Mortgage-related securities issued by FNMA include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are solely the obligations of FNMA and are not backed by or entitled to the full faith and credit of the United States. Fannie Maes are guaranteed as to timely payment of principal and interest by FNMA. Mortgage-related securities issued by FHLMC include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs"). Freddie Macs are not guaranteed by the United States or by any Federal Home Loan Bank and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. COMMERCIAL MORTGAGE-RELATED SECURITIES. Each of these Portfolios may invest in commercial mortgage-related securities which generally are multi-class debt or pass-through certificates secured by mortgage loans on commercial properties. Similar to residential mortgage-related securities, commercial mortgage-related securities have been issued using a variety of structures, including multi-class structures featuring senior and subordinated classes. These mortgage-related securities generally are constructed to provide protection to the senior classes investors against potential losses on the underlying mortgage loans. This protection is generally provided by having the holders of the subordinated class of securities 5 ("Subordinated Securities") take the first loss if there are defaults on the underlying commercial mortgage loans. Other protection, which may benefit all of the classes or particular classes, may include issuer guarantees, reserve funds, additional Subordinated Securities, cross-collateralization and over-collateralization. SUBORDINATED SECURITIES. Each of these Portfolios may invest in Subordinated Securities issued or sponsored by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Subordinated Securities have no governmental guarantee, and are subordinated in some manner as to the payment of principal and/or interest to the holders of more senior mortgage-related securities arising out of the same pool of mortgages. The holders of Subordinated Securities typically are compensated with a higher stated yield than are the holders of more senior mortgage-related securities. On the other hand, Subordinated Securities typically subject the holder to greater risk than senior mortgage-related securities and tend to be rated in a lower rating category, and frequently a substantially lower rating category, than the senior mortgage-related securities issued in respect of the same pool of mortgage. Subordinated Securities generally are likely to be more sensitive to changes in prepayment and interest rates and the market for such securities may be less liquid than is the case for traditional fixed-income securities and senior mortgage-related securities. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND MULTI-CLASS PASS-THROUGH SECURITIES. Each of these Portfolios may invest in CMOs, which are multiclass bonds backed by pools of mortgage pass-through certificates or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie Mae or FHLMC pass-through certificates, (b) unsecuritized mortgage loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans' Affairs, (c) unsecuritized conventional mortgages, (d) other mortgage-related securities or (e) any combination thereof. Each class of CMOs, often referred to as a "tranche," is issued at a specific coupon rate and has a stated maturity or final distribution date. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than the stated maturities or final distribution dates. The principal and interest on the underlying mortgages may be allocated among the several classes of a series of a CMO in many ways. One or more tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index, such as the London Interbank Offered Rate ("LIBOR") (or sometimes more than one index). These floating rate CMOs typically are issued with lifetime caps on the coupon rate thereon. Each of these Portfolios also may invest in inverse floating rate CMOs. Inverse floating rate CMOs constitute a tranche of a CMO with a coupon rate that moves in the reverse direction to an applicable index such as the LIBOR. Accordingly, the coupon rate thereon will increase as interest rates decrease. Inverse floating rate CMOs are typically more volatile than fixed or floating rate tranches of CMOs. High Yield Portfolio may invest, to a limited extent, in residual interests in real estate mortgage investment conduits ("REMICs"). See "Taxation." Many inverse floating rate CMOs have coupons that move inversely to a multiple of the applicable indexes. The coupon varying inversely to a multiple of an applicable index creates a leverage factor. Inverse floaters based on multiples of a stated index are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and loss of principal. The markets for inverse floating rate CMOs with highly leveraged characteristics may at times be very thin. Each Portfolio's ability to dispose of its positions in such securities will depend on the degree of liquidity in the markets for such securities. It is impossible to predict the amount of trading interest that may exist in such securities, and therefore the future degree of liquidity. STRIPPED MORTGAGE-BACKED SECURITIES. Each of these Portfolios also may invest in stripped mortgage-backed securities which are created by segregating the cash flows from underlying mortgage 6 loans or mortgage securities to create two or more new securities, each with a specified percentage of the underlying security's principal or interest payments. Mortgage securities may be partially stripped so that each investor class received some interest and some principal. When securities are completely stripped, however, all of the interest is distributed to holders of one type of security, known as an interest-only security, or IO, and all of the principal is distributed to holders of another type of security known as a principal-only security, or PO. Strips can be created in a pass-through structure or as tranches of a CMO. The yields to maturity on IOs and POs are very sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Portfolio may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the yield on POs could be materially and adversely affected. PRIVATE ENTITY SECURITIES. Each of these Portfolios may invest in mortgage-related securities issued by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Timely payment of principal and interest on mortgage-related securities backed by pools created by non-governmental issuers often is supported partially by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or mortgage poolers can meet their obligations under the policies, so that if the issuers default on their obligations the holders of the security could sustain a loss. No insurance or guarantee covers the Portfolio or the price of the Portfolio's shares. Mortgage-related securities issued by non-governmental issuers generally offer a higher rate of interest than government-agency and government-related securities because there are no direct or indirect government guarantees of payment. CMO RESIDUALS. CMO Residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. The cash flow generated by the mortgage assets underlying series of CMOs is applied first to make required payments of principal of and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO Residual represents dividend or interest income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMOs, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to maturity on CMO Residuals is extremely sensitive to prepayments on the related underlying mortgage assets in the same manner as an IO class of stripped mortgage-back securities. See "Stripped Mortgage-Backed Securities" above. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to the level of the index upon which interest rate adjustments are based. As described above with respect to stripped mortgage-back securities, in certain circumstances, the Portfolio may fail to fully recoup its initial investment in a CMO Residual. CMO Residuals generally are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. CMO Residuals may not have the liquidity of other more established securities trading in other markets. Transactions in CMO Residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, 7 whether or not registered under the Securities Act of 1933, as amended (the "Securities Act"), CMO Residuals may be subject to certain restrictions of transferability. Ownership of certain CMO Residuals imposes liability for certain of the expenses of the related CMO issuer on the purchaser. The Investment Manager will not purchase any CMO Residual that imposes such liability on the Portfolio. OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities in which a Portfolio may invest include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing. REAL ESTATE INVESTMENT TRUSTS. (All Portfolios) Each of these Portfolios may invest in Real Estate Investment Trusts ("REITs"). A REIT is a corporation, or a business trust that would otherwise be taxed as a corporation, which meets the definitional requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The Code permits a qualifying REIT to deduct dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things, invest substantially all of its assets in interests in real estate (including mortgages and other REITs) or cash and government securities, derive most of its income from rents from real property or interest on loans secured by mortgages on real property, and distribute to shareholders annually a substantial portion of its otherwise taxable income. REITs are characterized as equity REITs, mortgage REITs and hybrid REITs. Equity REITs, which may include operating or finance companies, own real estate directly and the value of, and income earned by, the REITs depends upon the income of the underlying properties and the rental income they earn. Equity REITs also can realize capital gains (or losses) by selling properties that have appreciated (or depreciated) in value. Mortgage REITs can make construction, development or long-term mortgage loans and are sensitive to the credit quality of the borrower. Mortgage REITs derive their income from interest payments on such loans. Hybrid REITs combine the characteristics of both equity and mortgage REITs, generally by holding both ownership interests and mortgage interests in real estate. The values of securities issued by REITs are affected by tax and regulatory requirements and by perceptions of management skill. They also are subject to heavy cash flow dependency, defaults by borrowers or tenants, self-liquidation and the possibility of failing to qualify for tax-free status under the Code or to maintain exemption from the Investment Company Act of 1940, as amended (the "1940 Act"). ASSET-BACKED SECURITIES. (High Yield Portfolio) Asset-backed securities are a form of derivative. The securitization techniques used for asset-backed securities are similar to those used for mortgage-related securities. These securities include debt securities and securities with debt-like characteristics. The collateral for these securities has included credit card and automobile receivables, home equity loans, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. The Portfolio may invest in these and other types of asset-backed securities that may be developed in the future. Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may provide the Portfolio with a less effective security interest in the related collateral than do mortgage-backed securities. Therefore, there is the possibility that recoveries on the underlying collateral may not, in some cases, be available to support payments on these securities. 8 Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most organizations that issue asset-backed securities relating to motor vehicle installment purchase obligations perfect their interests in their respective obligations only by filing a financing statement and by having the servicer of the obligations, which is usually the originator, take custody thereof. In such circumstances, if the servicer were to sell the same obligations to another party, in violation of its duty not to so do, there is a risk that such party could acquire an interest in the obligations superior to that of the holders of the securities. Also, although most such obligations grant a security interest in the motor vehicle being financed, in most states the security interest in a motor vehicle must be noted on the certificate of title to perfect such security interest against competing claims of other parties. Due to the large number of vehicles involved, however, the certificate of title to each vehicle financed, pursuant to the obligations underlying the securities, usually is not amended to reflect the assignment of the seller's security interest for the benefit of the holders of the securities. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. In addition, various state and federal laws give the motor vehicle owner the right to assert against the holder of the owner's obligation certain defenses such owner would have against the seller of the motor vehicle. The assertion of such defenses could reduce payments on the related securities. INVESTMENT COMPANIES. (All Portfolios) Each of U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios may invest, to the extent permitted under the 1940 Act, in securities issued by investment companies which principally invest in securities of the type in which the Portfolio invests. Under the 1940 Act, a Portfolio's investment in such securities, subject to certain exceptions, currently is limited to (i) 3% of the total voting stock of any one investment company, (ii) 5% of the Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Equity, Small Cap and International Equity Portfolios may not purchase securities of other investment companies except in connection with a merger, consolidation, acquisition or reorganization, and may purchase securities of any one closed-end fund in an amount up to 5% of the Portfolio's total assets and may purchase securities of closed-end funds in the aggregate in an amount of up to 10% of the Portfolio's total assets. Investments in the securities of investment companies may involve duplication of advisory fees and certain other expenses. ILLIQUID SECURITIES. (All Portfolios) Each Portfolio may invest up to 10% (15% in the case of U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios) of the value of its net assets (total assets, in the case of Equity Portfolio) in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. These securities may include securities that are not readily marketable, such as securities that are subject to legal or contractual restrictions on resale (such as private placements and certain restricted securities), repurchase agreements providing for settlement in more than seven days after notice, certain mortgage-related securities, and certain privately negotiated, non-exchange traded options and securities used to cover such options. As to these securities, a Portfolio is subject to the risk that should the Portfolio desire to sell them when a ready buyer is not available at a price that is deemed to be representative of their value, the value of the Portfolio's net assets could be adversely affected. MONEY MARKET INSTRUMENTS; TEMPORARY DEFENSIVE POSITIONS. (All Portfolios) When the Investment Manager determines that adverse market conditions exist, a Portfolio may adopt a temporary defensive position and invest some or all of its assets in money market instruments, including U.S. Government securities, repurchase agreements, bank obligations and commercial paper and other short- 9 term obligations ("Money Market Instruments"). For Emerging Markets Portfolio, when the Investment Manager believes it is warranted for defensive purposes, the Portfolio may invest without limitation in high quality fixed-income securities or equity securities of U.S. companies. Each Portfolio also may purchase Money Market Instruments when it has cash reserves or in anticipation of taking a market position. INVESTMENT TECHNIQUES The following information supplements and should be read in conjunction with the Fund's Prospectuses. BORROWING MONEY. (All Portfolios) Each Portfolio may borrow to the extent permitted under the 1940 Act, which permits an investment company to borrow in an amount up to 33-1/3% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (including the amount borrowed) at the time the borrowing is made. While such borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not make any additional investments. Money borrowed will be subject to interest costs. In addition, Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios may each borrow for investment purposes to the extent permitted under the 1940 Act. See "Leverage" below. LEVERAGE. (All Portfolios, except Small Cap and International Equity Portfolios) Leveraging (buying securities using borrowed money) exaggerates the effect on net asset value of any increase or decrease in the market value of the Portfolio's investment. Money borrowed for leveraging is limited to 33-1/3% of the value of the Portfolio's total assets. Interest costs may or may not be recovered by appreciation of the securities purchased; in certain cases, interest costs may exceed the return received on the securities purchased. For borrowings for investment purposes, the 1940 Act requires the Portfolio to maintain continuous asset coverage (total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the required coverage should decline as a result of market fluctuations or other reasons, the Portfolio may be required to sell some of its portfolio holdings within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. The Portfolio also may be required to maintain minimum average balances in connection with such borrowing or pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. Each Portfolio may enter into reverse repurchase agreements with banks, brokers or dealers. This form of borrowing involves the transfer by the Portfolio of an underlying debt instrument in return for cash proceeds based on a percentage of the value of the security. The Portfolio retains the right to receive interest and principal payments on the security. As a result of these transactions, the Portfolio is exposed to greater potential fluctuation in the value of its assets and its net asset value per share. At an agreed upon future date, the Portfolio repurchases the security at principal plus accrued interest. To the extent a Portfolio enters into a reverse repurchase agreement, the Portfolio will maintain in a segregated custodial account permissible liquid assets at least equal to the aggregate amount of its reverse repurchase obligations, plus accrued interest, in certain cases, in accordance with releases promulgated by the Securities and Exchange Commission (the "Commission"). The Commission views reverse repurchase transactions as collateralized borrowing by a Portfolio. Except for these transactions, each Portfolio's borrowings generally will be unsecured. 10 LENDING PORTFOLIO SECURITIES. (All Portfolios) Each Portfolio may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. In connection with such loans, the Portfolio remains the owner of the loaned securities and continues to be entitled to payments in amounts equal to the interest, dividends or other distributions payable on the loaned securities. The Portfolio also has the right to terminate a loan at any time. The Portfolio may call the loan to vote proxies if a material issue affecting the Portfolio's investment is to be voted upon. Loans of portfolio securities may not exceed 33-1/3% of the value of the Portfolio's total assets. The Portfolio will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. If the collateral consists of a letter of credit or securities, the borrower will pay the Portfolio a loan premium fee. If the collateral consists of cash, the Portfolio will reinvest the cash and pay the borrower a pre-negotiated fee or "rebate" from any return earned on the investment. Should the borrower of the securities fail financially, the Portfolio may experience delays in recovering the loaned securities or exercising its rights in the collateral. Loans are made only to borrowers that are deemed by the Investment Manager to be of good financial standing. In a loan transaction, the Portfolio will also bear the risk of any decline in value of securities acquired with cash collateral. DERIVATIVES. (All Portfolios) Each Portfolio may invest in, or enter into, derivatives, such as options, futures contracts, options on futures contracts and swap agreements, for a variety of reasons, including to hedge certain market risks, to provide a substitute for purchasing or selling particular securities or to increase potential income gain. Derivatives may provide a cheaper, quicker or more specifically focused way for the Portfolio to invest than "traditional" securities would. Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular derivative and the portfolio as a whole. Derivatives permit a Portfolio to increase or decrease the level of risk, or change the character of the risk, to which its portfolio is exposed in much the same way as the Portfolio can increase or decrease the level of risk, or change the character of the risk, of its portfolio by making investments in specific securities. However, derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in derivatives could have a large potential impact on a Portfolio's performance. If a Portfolio invests in derivatives at inopportune times or judges market conditions incorrectly, such investments may lower the Portfolio's return or result in a loss. A Portfolio also could experience losses if its derivatives were poorly correlated with its other investments, or if the Portfolio were unable to liquidate its position because of an illiquid secondary market. The market for many derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for derivatives. The Fund will not be a commodity pool (i.e., a pooled investment vehicle which trades in commodity futures contracts and options thereon and the operator of which is registered with the Commodity Futures Trading Commission (the "CFTC")). In addition, the Fund has claimed an exclusion from the definition of commodity pool operator and, therefore, is not subject to registration or regulation as a pool operator under the Commodity Exchange Act. Derivatives may be purchased on established exchanges or through privately negotiated transactions referred to as over-the-counter derivatives. Exchange-traded derivatives generally are guaranteed by the clearing agency which is the issuer or counterparty to such derivatives. This guarantee usually is supported by a daily variation margin system operated by the clearing agency in order to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty 11 credit risk associated with derivatives purchased on an exchange. In contrast, no clearing agency guarantees over-the-counter derivatives. Therefore, each party to an over-the-counter derivative bears the risk that the counterparty will default. Accordingly, the Investment Manager will consider the creditworthiness of counterparties to over-the-counter derivatives in the same manner as it would review the credit quality of a security to be purchased by the Portfolio. Over-the-counter derivatives are less liquid than exchange-traded derivatives since the other party to the transaction may be the only investor with sufficient understanding of the derivative to be interested in bidding for it. Successful use of derivatives by a Portfolio also is subject to the Investment Manager's ability to predict correctly movements in the direction of the relevant market and to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if a Portfolio uses futures to hedge against the possibility of a decline in the market value of securities held in its portfolio and the prices of such securities instead increase, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. Furthermore, if in such circumstances the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. The Portfolio may have to sell such securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Commission, a Portfolio may be required to segregate permissible liquid assets to cover its obligations relating to its transactions in derivatives. To maintain this required cover, the Portfolio may have to sell securities at disadvantageous prices or times since it may not be possible to liquidate a derivative position at a reasonable price. The segregation of such assets will have the effect of limiting the Portfolio's ability to otherwise invest those assets. FUTURES TRANSACTIONS--IN GENERAL. (All Portfolios, except Equity, Small Cap and International Equity Portfolios) Each Portfolio may enter into futures contracts in U.S. domestic markets, or on exchanges located outside the United States. Foreign markets may offer advantages such as trading opportunities or arbitrage possibilities not available in the United States. Foreign markets, however, may have greater risk potential than domestic markets. For example, some foreign exchanges are principal markets so that no common clearing facility exists and an investor may look only to the broker for performance of the contract. In addition, any profits a Portfolio might realize in trading could be eliminated by adverse changes in the currency exchange rate, or the Portfolio could incur losses as a result of those changes. Transactions on foreign exchanges may include both commodities which are traded on domestic exchanges and those which are not. Unlike trading on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the CFTC. Engaging in these transactions involves risk of loss to the Portfolio which could adversely affect the value of the Portfolio's net assets. Although each of these Portfolios intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Portfolio to substantial losses. SPECIFIC FUTURES TRANSACTIONS. U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small 12 Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap and Emerging Markets Portfolios may purchase and sell stock index futures contracts. A stock index future obligates the Portfolio to pay or receive an amount of cash equal to a fixed dollar amount specified in the futures contract multiplied by the difference between the settlement price of the contract on the contract's last trading day and the value of the index based on the stock prices of the securities that comprise it at the opening of trading in such securities on the next business day. U.S. Equity Value, U.S. Strategic Equity, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios may purchase and sell interest rate futures contracts. An interest rate future obligates the Portfolio to purchase or sell an amount of a specific debt security at a future date at a specific price. Each Portfolio, except Equity, Small Cap and International Equity Portfolios, may buy and sell foreign currency futures. A currency future obligates the Portfolio to purchase or sell an amount of a specific currency at a future date at a specific price. OPTIONS--IN GENERAL. (All Portfolios, except Equity and Small Cap Portfolios) Each Portfolio may buy and sell (write) covered call and put options. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security or securities at the exercise price at any time during the option period, or at a specific date. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security or securities at the exercise price at any time during the option period, or at a specific date. A covered call option written by a Portfolio is a call option with respect to which the Portfolio owns the underlying security or otherwise covers the transaction by segregating permissible liquid assets. A put option written by a Portfolio is covered when, among other things, the Portfolio segregates permissible liquid assets having a value equal to or greater than the exercise price of the option to fulfill the obligation undertaken. The principal reason for writing covered call and put options is to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. A Portfolio receives a premium from writing covered call or put options which it retains whether or not the option is exercised. There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times have rendered certain of the clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that may otherwise interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If, as a covered call option writer, a Portfolio is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. SPECIFIC OPTIONS TRANSACTIONS. Each of these Portfolios may buy and sell call and put options in respect of specific securities (or groups or "baskets" of specific securities) or indices listed on national securities exchanges or traded in the over-the-counter market. An option on an index is similar to an option in respect of specific securities, except that settlement does not occur by delivery of the securities comprising the index. Instead, the option holder receives an amount of cash if the closing level of the 13 index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. Thus, the effectiveness of purchasing or writing index options will depend upon price movements in the level of the index rather than the price of a particular security. Each of these Portfolios, except International Equity Portfolio, may buy and sell call and put options on foreign currency. These options convey the right to buy or sell the underlying currency at a price which is expected to be lower or higher than the spot price of the currency at the time the option is exercised or expires. Each of these Portfolios may purchase cash-settled options on interest rate swaps (except International Equity Portfolio), interest rate swaps denominated in foreign currency, and equity index swaps (except in the case of International Equity Portfolio) in pursuit of its investment objective. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest (for example, an exchange of floating-rate payments for fixed-rate payments) denominated in U.S. dollars or foreign currency. Equity index swaps involve the exchange by the Portfolio with another party of cash flows based upon the performance of an index or a portion of an index of securities which usually includes dividends. A cash-settled option on a swap gives the purchaser the right, but not the obligation, in return for the premium paid, to receive an amount of cash equal to the value of the underlying swap as of the exercise date. These options typically are purchased in privately negotiated transactions from financial institutions, including securities brokerage firms. Successful use by a Portfolio of options will be subject to the Investment Manager's ability to predict correctly movements in the prices of individual stocks, the stock market generally, foreign currencies or interest rates. To the extent the Investment Manager's predictions are incorrect, the Portfolio may incur losses. SWAP AGREEMENTS. To the extent consistent with the Portfolio's investment objective and management policies as set forth herein, each Portfolio may enter into equity, interest rate, index, total return and currency rate swap agreements. These transactions are entered into in an attempt to obtain a particular return when it is considered desirable to do so, possibly at a lower cost to the Portfolio than if the Portfolio had invested directly in the asset that yielded the desired return. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than a year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or "swapped" between the parties are generally calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent interest rates exceed a specified rate or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent interest rates fall below a specified level or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. Most swap agreements entered into by a Portfolio would calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Portfolio's current obligations (or rights) under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The risk of loss with respect to swaps is limited to the net amount of payments that the Portfolio is contractually obligated to make. If the other party to a swap defaults, the Portfolio's risk of loss consists 14 of the net amount of payments that the Portfolio contractually is entitled to receive. FUTURE DEVELOPMENTS. A Portfolio may take advantage of opportunities in options and futures contracts and options on futures contracts and any other derivatives which are not presently contemplated for use by the Portfolio or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Portfolio's investment objective and legally permissible for the Portfolio. Before entering into such transactions or making any such investment, the Portfolio will provide appropriate disclosure in its Prospectus or this Statement of Additional Information. FOREIGN CURRENCY TRANSACTIONS. (All Portfolios, except Equity and Small Cap Portfolios) Foreign currency transactions may be entered into for a variety of purposes, including: to fix in U.S. dollars, between trade and settlement date, the value of a security the Portfolio has agreed to buy or sell; to hedge the U.S. dollar value of securities the Portfolio already owns, particularly if it expects a decrease in the value of the currency in which the foreign security is denominated; or to gain exposure to the foreign currency in an attempt to realize gains. Foreign currency transactions may involve, for example, the Portfolio's purchase of foreign currencies for U.S. dollars or the maintenance of short positions in foreign currencies. A short position would involve the Portfolio agreeing to exchange an amount of a currency it did not currently own for another currency at a future date in anticipation of a decline in the value of the currency sold relative to the currency the Portfolio contracted to receive. The Portfolio's success in these transactions will depend principally on the Investment Manager's ability to predict accurately the future exchange rates between foreign currencies and the U.S. dollar. SHORT-SELLING. (U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Strategic Equity and High Yield Portfolios) Each of these Portfolios may engage in short sales of securities. In these transactions, the Portfolio sells a security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio is obligated to replace the security borrowed by purchasing it subsequently at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio, which would result in a loss or gain, respectively. The Portfolio also may make short sales "against the box," in which the Portfolio enters into a short sale of a security it owns. Securities will not be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net assets. A Portfolio may not make a short-sale which results in the Portfolio having sold short in the aggregate more than 5% of the outstanding securities of any class of issuer. Until the Portfolio closes its short position or replaces the borrowed security, it will: (a) segregate permissible liquid assets in an amount that, together with the amount deposited as collateral, always equals the current value of the security sold short; or (b) otherwise cover its short position. FORWARD COMMITMENTS. (All Portfolios) A Portfolio may purchase or sell securities on a forward commitment, when-issued or delayed delivery basis, which means that delivery and payment take place a number of days after the date of the commitment to purchase or sell. The payment obligation and the interest rate receivable on a forward commitment, when-issued or delayed-delivery security are fixed when the Portfolio enters into the commitment, but the Portfolio does not make a payment until it receives delivery from the counterparty. The Portfolio will segregate permissible liquid assets at least equal at all times to the amount of the Portfolio's purchase commitments. The Portfolio intends to engage in forward commitments to increase the Portfolio's financial exposure to the types of securities in which it invests, which will increase the Portfolio's exposure to changes in interest rates and will increase the 15 volatility of its returns. If the Portfolio is fully or almost fully invested when forward commitment purchases are outstanding, such purchases may result in a form of leverage. At no time will the Portfolio have more than 33-?% of its total assets committed to purchase securities on a forward commitment basis. Securities purchased on a forward commitment, when-issued or delayed-delivery basis are subject to changes in value (generally changing in the same way, I.E., appreciating when interest rates decline and depreciating when interest rates rise) based upon the public's perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. Securities purchased on a forward commitment, when-issued or delayed-delivery basis may expose a Portfolio to risks because they may experience such fluctuations prior to their actual delivery. Purchasing securities on a forward commitment, when-issued or delayed-delivery basis can involve the additional risk that the yield available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. Purchasing securities on a forward commitment, when-issued or delayed-delivery basis when the Portfolio is fully or almost fully invested may result in greater potential fluctuation in the value of the Portfolio's net assets and its net asset value per share. CERTAIN INVESTMENT CONSIDERATIONS AND RISKS EQUITY SECURITIES. (All Portfolios) Equity securities, including common stock, preferred stock, convertible securities and warrants, fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and such fluctuations can be pronounced. Changes in the value of a Portfolio's investments will result in changes in the value of its shares and thus the Portfolio's total return to investors. INITIAL PUBLIC OFFERINGS. (All Portfolios, except High Yield Portfolio) Each of these Portfolios may purchase securities of companies in initial public offerings ("IPOs") or shortly thereafter. An IPO is a corporation's first offering of stock to the public. Shares are given a market value reflecting expectations for the corporation's future growth. Special rules of the National Association of Securities Dealers, Inc. (the "NASD") apply to the distribution of IPOs. Corporations offering stock in IPOs generally have limited operating histories and may involve greater investment risk. The prices of these companies' securities may be very volatile, rising and falling rapidly, sometimes based solely on investor perceptions rather than economic reasons. IPO securities will be sold when the Investment Manager believes the price has reached full value. IPO securities may be sold by a Portfolio on the same day the Portfolio receives an allocation. SMALLER COMPANY SECURITIES. (U.S. Equity Value, U.S. Strategic Equity, Small Cap, U.S. Small Cap Equity Growth, International Strategic Equity, International Small Cap and Emerging Markets Portfolios) Each of these Portfolios may purchase securities of smaller capitalization companies, the prices of which may be subject to more abrupt or erratic market movements than securities of larger, more established companies, because securities of smaller companies typically are traded in lower volume and the issuers typically are subject to greater changes in earnings and prospects. Smaller capitalization companies often have limited product lines, markets or financial resources. They may be dependent on management for one or a few key persons, and can be more susceptible to losses and the risk of bankruptcy. In addition, securities of the small capitalization sector may be thinly traded (and therefore may have to be sold at a discount from current market prices or sold in small lots over an extended period of time), may be followed by fewer investment research analysts and may pose a greater chance of loss than investments in securities of larger capitalization companies. 16 FIXED-INCOME SECURITIES. (All Portfolios) Even though interest-bearing securities are investments which promise a stable stream of income, the prices of such securities generally are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. Certain portfolio securities, such as those with interest rates that fluctuate directly or indirectly based on multiples of a stated index, are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and possibly loss of principal. The values of fixed-income securities also may be affected by changes in the credit rating or financial condition of the issuer. Certain securities, such as those rated below investment grade by Standard & Poor's Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's" and together with S&P, the "Rating Agencies"), may be subject to such risk with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated fixed-income securities. Once the rating of a portfolio security has been changed, the Portfolio will consider all circumstances deemed relevant in determining whether to continue to hold the security. MORTGAGE-RELATED SECURITIES. (High Yield Portfolio and, to a limited extent, Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap and U.S. Small Cap Equity Growth Portfolios) Mortgage-related securities are complex derivative instruments, subject to both credit and prepayment risk, and may be more volatile and less liquid, and more difficult to price accurately, than more traditional debt securities. Although certain mortgage-related securities are guaranteed by a third party (such as a U.S. Government agency or instrumentality with respect to government-related mortgage-backed securities) or otherwise similarly secured, the market value of the security, which may fluctuate, is not secured. Mortgage-related securities generally are subject to credit risks associated with the performance of the underlying mortgage properties and to prepayment risk. In certain instances, the credit risk associated with mortgage-related securities can be reduced by third party guarantees or other forms of credit support. Improved credit risk does not reduce prepayment risk which is unrelated to the rating assigned to the mortgage-related security. Prepayment risk can lead to fluctuations in value of the mortgage-related security which may be pronounced. If a mortgage-related security is purchased at a premium, all or part of the premium may be lost if the market value of the security declines, whether resulting from changes in interest rates or prepayments on the underlying mortgage collateral. Certain mortgage-related securities, such as inverse floating rate collateralized mortgage obligations, have coupons that move inversely to a multiple of a specific index which may result in increased price volatility. As with other interest-bearing securities, the prices of certain mortgage-related securities are inversely affected by changes in interest rates. However, although the value of a mortgage-related security may decline when interest rates rise, the converse is not necessarily true, since during periods of declining interest rates the mortgages underlying the security are more likely to be prepaid. For this and other reasons, a mortgage-related security's stated maturity may be shortened by unscheduled prepayments on the underlying mortgages, and, therefore, it is not possible to predict accurately the security's return to the Portfolio. Moreover, with respect to certain stripped mortgage-backed securities, if the underlying mortgage securities experience greater than anticipated prepayments of principal, the Portfolio may fail to fully recoup its initial investment even if the securities are rated in the highest rating category by a nationally recognized statistical rating organization. During periods of rapidly rising interest rates, prepayments of mortgage-related securities may occur at slower than expected rates. Slower prepayments effectively may lengthen a mortgage-related security's expected maturity, which generally would cause the value of such security to fluctuate more widely in response to changes in interest rates. Were the prepayments on the Portfolio's mortgage-related securities to decrease broadly, the Portfolio's effective duration, and thus sensitivity to interest rate fluctuations, would increase. Commercial real property loans, however, often contain provisions that substantially reduce the likelihood 17 that such securities will be prepaid. The provisions generally impose significant prepayment penalties on loans and in some cases there may be prohibitions on principal prepayments for several years following origination. FOREIGN SECURITIES. (All Portfolios, except Small Cap Portfolio) Foreign securities markets generally are not as developed or efficient as those in the United States. Securities of some foreign issuers, including depositary receipts, foreign government obligations and securities of supranational entities, are less liquid and more volatile than securities of comparable U.S. issuers. Similarly, volume and liquidity in most foreign securities markets are less than in the United States and, at times, volatility of price can be greater than in the United States. Because evidences of ownership of such securities usually are held outside the United States, a Portfolio will be subject to additional risks which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions, which might adversely affect or restrict the payment of principal and interest on the foreign securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Moreover, foreign securities held by a Portfolio may trade on days when the Portfolio does not calculate its net asset value and thus affect the Portfolio's net asset value on days when investors have no access to the Portfolio. With respect to International Equity, International Strategic Equity, Emerging Markets and High Yield Portfolios, developing countries have economic structures that generally are less diverse and mature, and political systems that are less stable, than those of developed countries. The markets of developing countries may be more volatile than the markets of more mature economies; however, such markets may provide higher rates of return to investors. Many developing countries providing investment opportunities for these Portfolios have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have adverse effects on the economies and securities markets of certain of these countries. The Portfolios consider emerging market countries to include all countries represented by the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index. As of May 2005, the MSCI EM Index included the following countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. Because foreign securities often are purchased with and payable in currencies of foreign countries, the value of these assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. FOREIGN CURRENCY TRANSACTIONS. (All Portfolios, except Equity and Small Cap Portfolios) Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or perceived changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the United States or abroad. LOWER RATED SECURITIES. (High Yield Portfolio) High Yield Portfolio invests at least 80% of its assets in higher yielding (and, therefore, higher risk) debt securities rated as low as the lowest rating assigned by a Rating Agency (commonly known as junk bonds). 18 Bond prices are inversely related to interest rate changes; however, bond price volatility also may be inversely related to coupon. Accordingly, below investment grade securities may be relatively less sensitive to interest rate changes than higher quality securities of comparable maturity, because of their higher coupon. This higher coupon is what the investor receives in return for bearing greater credit risk. The higher credit risk associated with below investment grade securities potentially can have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity, and will be a substantial factor in the Portfolio's relative share price volatility. The ratings of the Rating Agencies represent their opinions as to the quality of the obligations which they undertake to rate. Although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of these securities. See "Appendix" for a general description of the Rating Agencies' ratings. The Portfolio will rely on the judgment, analysis and experience of the Investment Manager in evaluating the creditworthiness of an issuer. Companies that issue certain of these securities often are highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with higher rated securities and will fluctuate over time. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of these securities may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be affected adversely by specific corporate developments, forecasts, or the unavailability of additional financing. The risk of loss because of default by the issuer is significantly greater for the holders of these securities because such securities generally are unsecured and often are subordinated to other creditors of the issuer. Because there is no established retail secondary market for many of these securities, the Portfolio anticipates that such securities could be sold only to a limited number of dealers or institutional investors. To the extent a secondary trading market for these securities does exist, it generally is not as liquid as the secondary market for higher rated securities. The lack of a liquid secondary market may have an adverse impact on market price and yield and the Portfolio's ability to dispose of particular issues when necessary to meet the Portfolio's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. The lack of a liquid secondary market for certain securities also may make it more difficult for the Portfolio to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value and could result in the Portfolio selling such securities at lower prices than those used in calculating the Portfolio's net asset value. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of these securities. In such cases, judgment may play a greater role in valuation because less reliable, objective data may be available. These securities may be particularly susceptible to economic downturns. An economic recession could adversely affect the ability of the issuers of lower rated bonds to repay principal and pay interest thereon and increase the incidence of default for such securities. It is likely that an economic recession could disrupt severely the market for such securities and may have an adverse impact on their value. High Yield Portfolio may acquire these securities during an initial offering. Such securities may involve special risks because they are new issues. The Portfolio does not have an arrangement with any persons concerning the acquisition of such securities, and the Investment Manager will review carefully the credit and other characteristics pertinent to such new issues. The credit risk factors pertaining to lower rated securities also apply to lower rated zero coupon, pay-in-kind and step up securities. In addition to the risks associated with the credit rating of the issuers, the market prices of these securities may be very volatile during the period no interest is paid. 19 SIMULTANEOUS INVESTMENTS. (All Portfolios) Investment decisions for each Portfolio are made independently from those of the other Portfolios and other accounts managed by the Investment Manager. If, however, such other Portfolios or accounts desire to invest in, or dispose of, the same securities as the Portfolio, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by a Portfolio or the price paid or received by a Portfolio. DISCLOSURE OF PORTFOLIO HOLDINGS It is the policy of the Fund to protect the confidentiality of the Portfolios' holdings and prevent the selective disclosure of non-public information about such holdings. The Fund will publicly disclose the Portfolios' holdings on a calendar quarter-end basis on its website accessible from http://www.lazardnet.com/lam/us/lazardfunds/shtml, approximately 14 days after such quarter end. The information will remain accessible until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information was current. In order to avoid conflicts of interest between the Fund, on the one hand, and the Investment Manager or any affiliated person of the Fund or the Investment Manager, on the other (1) disclosure of portfolio holdings information is made only when such disclosure is in the best interest of Portfolio shareholders and the Fund has a legitimate business purpose for doing so and (2) none of the Fund or the Investment Manager or their affiliates may receive any compensation in connection with an arrangement to make portfolio holdings information available. In accordance with the foregoing, the Fund provides portfolio holdings information to service providers who provide necessary or beneficial services when such service providers need access to this information in the performance of their services and are subject to duties of confidentiality (1) imposed by law, including a duty not to trade on non-public information, and/or (2) pursuant to an agreement that confidential information is not to be disclosed or used (including trading on such information) other than as required by law. From time to time, the Fund will communicate with these service providers to confirm that they understand the Fund's policies and procedures regarding such disclosure. Such service providers currently include the Fund's investment adviser, administrator, custodian, auditors and legal counsel and each of their respective affiliates and advisors, as well as Institutional Shareholder Services, Inc., Lipper Inc. ("Lipper"), Morningstar, Inc., Bloomberg, Russell/Mellon Analytical Services, LLC, Canterbury Consulting Incorporated and Thomson Vestek, Inc. Service providers receive holdings information at a frequency appropriate to their services, which may be as frequently as daily. Certain other service providers may be provided with portfolio holdings information on a quarterly basis, but in no event will such information be provided until after its posting on the Fund's website. Disclosure of portfolio holdings information may be authorized only by the Fund's Chief Compliance Officer or the General Counsel of the Investment Manager, each of whom evaluates such disclosure in light of the best interests of Portfolio shareholders and any potential conflicts of interest. The service providers that receive portfolio holdings information from the Fund as described above, and any additions to this list of service providers, are reported to the Fund's Board of Directors for its review. Any exceptions to the Fund's portfolio holdings disclosure policy are reported to the Board of Directors. INVESTMENT RESTRICTIONS Each Portfolio's investment objective is a fundamental policy, which cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting shares. In addition, each Portfolio (except as noted) has adopted investment restrictions numbered 1 20 through 10 as fundamental policies. However, the amendment of these restrictions to add an additional Portfolio, which amendment does not substantively affect the restrictions with respect to an existing Portfolio, will not require approval as described in the first sentence. Investment restrictions numbered 11 through 16 are not fundamental policies and may be changed, as to a Portfolio, by vote of a majority of the Fund's Board of Directors at any time. Under normal circumstances, each of the following Portfolios will invest at least 80% of its net assets, plus any borrowings for investment purposes, as follows (or other investments with similar economic characteristics): (i) Equity, International Equity, International Equity Select and International Strategic Equity Portfolios--equity securities; (ii) U.S. Equity Value and U.S. Strategic Equity--equity securities of U.S. companies; (iii) Mid Cap Portfolio--equity securities of medium-size companies; (iv) Small Cap and International Small Cap Portfolios--equity securities of small cap companies; (v) U.S. Small Cap Equity Growth Portfolio--equity securities of small cap U.S. companies; (vi) Emerging Markets Portfolio--equity securities of companies whose principal business activities are located in emerging market countries; and (vii) High Yield Portfolio--bonds and other fixed-income securities rated, at the time of purchase, below investment grade by S&P or Moody's and as low as the lowest rating assigned by S&P or Moody's, or the unrated equivalent as determined by the Investment Manager. Each of these Portfolios has adopted a policy to provide its shareholders with at least 60 days' prior notice of any change with respect to its 80% policy. None of the Portfolios may: 1. issue senior securities, borrow money or pledge or mortgage its assets, except that (A) each Portfolio may borrow from banks for temporary purposes, including the meeting of redemption requests which might require the untimely disposition of securities, as described in the Prospectus, (B) each of U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios also may borrow money to the extent permitted under the 1940 Act; provided, however, that the Portfolio will not make new investments to the extent borrowings exceed 5% of its total assets, except for borrowings covered within the interpretations of Sections 18(f) of the 1940 Act, and (C) Equity Portfolio may additionally utilize leverage as described in the Prospectus. For purposes of this investment restriction, a Portfolio's entry into options, forward contracts, futures contracts, including those related to indexes, shall not constitute borrowing; 2. make loans, except loans of portfolio securities not having a value in excess of 33-1/3% of a Portfolio's total assets and except that each Portfolio may purchase debt obligations in accordance with its investment objectives and policies; 3. for all Portfolios except U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, invest in illiquid securities as defined in "Investment Objectives and Management Policies--Illiquid Securities" if immediately after such investment more than 10% of the value of the Portfolio's net assets, or, in the case of Equity Portfolio, more than 10% of the value of that Portfolio's total assets, taken at market value, would be invested in such securities; 4. for Equity, Small Cap and International Equity Portfolios, (A) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization; and (B) Equity, Small Cap and International Equity Portfolios may purchase securities in an amount up to 5% of the value of the Portfolio's total assets in any one closed-end fund and may purchase in the aggregate securities of closed-end 21 funds in an amount of up to 10% of the value of the Portfolio's total assets; 5. purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Portfolio's investments in that industry would exceed 25% of the current value of such Portfolio's total assets, provided that there is no limitation with respect to investments in obligations of the U.S. Government, its agencies or instrumentalities; 6. (A) purchase or sell real estate or real estate limited partnerships, except that a Portfolio may purchase and sell securities of companies which deal in real estate or interests therein and U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios also may purchase and sell securities that are secured by real estate; (B) purchase or sell commodities or commodity contracts (except that U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios may purchase and sell swaps, options, forward contracts, futures contracts, including those relating to indices, and options on futures contracts or indices, and U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity, International Equity Select, International Strategic Equity and High Yield Portfolios may purchase or sell foreign currency forward exchange contracts; and (C) for all Portfolios except Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, invest in interests in or leases relating to oil, gas, or other mineral exploration or development programs; 7. purchase securities on margin (except for short-term credits necessary for the clearance of transactions) or, except for U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, make short sales of securities; 8. underwrite securities of other issuers, except to the extent that the purchase of municipal obligations or other permitted investments directly from the issuer thereof or from an underwriter for an issuer and the later disposition of such securities in accordance with the Portfolio's investment program may be deemed to be an underwriting; 9. for Equity, Small Cap and International Equity Portfolios, make investments for the purpose of exercising control or management; 10. for Equity Portfolio, purchase restricted securities, which are securities that must be registered under the Securities Act before they may be offered or sold to the public, except that Equity Portfolio may invest up to 5% of the value of its total assets, taken at cost, in such securities; * * * 11. for U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios, pledge, hypothecate, mortgage or otherwise encumber its assets other than to secure permitted borrowings; 12. for U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, 22 International Equity Select, International Strategic Equity and High Yield Portfolios, invest in illiquid securities as defined in "Investment Objectives and Management Policies--Illiquid Securities" if immediately after such investment more than 15% of the value of the Portfolio's net assets would be invested in such securities; 13. for U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios, purchase securities of other investment companies, except to the extent permitted under the 1940 Act; 14. for Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, invest in interests in or leases relating to oil, gas, or other mineral exploration or development programs; 15. for International Equity Select Portfolio, make short sales of securities; or 16. for International Small Cap and Emerging Markets Portfolios, make investments for the purpose of exercising control or management. * * * If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such restriction. With respect to Investment Restriction No. 1, however, if borrowings exceed 33-?% of the value of a Portfolio's total assets as a result of a change in values or assets, the Portfolio must take steps to reduce such borrowings at least to the extent of such excess within three business days. MANAGEMENT The Fund's Board of Directors is responsible for the management and supervision of each Portfolio and approves all significant agreements with those companies that furnish services to the Portfolios. These companies are as follows: Lazard Asset Management LLC................... Investment Manager Lazard Asset Management Securities LLC........ Distributor Boston Financial Data Services, Inc........... Transfer Agent and Dividend Disbursing Agent State Street Bank and Trust Company........... Custodian The Directors and officers of the Fund, together with information as to their principal occupations during at least the last five years, are shown below.
NAME (AGE) POSITION(S) WITH THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND OTHER DIRECTORSHIPS ADDRESS(1) (SINCE) AND TERM(2) HELD - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED DIRECTORS: John J. Burke (77) Director Lawyer and Private Investor; Director, Lazard Alternative (May 1991) Strategies Fund, LLC; Director, Pacific Steel & Recycling; Director, Sletten Construction Company; Trustee Emeritus, The University of Montana Foundation
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NAME (AGE) POSITION(S) WITH THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND OTHER DIRECTORSHIPS ADDRESS(1) (SINCE) AND TERM(2) HELD - ----------------------------------------------------------------------------------------------------------------------------- Kenneth S. Davidson (60) Director President, Davidson Capital Management Corporation; Trustee, The (August 1995) Juilliard School; Chairman of the Board, Bridgehampton Chamber Music Festival; Trustee, American Friends of the National Gallery/London; President, Aquiline Advisors LLC Lester Z. Lieberman (75) Director Private Investor; Chairman, Healthcare Foundation of New Jersey; (October 1991) Director, Cives Steel Co.; Director, Northside Power Transmission Co.; Advisory Trustee, New Jersey Medical School; Director, Public Health Research Institute; Trustee Emeritus, Clarkson University; Council of Trustees, New Jersey Performing Arts Center Richard Reiss, Jr. (61) Director Chairman, Georgica Advisors LLC, an investment manager; Director, (May 1991) Lazard Alternative Strategies Fund, LLC; Director, O'Charley's, Inc., a restaurant chain Robert M. Solmson (58) Director Director, Lazard Alternative Strategies Fund, LLC; Director, (September 2004) Colonial Williamsburg Co.; Former Chief Executive Officer and Chairman, RFS Hotel Investors, Inc.; Former Director, Morgan Keegan, Inc.; Former Director, Independent Bank, Memphis INTERESTED DIRECTORS(3) Charles Carroll (45) Chief Executive Officer, Deputy Chairman and Head of Global Marketing of the Investment President and Director Manager (June 2004) Ashish Bhutani (45) Director Chief Executive Officer of the Investment Manager; from 2001 to (July 2005) December 2002, Co-Chief Executive Officer North America of Dresdner Kleinwort Wasserstein and member of its Global Corporate and Markets Board and the Global Executive Committee; from 1995 to 2001, Chief Executive Officer of Wasserstein Perella Securities; and from 1989 to 2001, Deputy Chairman of Wasserstein Perella Group
24
NAME (AGE) POSITION(S) WITH THE FUND ADDRESS(1) (SINCE) AND TERM(4) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS - ----------------------------------------------------------------------------------------------------------------------------- OFFICERS: Nathan A. Paul (32) Vice President and Secretary Managing Director and General Counsel of the Investment Manager (April 2002) Brian D. Simon (43) Assistant Secretary Director of the Investment Manager; from July 1999 to October 2002, (November 2002) Vice President, Law & Regulations at J. & W. Seligman & Co. Stephen St. Clair (47) Treasurer Vice President of the Investment Manager (May 2003) John Blevins (40) Chief Compliance Officer Director and Chief Compliance Officer of the Investment Manager (September 2004) David A. Kurzweil (31) Assistant Secretary Vice President of the Investment Manager; Associate at Kirkpatrick (April 2005) & Lockhart LLP, a law firm, from August 1999 to January 2003 Cesar A. Trelles (31) Assistant Treasurer Fund Administration Manager of the Investment Manager; Manager for (December 2004) Mutual Fund Finance Group at UBS Global Asset Management, from August 1998 to August 2004
- -------------------------------------------------------------------------------- (1) The address of each Director and officer is Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, New York 10112. (2) Each Director also serves as a Director of Lazard Retirement Series, Inc. ("LRS"), an open-end registered management investment company (comprised of ten portfolios), and Lazard Global Total Return and Income Fund, Inc. and Lazard World Dividend & Income Fund, Inc., closed-end registered management investment companies (collectively with the Fund, the "Lazard Funds," in total comprised of 24 investment portfolios). Each Director serves an indefinite term, until his successor is elected, and each Director serves in the same capacity for LRS. (3) Messrs. Bhutani and Carroll are "interested persons" (as defined in the 1940 Act) of the Fund because of their positions with the Investment Manager. (4) Each officer serves for an indefinite term, until his successor is elected and qualified. Each officer serves in the same capacity for the other Lazard Funds. The Fund has standing audit and nominating committees, each comprised of its Directors who are not "interested persons" of the Fund, as defined in the 1940 Act ("Independent Directors"). The function of the audit committee is to (1) oversee the Fund's accounting and financial reporting processes and the audits of the Fund's financial statements, (2) assist in Board oversight of the quality and integrity of the Fund's financial statements and the Fund's compliance with legal and regulatory requirements relating to accounting, financial reporting, internal control over financial reporting and independent audits, (3) approve engagement of the independent registered public accounting firm and review and evaluate the qualifications, independence and performance of the independent registered public accounting firm and (4) act as a liaison between the Fund's independent 25 registered public accounting firm and the Board. Nominations may be submitted only by a shareholder or group of shareholders that, individually or as a group, has beneficially owned the lesser of (a) 1% of the Fund's outstanding shares or (b) $500,000 of the Fund's shares for at least one year prior to the date such shareholder or group submits a candidate for nomination. Not more than one nominee for Director may be submitted by such a shareholder or group each calendar year. In evaluating potential nominees, including any nominees recommended by shareholders, the nominating committee takes into consideration the factors listed in the nominating committee charter, including character and integrity, business and professional experience, and whether the committee believes that the person has the ability to apply sound and independent business judgment and would act in the interest of the Fund and its shareholders. A nomination submission must include all information relating to the recommended nominee that is required to be disclosed in solicitations or proxy statements for the election of Directors, as well as information sufficient to evaluate the factors listed above. Nomination submissions must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders, and such additional information must be provided regarding the recommended nominee as reasonably requested by the nominating committee. The audit committee met four times and the nominating committee meet twice during the fiscal year ended December 31, 2005. The table below indicates the dollar range of each Director's ownership of Portfolio shares and aggregate holdings of all of the Lazard Funds, in each case as of December 31, 2005.
Ashish John J. Charles Kenneth S. Lester Z. Richard Robert M. Portfolio Bhutani Burke Carroll Davidson Lieberman Reiss, Jr. Solmson - ------------------------------------------------------------------------------------------------------------------------------- Equity Portfolio None Over $100,000 None None None None None U.S. Equity Value Portfolio None None None None None None None U.S. Strategic Equity Portfolio None None None None None None None Mid Cap Portfolio None Over $100,000 $50,001-100,000 None None None None Small Cap Portfolio None Over $100,000 $50,001-100,000 None None None None U.S. Small Cap Equity Growth Portfolio None None None None None None None International Equity Portfolio None $1-$10,000 None None None None None International Equity Select Portfolio None $10,001-50,000 None None None None None International Strategic Equity None None None None None None None Portfolio International Small Cap Portfolio None $50,001-100,000 None None None None None Emerging Markets Portfolio None None Over $100,000 None None None None High Yield Portfolio None None Over $100,000 None None None None Aggregate Holdings of all Lazard Funds None Over $100,000 Over $100,000 None None None None
26 As of December 31, 2005, none of the Directors or his immediate family members owned securities of the Investment Manager or the Distributor or any person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the Investment Manager or the Distributor. Each Director who is not an employee or an affiliated person of the Investment Manager is paid an annual aggregate fee of $50,000, plus $2,500 per meeting attended in person ($1,000 per meeting attended by telephone), for the Fund and the other Lazard Funds, and is reimbursed for travel and other out-of-pocket expenses for attending Board and committee meetings. No additional compensation is provided in respect of committee meetings held in conjunction with a meeting of the Board of Directors. Compensation is divided among the Lazard Funds based on relative net assets. The Directors do not receive benefits from the Fund pursuant to any pension, retirement or similar arrangement. In addition, the Chairman of the Audit Committees for the Lazard Funds also receives an annual fee of $5,000. The aggregate amount of compensation paid to each Director for the year ended December 31, 2005, was as follows:
TOTAL COMPENSATION FROM THE FUND AND DIRECTOR AGGREGATE COMPENSATION FROM THE FUND THE LAZARD FUNDS - --------------------------------------------------------------------------------------------------------- Ashish Bhutani* N/A N/A John J. Burke $55,951 $66,500 Charles Carroll N/A N/A Kenneth S. Davidson 55,075 65,500 Norman Eig** N/A N/A William Katz*** 53,797 63,000 Lester Z. Lieberman 58,044 69,000 Richard Reiss, Jr. 55,951 66,500 Robert M. Solmson 55,075 64,500
- -------------------------------------------------------------------------------- * Mr. Bhutani became a Director in July 2005. ** Mr. Eig resigned as a Director in October 2005. *** Mr. Katz resigned as a Director in January 2006. The Fund does not compensate officers or Directors who are employees or affiliated persons of the Investment Manager. As of February 1, 2006, the Fund's officers and Directors, as a group, owned less than 1% of the shares of each Portfolio. PORTFOLIO MANAGERS TEAM MANAGEMENT. Portfolio managers at the Investment Manager manage multiple accounts for a diverse client base, including private clients, institutions and investment funds. The Investment Manager manages all portfolios on a team basis. The team is involved at all levels of the investment process. This team approach allows for every portfolio manager to benefit from his/her peers, and for clients to receive the firm's best thinking, not that of a single portfolio manager. The Investment Manager manages all like investment mandates against a model portfolio. Specific client objectives, guidelines or limitations then are applied against the model, and any necessary adjustments are made. MATERIAL CONFLICTS RELATED TO MANAGEMENT OF SIMILAR ACCOUNTS. Although the potential for conflicts of interest exist when an investment adviser and portfolio managers manage other accounts that invest in securities in which a Portfolio may invest or that may pursue a strategy similar to one of the Portfolio's component strategies (collectively, "Similar Accounts"), the Investment Manager has procedures in place that are designed to ensure that all accounts are treated fairly and that the Portfolio is 27 not disadvantaged, including procedures regarding trade allocations and "conflicting trades" (e.g., long and short positions in the same security, as described below). In addition, each Portfolio, as a series of a registered investment company, is subject to different regulations than certain of the Similar Accounts, and, consequently, may not be permitted to engage in all the investment techniques or transactions, or to engage in such techniques or transactions to the same degree, as the Similar Accounts. Potential conflicts of interest may arise because of the Investment Manager's management of a Portfolio and Similar Accounts. For example, conflicts of interest may arise with both the aggregation and allocation of securities transactions and allocation of limited investment opportunities, as the Investment Manager may be perceived as causing accounts it manages to participate in an offering to increase the Investment Manager's overall allocation of securities in that offering, or to increase the Investment Manager's ability to participate in future offerings by the same underwriter or issuer. Allocations of bunched trades, particularly trade orders that were only partially filled due to limited availability, and allocation of investment opportunities generally, could raise a potential conflict of interest, as the Investment Manager may have an incentive to allocate securities that are expected to increase in value to preferred accounts. Initial public offerings, in particular, are frequently of very limited availability. Additionally, portfolio managers may be perceived to have a conflict of interest because of the large number of Similar Accounts, in addition to the Portfolios, that they are managing on behalf of the Investment Manager. In addition, the Investment Manager could be viewed as having a conflict of interest to the extent that the Investment Manager and/or portfolio managers have a materially larger investment in a Similar Account than their investment in a Portfolio. Although the Investment Manager does not track each individual portfolio manager's time dedicated to each account, the Investment Manager periodically reviews each portfolio manager's overall responsibilities to ensure that he or she is able to allocate the necessary time and resources to effectively manage a Portfolio. A potential conflict of interest may be perceived to arise if transactions in one account closely follow related transactions in a different account, such as when a purchase increases the value of securities previously purchased by the other account, or when a sale in one account lowers the sale price received in a sale by a second account. Although none of the Portfolios' portfolio managers manage any accounts with respect to which the advisory fee is based on the performance of the account, other portfolio managers employed by the Investment Manager manage hedge funds that are subject to performance/incentive fees. Certain hedge funds managed by the Investment Manager may also be permitted to sell securities short. However, the Investment Manager currently does not have any portfolio managers that manage both hedge funds that engage in short sales and long-only accounts, including open-end and closed-end registered investment companies. When the Investment Manager engages in short sales of securities of the type in which a Portfolio invests, the Investment Manager could be seen as harming the performance of the Portfolio for the benefit of the account engaging in short sales if the short sales cause the market value of the securities to fall. As described above, the Investment Manager has procedures in place to address these conflicts. OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS. The chart below includes information regarding the members of the portfolio management teams responsible for managing the Portfolios. Specifically, it shows the number of other portfolios and assets managed by management teams of which each Portfolio's portfolio manager is a member. Regardless of the number of accounts, the portfolio management team still manages each account based on a model portfolio as described above. 28
REGISTERED INVESTMENT OTHER POOLED INVESTMENT OTHER ACCOUNTS PORTFOLIO MANAGER COMPANIES ($*)# VEHICLES ($*)# ($*)# - ------------------------------------------------------------------------------------------------------------------------------------ Michael Bennett 13 (4.6 billion) 1 (12.4 million) 1,244 (21.1 billion)+ Christopher Blake 7 (3.6 billion) 2 (55.2 million) 90 (1.9 billion)+ Gabrielle M. Boyle 13 (4.6 billion) 3 (27.4 million) 1,527 (24.2 billion)+ Gary Buesser 7 (3.6 billion) 2 (55.2 million) 87 (1.5 billion)+ J. William Charlton 1 (78.4 million) 1 (5.8 million) 14 (462.5 million) James M. Donald 6 (1.95 billion) 32 (15 million) 76 (1.17 billion) Thomas M. Dzwil 1 (78.4 million) 1 (5.8 million) 14 (462.5 million) Robert A. Failla 7 (3.6 billion) 2 (55.2 million) 84 (1.1 billion)+ Michael G. Fry 13 (4.6 billion) 1 (12.4 million) 1244 (21.1 billion)+ I.P. Knelman 0 0 87 (161.7 million) Andrew D. Lacey 13 (3.9 billion) 6 (79.3 million) 1,258 (12.4 billion)+ Mark Little 1 (135.7 million) 0 10 (359.2 million) Patrick M. Mullin 4 (2.3 billion) 0 41 (902.4 million) Brian Pessin 4 (448.2 million) 1 (74.5 million) 34 (1.3 billion) Michael Powers 11 (4.4 billion) 3 (27.4 million) 1,510 (21.2 billion)+ John R. Reinsberg 14 (4.69 billion) 1 (12.36 million) 1,254 (21.46 billion)+ Nicholas Sordoni 2 (32.2 million) 1 (6.0 million) 22 (1.5 billion) James P. Tatera 0 0 87 (161.7 million) J. Richard Tutino 3 (142.5 million) 3 (20.2 million) 944 (6.9 billion)+
- -------------------------------------------------------------------------------- * Total assets in accounts as of December 31, 2005. # None of the portfolio managers manage any accounts with respect to which the advisory fee is based on the performance of the account. + Includes an aggregation of Similar Accounts within managed account programs where the third party program sponsor is responsible for applying specific client objectives, guidelines and limitations against the model portfolio managed by the portfolio management team. COMPENSATION FOR PORTFOLIO MANAGERS. The Investment Manager's portfolio managers are generally responsible for managing multiple types of accounts that may, or may not, invest in securities in which the Fund may invest or pursue a strategy similar to a Portfolio's strategies. Portfolio managers responsible for managing the Portfolios may also manage sub-advised registered investment companies, collective investment trusts, unregistered funds and/or other pooled investment vehicles, separate accounts, separately managed account programs (often referred to as "wrap accounts") and model portfolios. The Investment Manager compensates portfolio managers by a competitive salary and bonus structure, which is determined both quantitatively and qualitatively. Salary and bonus are paid in cash. Portfolio managers are compensated on the performance of the aggregate group of portfolios managed by the teams of which they are a member rather than for a specific fund or account. Various factors are considered in the determination of a portfolio manager's compensation. All of the portfolios managed by a portfolio manager are comprehensively evaluated to determine his or her positive and consistent performance contribution over time. Further factors include the amount of assets in the portfolios as well as qualitative aspects that reinforce the Investment Manager's investment philosophy. Total compensation is generally not fixed, but rather is based on the following factors: (i) 29 leadership, teamwork and commitment, (ii) maintenance of current knowledge and opinions on companies owned in the portfolio; (iii) generation and development of new investment ideas, including the quality of security analysis and identification of appreciation catalysts; (iv) ability and willingness to develop and share ideas on a team basis; and (v) the performance results of the portfolios managed by the investment teams of which the portfolio manager is a member. Variable bonus is based on the portfolio manager's quantitative performance as measured by his or her ability to make investment decisions that contribute to the pre-tax absolute and relative returns of the accounts managed by the teams of which the portfolio manager is a member, by comparison of each account to a predetermined benchmark (as set forth in the prospectus or other governing document) over the current fiscal year and the longer-term performance (3-, 5- or 10-year, if applicable) of such account, as well as performance of the account relative to peers. The variable bonus for each Portfolio's portfolio management team in respect of its management of the Portfolio is determined by reference to the corresponding indices listed below. The portfolio manager's bonus also can be influenced by subjective measurement of the manager's ability to help others make investment decisions. PORTFOLIO INDEX Equity Portfolio S&P 500(R) Index U.S. Equity Value Portfolio Russell 1000(R) Value Index U.S. Strategic Equity Portfolio S&P 500 Index Mid Cap Portfolio Russell Midcap(R) Index Small Cap Portfolio Russell 2000(R) Index U.S. Small Cap Equity Growth Portfolio Russell 2000(R) Growth Index International Equity Portfolio Morgan Stanley Capital International (MSCI(R)) Europe, Australasia and Far East (EAFE(R)) Index International Equity Select Portfolio MSCI EAFE Index International Strategic Equity Portfolio MSCI EAFE Index International Small Cap Portfolio MSCI EAFE Small Cap Index Emerging Markets Portfolio MSCI EM Index High Yield Portfolio Merrill Lynch High Yield Master II(R) Index Portfolio managers also have an interest in the Lazard Asset Management LLC Equity Plan, an equity based incentive program for the Investment Manager. The plan offers permanent equity in the Investment Manager to a significant number of its professionals, including portfolio managers, as determined by the Board of Managers of the Investment Manager from time to time. This plan gives certain employees of the Investment Manager a permanent equity interest in the Investment Manager and an opportunity to participate in the future growth of the Investment Manager. OWNERSHIP OF SECURITIES. As of December 31, 2005, the portfolio managers owned the following shares of the Portfolios: PORTFOLIO/PORTFOLIO MANAGER NUMBER OF SHARES EQUITY PORTFOLIO Andrew D. Lacey None J. Richard Tutino $50,001-$100,000 U.S. EQUITY VALUE PORTFOLIO Andrew D. Lacey None Nicholas Sordoni None J. Richard Tutino None 30 PORTFOLIO/PORTFOLIO MANAGER NUMBER OF SHARES U.S. STRATEGIC EQUITY PORTFOLIO Christopher H. Blake None Gary Buesser None Robert A. Failla None Andrew D. Lacey None J. Richard Tutino None MID CAP PORTFOLIO Christopher H. Blake $50,001-$100,000 Gary Buesser $1-$10,000 Robert A. Failla None Andrew D. Lacey $10,001-$50,000 SMALL CAP PORTFOLIO Andrew D. Lacey None Patrick M. Mullin $100,001-$500,000 U.S. SMALL CAP EQUITY GROWTH PORTFOLIO I.P. Knelman None James P. Tatera None INTERNATIONAL EQUITY PORTFOLIO Michael A. Bennett $100,001-$500,000 Gabrielle M. Boyle None Michael G. Fry None Michael Powers $50,001-$100,000 John R. Reinsberg $100,001-$500,000 INTERNATIONAL EQUITY SELECT PORTFOLIO Michael A. Bennett $100,001-$500,000 Gabrielle M. Boyle None Michael G. Fry None Michael Powers $50,001-$100,000 John R. Reinsberg None INTERNATIONAL STRATEGIC EQUITY PORTFOLIO Mark Little None Brian Pessin None John R. Reinsberg None INTERNATIONAL SMALL CAP PORTFOLIO Brian Pessin None John R. Reinsberg $100,001-$500,000 EMERGING MARKETS PORTFOLIO James M. Donald $100,001-$500,000 John R. Reinsberg $100,001-$500,000 HIGH YIELD PORTFOLIO J. William Charlton None Thomas M. Dzwil None 31 INVESTMENT MANAGER AND INVESTMENT MANAGEMENT AGREEMENTS The Investment Manager, located at 30 Rockefeller Plaza, New York, NY 10112-6300, has entered into investment management agreements (each, the "Management Agreement") with the Fund on behalf of the Portfolios. Pursuant to each Management Agreement, the Investment Manager regularly provides each Portfolio with investment research, advice and supervision and furnishes continuously an investment program for each Portfolio consistent with its investment objective and policies, including the purchase, retention and disposition of securities. The Investment Manager, a wholly-owned subsidiary of Lazard, is registered as an investment adviser with the Commission. The Investment Manager provides day-to-day management of the Portfolios' investments and assists in the overall management of the Fund's affairs. The Investment Manager and its global affiliates provide investment management services to client discretionary accounts with assets as of December 31, 2005 totaling approximately $78 billion. Its clients are both individuals and institutions, some of whose accounts have investment policies similar to those of several of the Portfolios. The Fund, the Investment Manager and the Distributor each have adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act that permits its personnel, subject to such Code of Ethics, to invest in securities, including securities that may be purchased or held by a Portfolio. The Codes of Ethics restrict the personal securities transactions of employees and require portfolio managers and other investment personnel to comply with the preclearance and disclosure procedures. The primary purpose of the Codes of Ethics is to ensure that personal trading by employees does not disadvantage any Portfolio. Under the terms of each Management Agreement, the Investment Manager will pay the compensation of all personnel of the Fund, except the fees of Directors of the Fund who are not employees or affiliated persons of the Investment Manager. The Investment Manager will make available to the Portfolios such of the Investment Manager's members, officers and employees as are reasonably necessary for the operations of each Portfolio, or as may be duly elected officers or directors of the Fund. Under each Management Agreement, the Investment Manager also pays each Portfolio's office rent and provides investment advisory research and statistical facilities and all clerical services relating to research, statistical and investment work. The Investment Manager, including its employees who serve the Portfolios, may render investment advice, management and other services to other clients. As compensation for its services, the Fund has agreed to pay the Investment Manager an investment management fee, accrued daily and payable monthly, at the annual rates set forth below as a percentage of the average daily net asset value of the relevant Portfolio: PORTFOLIO MANAGEMENT FEE RATE - ----------------------------------------------- ------------------------------- Equity Portfolio .75% U.S. Equity Value .75 U.S. Strategic Equity .75 Mid Cap Portfolio .75 Small Cap Portfolio .75 U.S. Small Cap Equity Growth Portfolio 1.00 International Equity Portfolio .75 International Equity Select Portfolio .85 International Strategic Equity Portfolio .75 International Small Cap Portfolio .75 Emerging Markets Portfolio 1.00 High Yield Portfolio .55 32 For the fiscal year ending December 31, 2006, the Investment Manager has agreed to waive its management fees or otherwise bear the expenses of the following Portfolios to the extent the aggregate expenses of a Portfolio exceed the percentage of the value of the Portfolio's average daily net assets set forth opposite the Portfolio's name: MAXIMUM TOTAL PORTFOLIO OPERATING EXPENSES PORTFOLIO INSTITUTIONAL SHARES OPEN SHARES - -------------------------------------- ---------------------- ---------------- U.S. Equity Value Portfolio 1.00% 1.30% U.S. Strategic Equity Portfolio 1.05 1.35 Mid Cap Portfolio 1.05 1.35 U.S. Small Cap Equity Growth Portfolio 1.25 1.55 International Equity Select Portfolio 1.15 1.45 International Strategic Equity Portfolio N/A 1.45 International Small Cap Portfolio N/A 1.43 Emerging Markets Portfolio N/A 1.60 High Yield Portfolio .55 .85 For the fiscal years ended December 31, 2003, 2004 and 2005, the management fees payable by each Portfolio, the amounts waived, and reimbursements, by the Investment Manager and the net fees paid to the Investment Manager were as follows:
FEE PAYABLE FOR FISCAL FEE PAYABLE FOR FISCAL FEE PAYABLE FOR FISCAL YEAR ENDED YEAR ENDED YEAR ENDED PORTFOLIO DECEMBER 31, 2003 DECEMBER 31, 2004 DECEMBER 31, 2005 - ------------------------------------------------ ---------------------- ---------------------- ---------------------- Equity Portfolio $ 941,684 $ 976,108 $ 984,065 U.S. Equity Value Portfolio -- -- 184 U.S. Strategic Equity Portfolio N/A 11 12,880 Mid Cap Portfolio 311,728 508,038 1,303,458 Small Cap Portfolio 3,396,183 3,748,542 2,694,434 International Equity Portfolio 14,884,759 13,758,692 9,896,473 International Equity Select Portfolio 162,118 138,775 163,134 International Strategic Equity Portfolio -- -- 99,708 International Small Cap Portfolio 4,184,211 5,276,124 4,647,834 Emerging Markets Portfolio 4,288,630 6,701,038 10,652,831 High Yield Portfolio 850,907 550,455 451,922
REDUCTION IN REDUCTION IN REDUCTION IN FEE FOR FISCAL FEE FOR FISCAL FEE FOR FISCAL YEAR ENDED YEAR ENDED YEAR ENDED PORTFOLIO DECEMBER 31, 2003 DECEMBER 31, 2004 DECEMBER 31, 2004 - ----------------------------------------------- ------------------------ ---------------------- ---------------------- Equity Portfolio $ -- $ -- $ -- U.S. Equity Value Portfolio -- -- 184 U.S. Strategic Equity Portfolio N/A 8,822 12,880 Mid Cap Portfolio 114,824 59,910 -- Small Cap Portfolio -- -- -- International Equity Portfolio -- -- -- International Equity Select Portfolio 154,963 162,004 158,614 International Strategic Equity Portfolio -- -- -- International Small Cap Portfolio 3,065 -- -- Emerging Markets Portfolio 19,230 23,400 -- High Yield Portfolio 286,919 357,923 278,484
33
NET FEE PAID FOR NET FEE PAID FOR NET FEE PAID FOR FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED PORTFOLIO DECEMBER 31, 2003 DECEMBER 31, 2004 DECEMBER 31, 2005 - ----------------------------------------------- -------------------------- ---------------------- ----------------------- Equity Portfolio $ 941,684 $ 976,108 $ 984,065 U.S. Equity Value Portfolio -- -- -- U.S. Strategic Equity Portfolio N/A (8,811) -- Mid Cap Portfolio 196,904 448,128 1,303,458 Small Cap Portfolio 3,396,183 3,748,542 2,694,434 International Equity Portfolio 14,884,759 13,758,692 9,896,473 International Equity Select Portfolio 7,155 (23,229) 4,520 International Strategic Equity Portfolio -- -- 99,708 International Small Cap Portfolio 4,181,146 5,276,124 4,647,834 Emerging Markets Portfolio 4,269,400 6,677,638 10,652,831 High Yield Portfolio 563,988 192,532 173,438
Each Management Agreement provides that the relevant Portfolio pays all of its expenses that are not specifically assumed by the Investment Manager. Expenses attributable to each Portfolio will be charged against the assets of that Portfolio. Other expenses of the Fund will be allocated among the Portfolios in a manner which may, but need not, be proportionate in relation to the net assets of each Portfolio. Expenses payable by each of the Portfolios include, but are not limited to, brokerage and other expenses of executing portfolio transactions; legal, auditing or accounting expenses; trade association dues; taxes or governmental fees; the fees and expenses of any person providing administrative services to the Fund; the fees and expenses of the custodian and transfer agent of the Fund; clerical expenses of issue, redemption or repurchase of shares of the Portfolio; the expenses and fees for registering and qualifying securities for sale; the fees of Directors of the Fund who are not employees or affiliated persons of the Investment Manager or its affiliates; travel expenses of all Directors, officers and employees; insurance premiums; and the cost of preparing and distributing reports and notices to shareholders. In addition, Open Shares of each Portfolio are subject to an annual distribution and servicing fee. See "Distribution and Servicing Plan." As to each Portfolio, each Management Agreement is subject to annual approval by (i) the Fund's Board of Directors or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the relevant Portfolio, provided that in either event the continuance also is approved by a majority of the Independent Directors of the Fund or the Investment Manager, by vote cast in person at a meeting called for the purpose of voting on such approval. As to each Portfolio, each Management Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board of Directors or by vote of the holders of a majority of the shares of such Portfolio, or, upon not less than 90 days' notice, by the Investment Manager. Each Management Agreement will terminate automatically, as to the relevant Portfolio, in the event of its assignment (as defined in the 1940 Act). Each Management Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence on the part of the Investment Manager, or of reckless disregard of its obligations thereunder, the Investment Manager shall not be liable for any action or failure to act in accordance with its duties thereunder. BOARD APPROVAL OF MANAGEMENT AGREEMENTS. (Lazard U.S. Equity Value, Lazard U.S. Small Cap Equity Growth and Lazard International Strategic Equity Portfolios only) In considering the approval of the Management Agreements, the Directors discussed the nature, extent and quality of the services proposed to be provided to each Portfolio pursuant to the relevant Management Agreement. The Directors considered the various services proposed to be provided by the Investment Manager to each Portfolio and considered the Investment Manager's research and portfolio management capabilities and that the Investment Manager also would provide oversight of day-to-day operations of the Fund and the Portfolios, including fund accounting and administration and assistance in meeting legal and regulatory 34 requirements. The Directors also considered the Investment Manager's extensive administrative, accounting and compliance infrastructure. The Directors reviewed and placed significant emphasis on the proposed advisory fees and projected expense ratios for each Portfolio, including comparative information prepared by Lipper. As the Portfolios had not commenced investment operations, historical performance information was not available for the Directors' consideration. The Directors reviewed the Investment Manager's composite investment performance for other similar funds and accounts advised by the Investment Manager, compared with appropriate benchmarks/indices for each of the Portfolios. The Directors considered comparison groups composed solely of funds sub-advised by the Investment Manager in the same Lipper category as each Portfolio, as well as the Investment Manager's separately managed accounts with similar investment objectives, policies and strategies (for each Portfolio, collectively with such funds sub-advised by the Investment Manager, "Similar Accounts"). For each Portfolio, the Directors discussed the proposed fee to be paid to the Investment Manager compared to the fee paid to the Investment Manager by Similar Accounts. For each Portfolio the Directors reviewed the nature of the Similar Accounts and the differences, from the Investment Manager's perspective, in management of the different types of Similar Accounts as compared to the proposed management of the Portfolio. The Directors considered the relevance of the fee information provided for Similar Accounts managed by the Investment Manager to evaluate the appropriateness and reasonableness of each Portfolio's proposed advisory fees. The Directors concluded that each Portfolio's proposed fee under the relevant Management Agreement was reasonable in light of the mix of services proposed to be provided by the Investment Manager and comparative performance and advisory fee and expense information. The Directors evaluated the costs of the services to be provided and potential profits to be realized and benefits derived or to be derived by the Investment Manager and its affiliates from the relationship with the Fund. The Board recognized that economies of scale may be realized as the assets of the Portfolios increase and the Investment Manager realizes profitability and that, to the extent in the future it were to be determined that material economies of scale had not been shared with the Portfolios, the Board would seek to have those economies of scale shared with the Portfolios. The Board considered these conclusions and determinations and, without any one factor being dispositive, the Board determined that approval of the Management Agreements was in the best interests of the Portfolios and their shareholders. The Independent Directors were assisted in their review by independent legal counsel and met with counsel in executive session separate from the Investment Manager. PROXY VOTING The Fund has delegated voting of proxies in respect of portfolio holdings to the Investment Manager, to vote the Fund's proxies in accordance with the Investment Manager's proxy voting policy and guidelines (the "Voting Guidelines") that provide as follows: o The Investment Manager votes proxies in the best interests of its clients. o Unless the Investment Manager's Proxy Committee otherwise determines, the Investment Manager votes proxies in a manner consistent with the Voting Guidelines. o To avoid conflicts of interest, the Investment Manager votes proxies where a material 35 conflict has been deemed to exist in accordance with specific proxy voting guidelines regarding various standard proxy proposals ("Approved Guidelines") or, if the Approved Guideline is to vote case-by-case, in accordance with the recommendation of an independent source. o The Investment Manager also may determine not to vote proxies in respect of securities of any issuer if it determines that it would be in the client's overall best interests not to vote. The Voting Guidelines address how it will vote proxies on particular types of matters such as the election for directors, adoption of option plans and anti-takeover proposals. For example, the Investment Manager generally will: o vote as recommended by management in routine election or re-election of directors; o favor programs intended to reward management and employees for positive, long-term performance, evaluating whether the Investment Manager believes, under the circumstances, that the level of compensation is appropriate or excessive; and o vote against anti-takeover measures, such as adopting supermajority voting requirements, shareholder rights plans and fair price provisions. The Fund's proxy voting record for the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 823-6300 or (2) on the SEC's website at http://www.sec.gov. Information as of June 30 each year will generally be available by the following August 31. ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT The Fund has entered into an administrative agreement with State Street Bank and Trust Company ("State Street"), One Lincoln Street, Boston, Massachusetts 02111, to provide certain administrative services to the Portfolios. Each Portfolio bears the cost of such services at a fixed annual rate of $37,500, plus $7,500 per additional class, and 0.02% of average daily net assets up to $1 billion and 0.01% of average daily net assets over $1 billion. State Street also acts as the Fund's custodian. As the Fund's custodian, State Street, among other things, maintains a custody account or accounts in the name of each Portfolio; receives and delivers all assets for each Portfolio upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions on account of the assets of each Portfolio and disburses the Portfolio's assets in payment of its expenses. The custodian does not determine the investment policies of any Portfolio or decide which securities any Portfolio will buy or sell. Boston Financial Data Services, Inc. ("BFDS") is the Fund's transfer and dividend disbursing agent. Under a transfer agency agreement with the Fund, BFDS arranges for the maintenance of shareholder account records for each Portfolio, the handling of certain communications between shareholders and the Fund and the payment of dividends and distributions payable by the Fund. For these services, BFDS receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the Fund during the month and is reimbursed for certain out-of-pocket expenses. 36 DISTRIBUTOR Lazard Asset Management Securities LLC serves as the distributor of each Portfolio's shares and conducts a continuous offering pursuant to a "best efforts" arrangement. As the distributor, it accepts purchase and redemption orders for Portfolio shares. In addition, the distribution agreement obligates the Distributor to pay certain expenses in connection with the offering of Portfolio shares. After the prospectus and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor also will pay for the printing and distribution of copies thereof used in connection with the offering to prospective investors. DETERMINATION OF NET ASSET VALUE Net asset value per share for each Class of each Portfolio is determined by State Street for the Fund on each day the New York Stock Exchange (the "NYSE") is open for business. The NYSE is ordinarily closed on the following national 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. Net asset value per share is determined by dividing the value of the total assets of the Portfolio represented by such Class, less all liabilities, by the total number of Portfolio shares of such Class outstanding. Market values for securities listed on the NYSE, NASDAQ national market or other U.S. exchanges or markets are generally based on the last reported sales price on the principal exchange or market on which the security is traded, generally as of the close of regular trading on the NYSE (normally 4:00 p.m. Eastern time) on each valuation date; securities not traded on the valuation date are valued at the closing bid price. The Fund values NASDAQ-traded securities at the NASDAQ Official Closing Price, which may not be the last reported sales price in certain instances. Options on stock and stock indices traded on national securities exchanges are valued as of the close of options trading on such exchanges (which is normally 4:10 p.m., Eastern time). Any securities not listed, for which current over-the-counter market quotations or bids are readily available, are valued at the last quoted bid price or, if available, the mean of two such prices. Securities listed on foreign exchanges are valued at the last reported sales price except as described below; securities not traded on the valuation date are valued at the last quoted bid price. Bonds and other fixed-income securities that are not exchange-traded are valued on the basis of prices provided by pricing services which are based primarily on institutional trading in similar groups of securities, or by using brokers' quotations. Mortgage-backed securities issued by certain government-related organizations are valued using pricing services or brokers' quotations based on a matrix system which considers such factors as other security prices, yields and maturities. Debt securities maturing in 60 days or less are valued at amortized cost, except where to do so would not accurately reflect their fair value, in which case such securities are valued at fair value as determined under the supervision of the Board of Directors. Calculation of a Portfolio's net asset value may not take place contemporaneously with the determination of the prices of portfolio assets used in such calculation. Trading on Europe, Latin and South America and Far East securities exchanges and in over-the-counter markets ordinarily is completed well before the close of business on each business day in New York (i.e., a day on which the NYSE is open). In addition, European or Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York and on which the net asset value of a Portfolio is calculated. If events materially affecting the value of securities occur between the close of the exchange or market on which the security is principally traded and the time when a Portfolio's net asset 37 value is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board of Directors. Fair valuing of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant ADRs or futures contracts. The effect of using fair value pricing is that the net asset value of a Portfolio will reflect the affected securities' values as determined in the judgment of the Board of Directors or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from the most recent closing price of a security and from the prices used by other investment companies to calculate their portfolios' net asset values. Foreign securities may trade on days when a Portfolio is not open for business, thus affecting the value of the Portfolio's assets on days when Portfolio shareholders may not be able to buy or sell Portfolio shares. Securities and other assets for which current market quotations are not readily available are valued at fair value as determined in good faith in accordance with procedures approved by the Board of Directors. Under these procedures, in the event that the Investment Manager determines that a significant event has occurred after the close of a market on which a foreign security is traded but before the close of regular trading on the NYSE, such that current market quotations for a security or securities are not readily available, the Valuation Committee of the Investment Manager will evaluate a variety of factors to determine the fair value of the affected securities. These factors include, but are not limited to, the type of security, the value of comparable securities, observations from financial institutions and relevant news events. Input from the Investment Manager's analysts also will be considered. PORTFOLIO TRANSACTIONS GENERAL Subject to the supervision of the Board of Directors, the Investment Manager is primarily responsible for the investment decisions and the placing of portfolio transactions for each Portfolio. In arranging for the Portfolios' securities transactions, the Investment Manager is primarily concerned with seeking best execution, which is considered to be the most favorable combination of price and quantity that can be traded at a point in time given, among other factors, the liquidity, market conditions, and required urgency of execution. In choosing broker-dealers, the Investment Manager considers all relevant factors, including but not limited to: the ability of a broker-dealer to provide a prompt and efficient agency execution; the ability and willingness of a broker-dealer to facilitate the transactions by acting as principal and going at risk for its own accounts; the ability of a broker-dealer to provide accurate and timely settlement of the transaction; the Investment Manager's knowledge of the negotiated commission rates currently available and other current transactions costs; the clearance and settlement capabilities of the broker; the Investment Manager's knowledge of the financial condition of the broker or dealer selected; and any other matter relevant to the selection of a broker-dealer. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. To the extent consistent with applicable provisions of the 1940 Act and the rules adopted by the Commission thereunder, the Fund's Board of Directors has determined that securities transactions for a Portfolio may be executed through the Distributor if, in the judgment of the Investment Manager, the use 38 of the Distributor is likely to result in price and execution at least as favorable as those of other qualified brokers or dealers, and if, in the transaction, the Distributor charges the Portfolio a rate consistent with that charged to comparable unaffiliated customers in similar transactions. Purchase and sale orders for securities held by a Portfolio may be combined with those for other Portfolios in the interest of the most favorable net results for all. In some cases, this policy may adversely affect the price paid or received by an account, or the size of the position obtained or liquidated. When the Investment Manager determines that a particular security should be bought for or sold by more than one Portfolio, the Investment Manager undertakes to allocate those transactions between the participants equitably. IPO ALLOCATIONS. (All Portfolios, except High Yield Portfolio) Under the Investment Manager's trade allocation procedures applicable to domestic and foreign initial and secondary public offerings and Rule 144A transactions (collectively herein "IPO"), the number of shares allocated to any or all of the Portfolios and other accounts managed by the Investment Manager will be determined based on various factors, including the extent to which an account is considered relatively underweighted in a security, the extent to which an account has previously received an allocation of IPO securities, the extent to which the size of an allocation of IPO securities would represent a meaningful position for such account and any other factors that may be lawfully considered in allocating IPO shares among accounts. It is often difficult for the Investment Manager to obtain a sufficient number of IPO shares to provide a full allocation to each account. The Investment Manager's allocation procedures are designed to allocate IPO securities in a fair and equitable manner. The Portfolios listed below held securities of their regular brokers or dealers during the fiscal year ended December 31, 2005:
VALUE ON DECEMBER 31, 2005 PORTFOLIO BROKER/DEALER (IN $000S) - ----------------------------------------------- ------------------------------------ -------------------------- Equity Portfolio State Street Bank & Trust Company $ 863 Citigroup, Inc. 3,150 Bank of America Corp. 3,604 JPMorgan Chase & Co. 2,558 The Bear Stearns Cos., Inc. 1,652 U.S. Equity Value Portfolio Bank of America Corp. 5 Citigroup, Inc. 7 JPMorgan Chase & Co. 4 The Bear Stearns Cos., Inc. 2 U.S. Strategic Equity Portfolio State Street Bank & Trust Company 586 Bank of America Corp 492 Citigroup, Inc. 427 JPMorgan Chase & Co. 339 The Bear Stearns Cos., Inc. 223 Mid Cap Portfolio State Street Bank & Trust Company 15,187 Small Cap Portfolio State Street Bank & Trust Company 3,623 International Equity Portfolio State Street Bank & Trust Company 37,390 Credit Suisse Group 30,330 Deutsche Bank AG 10,308 International Equity Select Portfolio Credit Suisse Group 734 International Strategic Equity Portfolio State Street Bank & Trust Company 3,425 Credit Suisse Group 3,198 International Small Cap Portfolio State Street Bank & Trust Company 9,797 Emerging Markets Portfolio State Street Bank & Trust Company 112,771 High Yield Portfolio State Street Bank & Trust Company 3,982
39 RESEARCH AND STATISTICAL INFORMATION Consistent with the requirements of best execution, brokerage commissions on a Portfolio's transactions may be paid to brokers in recognition of investment research and information furnished as well as for brokerage and execution services provided by such brokers. The Investment Manager may in its discretion cause accounts to pay such broker-dealers a commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer adequately qualified to effect such transaction would have charged for effecting that transaction. This may be done where the Investment Manager has determined in good faith that such commission is reasonable in relation to the value of the brokerage and/or research to that particular transaction or to the Investment Manager's overall responsibilities with respect to the accounts as to which it exercises investment discretion. The Investment Manager receives a wide range of research (including proprietary research) and brokerage services from brokers. These services include information on the economy, industries, groups of securities, and individual companies; statistical information; technical market action, pricing and appraisal services; portfolio management computer services (including trading and settlement systems); risk management analysis; and performance analysis. Broker-dealers may also supply market quotations to the Fund's custodian for valuation purposes. Any research received in respect of a Portfolio's brokerage commission may be useful to the Portfolio, but also may be useful in the management of the account of another client of the Investment Manager. Similarly, the research received for the commissions of such other client may be useful for the Portfolio. BROKERAGE COMMISSIONS In connection with its portfolio securities transactions for the fiscal years ended December 31, 2003, 2004 and 2005, each Portfolio indicated below paid brokerage commissions as follows: YEAR ENDED DECEMBER 31, 2003
PERCENTAGE OF AMOUNT OF PERCENTAGE OF TOTAL BROKERAGE BROKERAGE TOTAL BROKERAGE TRANSACTIONS TOTAL BROKERAGE COMMISSIONS COMMISSIONS EFFECTED THROUGH PORTFOLIO COMMISSIONS PAID PAID TO LAZARD PAID TO LAZARD LAZARD - --------------------------------------------- --------------------- ------------------- ------------------ ------------------ Equity Portfolio $ 183,371 $ -- -- -- Mid Cap Portfolio 138,963 -- -- -- Small Cap Portfolio 1,744,721 -- -- -- International Equity Portfolio 2,792,928 -- -- -- International Equity Select Portfolio 15,326 -- -- -- International Small Cap Portfolio 501,595 -- -- -- Emerging Markets Portfolio 704,188 3,515 0.50% 0.20%
40 YEAR ENDED DECEMBER 31, 2004
PERCENTAGE OF AMOUNT OF PERCENTAGE OF TOTAL BROKERAGE BROKERAGE TOTAL BROKERAGE TRANSACTIONS TOTAL BROKERAGE COMMISSIONS COMMISSIONS EFFECTED THROUGH PORTFOLIO COMMISSIONS PAID PAID TO LAZARD PAID TO LAZARD LAZARD - --------------------------------------------- --------------------- ------------------- ------------------ ------------------ Equity Portfolio $ 209,249 $ -- -- -- U.S. Strategic Equity Portfolio -- -- -- -- Mid Cap Portfolio 202,608 -- -- -- Small Cap Portfolio 2,271,299 850 0.04% 0.07% International Equity Portfolio 3,758,227 -- -- -- International Equity Select Portfolio 1,516 -- -- -- International Small Cap Portfolio 946,205 386 0.04 0.04 Emerging Markets Portfolio 1,596,015 650 0.04 0.07
YEAR ENDED DECEMBER 31, 2005
PERCENTAGE OF AMOUNT OF PERCENTAGE OF TOTAL BROKERAGE BROKERAGE TOTAL BROKERAGE TRANSACTIONS TOTAL BROKERAGE COMMISSIONS COMMISSIONS EFFECTED THROUGH PORTFOLIO COMMISSIONS PAID PAID TO LAZARD PAID TO LAZARD LAZARD - --------------------------------------------- --------------------- ------------------- ------------------ ------------------ Equity Portfolio $ 216,838 -- -- -- U.S. Equity Value Portfolio 92 -- -- -- U.S. Strategic Equity Portfolio 7,875 -- -- -- Mid Cap Portfolio 423,896 -- -- -- Small Cap Portfolio 1,203,609 -- -- -- International Equity Portfolio 2,333,590 -- -- -- International Equity Select Portfolio 3,866 -- -- -- International Strategic Equity Portfolio 52,166 -- -- -- International Small Cap Portfolio 642,776 -- -- -- Emerging Markets Portfolio 3,094,798 -- -- --
The aggregate amount of transactions during the fiscal year ended December 31, 2005 in securities effected on an agency basis through a broker for, among other things, research services, and the commissions and concessions related to such transactions were as follows:
PORTFOLIO TRANSACTION AMOUNT COMMISSIONS AND CONCESSIONS - --------------------------------------- ------------------- ----------------------------- Equity Portfolio $ 209,223,367 $ 216,838 U.S. Equity Value Portfolio 149,315 92 U.S. Strategic Equity Portfolio 17,050,123 7,875 Mid Cap Portfolio 365,513,907 423,896 Small Cap Portfolio 704,197,709 1,203,609 International Equity Portfolio 2,150,771,357 2,333,590 International Equity Select Portfolio 8,992,841 3,866 International Strategic Equity Portfolio 92,533,887 52,166 International Small Cap Portfolio 534,107,827 642,776 Emerging Markets Portfolio 1,227,985,682 3,094,798
41 HOW TO BUY AND HOW TO SELL SHARES GENERAL. The minimum initial investment for each Portfolio is $10,000 for Open Shares, unless the investor is a client of a securities dealer or other institution which has made an aggregate minimum initial purchase for its clients of at least $10,000, and $1,000,000 for Institutional Shares. The minimum investment requirements may be waived or lowered for investments effected through banks and other institutions that have entered into special arrangements with the Fund or the Distributor and for investments effected on a group basis by certain other entities and their employees, such as pursuant to a payroll deduction plan. The Fund reserves the right to change or waive the minimum initial, and subsequent, investment requirements at any time. Securities dealers and other institutions effecting transactions in Portfolio shares for the accounts of their clients may charge their clients direct fees in connection with such transactions. The Fund and the Distributor reserve the right to reject any purchase order. All funds will be invested in full and fractional shares. Stock certificates will not be issued. Each Portfolio may, in its discretion, accept securities in payment for shares of the Portfolio. Securities may be accepted in payment for shares only if the securities are, in the judgment of the Investment Manager, appropriate investments for the Portfolio. In addition, securities accepted in payment for Portfolio shares must: (i) meet the Portfolio's investment objective and policies; (ii) be acquired by the Portfolio for investment and not for resale; and (iii) be liquid securities with readily available market prices on the American Stock Exchange, the NYSE, The NASDAQ Stock Market, a recognized non-U.S. exchange or non-NASDAQ listing with at least two market makers. These securities are valued by the same method used to value the Portfolio's portfolio holdings. The contribution of securities to the Portfolio may be a taxable transaction to the shareholder. PURCHASES THROUGH THE TRANSFER AGENT. Orders for Portfolio shares will become effective at the net asset value per share next determined after receipt by the Transfer Agent or other agent of a check drawn on any member of the Federal Reserve System or after receipt by the Custodian or other agent of a bank wire or Federal Reserve Wire. Checks must be payable in United States dollars and will be accepted subject to collection at full face value. By investing in a Portfolio, a shareholder appoints the Transfer Agent, as agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional shares. PURCHASES THROUGH A LAZARD BROKERAGE ACCOUNT. Shares of all of the Portfolios are sold by the Distributor only to customers of the Distributor without a sales charge, on a continuous basis at the net asset value of the Portfolio next determined after receipt of a purchase order by the Distributor. Payments must be made to Lazard by the settlement date. Because the Distributor does not forward investors' funds until the business day on which the order is settled, it may benefit from temporary use of these funds. Please contact your Lazard account representative for specific instructions on how to purchase Portfolio shares through your Lazard brokerage account. SERVICE AGENTS. The Fund has authorized one or more brokers and other financial intermediaries ("Service Agents") to accept on its behalf purchase and redemption orders. Service Agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund's behalf. The Fund will be deemed to have received a purchase or redemption order when a Service Agent or, if applicable, a Service Agent's authorized designee, accepts the order. Customer orders will be priced at the respective Portfolio's net asset value next computed after such orders are accepted by a Service Agent 42 or its authorized designee. Service Agents may charge their clients fees which would not apply to shares purchased through the Distributor. REDEMPTION FEE. Each Portfolio will impose a redemption fee equal to 1.00% of the net asset value of shares acquired by purchase or exchange and redeemed or exchanged within 30 days after such shares were acquired. This fee will be calculated based on the shares' net asset value at redemption and deducted from the redemption proceeds. The fee will be retained by the Portfolio and used primarily to offset the transaction costs that short-term trading imposes on the Portfolio and its remaining shareholders. The redemption fee will not apply to shares acquired through the reinvestment of dividends or distributions. For purposes of calculating the 30-day holding period, the Fund will first redeem shares acquired through the reinvestment of dividends or distributions and then will employ the "first in, first out" method, which assumes that the shares redeemed or exchanged are the ones held the longest. In addition, no redemption fee will be charged on the redemption or exchange of shares purchased through certain omnibus account and other service arrangements established by Service Agents and approved by the Distributor. The redemption fee may be waived, modified or terminated at any time, or from time to time. REDEMPTION COMMITMENT. The Fund has committed to pay in cash all redemption requests by any shareholder of record, limited in amount during any 90-day period to the lesser of $250,000 or 1% of the value of a Portfolio's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the Commission. In the case of requests for redemption in excess of such amount, the Fund's Board of Directors reserves the right to make payments, in whole or in part in portfolio securities or other assets of the Portfolio in cases of emergency or at any time that the Investment Manager believes a cash distribution would impair the liquidity of the Portfolio to the detriment of the existing shareholders. In such event, the securities would be valued in the same manner as the Portfolio's investments are valued. If the recipient sold such securities, brokerage charges might be incurred. SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended, or the date of payment postponed: (a) during any period when the NYSE is closed (other than customary weekend and holiday closings); (b) when trading in the markets the Portfolio ordinarily utilizes is restricted, or when an emergency exists as determined by the Commission so that disposal of the Portfolio's investments or determination of its net asset value is not reasonably practicable; or (c) for such other periods as the Commission by order may permit to protect the Portfolio's shareholders. DISTRIBUTION AND SERVICING PLAN (OPEN SHARES ONLY) Open Shares are subject to a Distribution and Servicing Plan adopted by the Fund's Board of Directors pursuant to Rule 12b-1 (the "Rule") adopted by the Commission under the 1940 Act which provides, among other things, that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. Pursuant to the Distribution and Servicing Plan, the Fund pays the Distributor for advertising, marketing and distributing each Portfolio's Open Shares, and for the provision of certain services to the holders of Open Shares, a fee at the annual rate of .25% of the average daily net assets of the Portfolio's Open Shares. The Distributor may make payments to Service Agents for providing these services. The services provided may include personal services relating to shareholder accounts, such as answering shareholder inquiries regarding the Fund and providing reports and other information, and services related to the maintenance of shareholder accounts. The fee payable for such services is intended to be a "service fee" as defined in Conduct Rules of the NASD. The Distributor may make payments to third parties in respect of these services. From time to 43 time, the Distributor may defer or waive receipt of fees under the Distribution and Servicing Plan while retaining the ability to be paid by the Fund under the Distribution and Servicing Plan thereafter. The fees payable under the Distribution and Servicing Plan are payable without regard to actual expenses incurred. The Fund's Board of Directors believes there is a reasonable likelihood that the Distribution and Servicing Plan will benefit each Portfolio and holders of Open Shares. A quarterly report of the amounts expended under the Distribution and Servicing Plan, and the purposes for which such expenditures were incurred, must be made to the Board of Directors for its review. The Distribution and Servicing Plan provides that it may not be amended to increase materially the costs which holders of Open Shares of a Portfolio may bear without such shareholders' approval and that other material amendments of the Distribution and Servicing Plan must be approved by the Board of Directors and by the Independent Directors of the Fund and have no direct or indirect financial interest in the operation of the Distribution and Servicing Plan or in any agreements entered into in connection with the Distribution and Servicing Plan, by vote cast in person at a meeting called for the purpose of considering such amendments. The Distribution and Servicing Plan is subject to annual approval by such vote cast in person at a meeting called for the purpose of voting on the Distribution and Servicing Plan. As to each Portfolio, the Distribution and Servicing Plan may be terminated at any time by vote of a majority of the Independent Directors and have no direct or indirect financial interest in the operation of the Distribution and Servicing Plan or in any agreements entered into in connection with the Distribution and Servicing Plan, or by vote of the holders of a majority of such Portfolio's Open Shares. For the fiscal year ended December 31, 2005, the Portfolios paid the Distributor the amounts set forth below with respect to their Open Shares under the Distribution and Servicing Plan: AMOUNT PAID UNDER DISTRIBUTION AND SERVICING PLAN FOR FISCAL YEAR PORTFOLIO ENDED DECEMBER 31, 2005 ------------------------------------------- -------------------------- Equity Portfolio $ 39,648 U.S. Equity Value Portfolio 6 U.S. Strategic Equity Portfolio 312 Mid Cap Portfolio 104,398 Small Cap Portfolio 113,226 International Equity Portfolio 170,128 International Equity Select Portfolio 21,036 International Strategic Equity Portfolio -- International Small Cap Portfolio 145,250 Emerging Markets Portfolio 222,118 High Yield Portfolio 8,548 DIVIDENDS AND DISTRIBUTIONS The Fund intends to declare as a dividend on the outstanding shares of High Yield Portfolio substantially all of the Portfolio's net investment income at the close of each business day to shareholders of record as of the close of regular trading on the NYSE. Net investment income for a Saturday, Sunday or holiday will be included in the dividend declared on the previous business day. Dividends declared on the shares of High Yield Portfolio ordinarily will be paid on the last business day of each month. Shareholders who redeem all their shares of the Portfolio prior to a dividend payment date will receive, in addition to the redemption proceeds, any dividends that are declared but unpaid through the date of their redemption. Shareholders of the Portfolio who redeem only a portion of their shares will receive all dividends declared but unpaid on those shares on the next dividend payment date. Dividends from net investment income on Equity, U.S. Equity Value, U.S. Strategic Equity, Mid 44 Cap, Small Cap, U.S. Small Cap Equity Growth, International Equity, International Equity Select, International Strategic Equity, International Small Cap and Emerging Markets Portfolios generally will be declared and paid at least annually, and may be declared and paid more frequently. Dividends for each Class of a Portfolio will be calculated at the same time and in the same manner and will be of the same amount, except that certain expenses will be borne exclusively by one Class and not by the other, such as fees payable under the Distribution and Servicing Plan. Open Shares will receive lower per share dividends than Institutional Shares because of the higher expenses borne by Open Shares. Investment income for a Portfolio includes, among other things, interest income, accretion of market and original issue discount and amortization of premium and, in the case of Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap, U.S. Small Cap Equity Growth, International Equity, International Equity Select, International Strategic Equity, International Small Cap and Emerging Markets Portfolios, would include dividends. With respect to all of the Portfolios, net realized capital gains, if any, will be distributed at least annually, and may be declared and paid more frequently. If a dividend check mailed to a shareholder who elected to receive dividends and/or capital gain distributions in cash is returned as undeliverable by the postal or other delivery service, such shareholder's distribution option automatically will be converted to all dividends and other distributions reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution or redemption checks. TAXATION Management believes that each Portfolio that had commenced investment operations as of the date of this Statement of Additional Information has qualified for the most recent fiscal year as a "regulated investment company" under Subchapter M of the Code. It is intended that each such Portfolio will continue to so qualify as a regulated investment company, if such qualification is in the best interests of its shareholders. Each Portfolio will be treated as a separate entity for tax purposes and thus the provisions of the Code applicable to regulated investment companies generally will be applied to each Portfolio separately, rather than to the Fund as a whole. As a regulated investment company, a Portfolio will pay no federal income tax on net investment income and net realized securities gains to the extent that such income and gains are distributed to shareholders in accordance with applicable provisions of the Code. To qualify as a regulated investment company, the Portfolio must distribute at least 90% of its net income (consisting of net investment income and net short-term capital gain) to its shareholders and meet certain asset diversification and other requirements. If the Portfolio did not qualify as a regulated investment company, it would be treated, for tax purposes, as an ordinary corporation subject to federal income tax. The term "regulated investment company" does not imply the supervision of management of investment practices or policies by any government agency. The initial assets of International Strategic Equity Portfolio consisted of an in kind contribution of securities on October 31, 2005 with an aggregate value on that date of $49,491,446 million and having an aggregate tax basis for federal income tax purposes in the hands of the transferor of $40,711,470 million. The Portfolio intends to treat the contribution as a tax free exchange for federal income tax purposes under Section 351 of the Code. As a result, the Portfolio's basis in the contributed securities is the same as the basis of the contributed securities in the hands of the transferor, and the Portfolio's holding period for the contributed securities includes the transferor's holding period of the securities. The excess of the aggregate value of the contributed securities on the date of contribution over their aggregate tax basis for federal income tax purposes represents potential gain to the Portfolio when such securities are sold, which 45 gain would be distributed to Portfolio shareholders principally in the form of (long term) capital gain dividends. Any dividend or distribution paid shortly after an investor's purchase may have the effect of reducing the net asset value of the shares below the investor's cost of those shares. Such a dividend or distribution would be a return of investment in an economic sense, although taxable as stated in the Prospectus. In addition, the Code provides that if a shareholder holds shares of a Portfolio for six months or less and has received a capital gain distribution with respect to such shares, any loss incurred on the sale of such shares will be treated as long-term capital loss to the extent of the capital gain distribution received. Corporate shareholders of Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap and U.S. Small Cap Equity Growth Portfolios will be eligible for the dividends-received deduction on the dividends (excluding the net capital gain dividends) paid by the Portfolio, to the extent that the Portfolio's income is derived from certain dividends received from domestic corporations. A corporation's dividends-received deduction will be disallowed unless the corporation holds shares in the Portfolio for 46 days or more during the 90-day period commencing 45 days before the shares become ex-dividend. Furthermore, a corporation's dividends-received deduction will be disallowed to the extent a corporation's investment in shares of the Portfolio is financed with indebtedness. It is anticipated that distributions from the other Portfolios will not qualify for the dividends-received distribution. Each year the Fund will notify shareholders of the federal income tax status of distributions. High Yield Portfolio may invest in REMICs. Interests in REMICs are classified as either "regular" interests or "residual" interests. Under the Code, special rules apply with respect to the treatment of a portion of the Portfolio's income from REMIC residual interests. (Such portion is referred to herein as "Excess Inclusion Income.") Excess Inclusion Income generally cannot be offset by net operating losses and, in addition, constitutes unrelated business taxable income to entities which are subject to the unrelated business income tax. The Code provides that a portion of Excess Inclusion Income attributable to REMIC residual interests held by regulated investment companies such as the Portfolios shall, pursuant to regulations, be allocated to the shareholders of such regulated investment company in proportion to the dividends received by such shareholders. Accordingly, shareholders of High Yield Portfolio generally will not be able to use net operating losses to offset such Excess Inclusion Income. In addition, if a shareholder of one of the Portfolios is an entity subject to the unrelated business income tax (including a qualified pension plan, an IRA, a 401(k) plan, a Keogh plan, or another tax-exempt entity) and is allocated any amount of Excess Inclusion Income, such a shareholder may be required to file a return and pay a tax on such Excess Inclusion Income even though a shareholder might not have been required to pay such tax or file such return absent the receipt of such Excess Inclusion Income. The Investment Manager anticipates that only a small portion, if any, of the assets of High Yield Portfolio will be invested in REMIC residual interests. Accordingly, the amount of Excess Inclusion Income, if any, received by the Portfolio and allocated to its shareholders should be quite small. Shareholders that are subject to the unrelated business income tax should consult their own tax adviser regarding the treatment of their income derived from the Portfolio. Except as discussed above with respect to Excess Inclusion Income, a dividend or capital gains distribution with respect to shares held by a tax-deferred or qualified plan, such as an IRA, 403(b)(7) retirement plan or corporate pension or profit sharing plan, will not be taxable to the plan. Distributions from such plans will be taxable to individual participants under applicable tax rules without regard to the income earned by the qualified plan. Ordinarily, gains and losses realized from portfolio transactions will be treated as capital gains 46 and losses. However, a portion of the gain or loss realized from the disposition of foreign currencies and non-U.S. dollar denominated securities (including debt instruments and certain futures or forward contracts and options) may be treated as ordinary income or loss. In addition, all or a portion of any gains realized from the sale or other disposition of certain market discount bonds will be treated as ordinary income. Finally, all or a portion of the gain realized from engaging in "conversion transactions" (generally including certain transactions designed to convert ordinary income into capital gain) may be treated as ordinary income. Gain or loss, if any, realized by a Portfolio from certain financial futures or forward contracts and options transactions ("Section 1256 contracts") will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. Gain or loss will arise upon exercise or lapse of such Section 1256 contract as well as from closing transactions. In addition, any Section 1256 contracts remaining unexercised at the end of the Portfolio's taxable year will be treated as sold for its then fair market value, resulting in additional gain or loss to such Portfolio. Offsetting positions held by a Portfolio involving certain financial futures or forward contracts or options transactions with respect to actively traded personal property may be considered, for tax purposes, to constitute "straddles." To the extent the straddle rules apply to positions established by the Portfolio, losses realized by the Portfolio may be deferred to the extent of unrealized gain in the offsetting position. In addition, short-term capital loss on straddle positions may be recharacterized as long-term capital loss, and long-term capital gains on straddle positions may be treated as short-term capital gains or ordinary income. Certain of the straddle positions held by the Portfolio may constitute "mixed straddles." The Portfolio may make one or more elections with respect to the treatment of "mixed straddles," resulting in different tax consequences. In certain circumstances, the provisions governing the tax treatment of straddles override or modify certain of the provisions discussed above. If a Portfolio either (1) holds an appreciated financial position with respect to stock, certain debt obligations, or partnership interests ("appreciated financial position") and then enters into a short sale, futures or forward contract, or offsetting notional principal contract (collectively, a "Contract") with respect to the same or substantially identical property or (2) holds an appreciated financial position that is a Contract and then acquires property that is the same as, or substantially identical to, the underlying property, the Portfolio generally will be taxed as if the appreciated financial position were sold at its fair market value on the date the Portfolio enters into the financial position or acquires the property, respectively. If a Portfolio enters into certain derivatives (including forward contracts, long positions under notional principal contracts, and related puts and calls) with respect to equity interests in certain pass-thru entities (including other regulated investment companies, real estate investment trusts, partnerships, real estate mortgage investment conduits and certain trusts and foreign corporations), long-term capital gain with respect to the derivative may be recharacterized as ordinary income to the extent it exceeds the long-term capital gain that would have been realized had the interest in the pass-thru entity been held directly by the Portfolio during the term of the derivative contract. Any gain recharacterized as ordinary income will be treated as accruing at a constant rate over the term of the derivative contract and may be subject to an interest charge. The Treasury has authority to issue regulations expanding the application of these rules to derivatives with respect to debt instruments and/or stock in corporations that are not pass-through entities. Investment by a Portfolio in securities issued or acquired at a discount, or providing for deferred interest or for payment of interest in the form of additional obligations, could under special tax rules affect the amount, timing and character of distributions to shareholders by causing the Portfolio to 47 recognize income prior to the receipt of cash payments. For example, the Portfolio could be required each year to accrue a portion of the discount (or deemed discount) at which the securities were issued and to distribute such income in order to maintain its qualification as a regulated investment company. In such case, the Portfolio may have to dispose of securities which it might otherwise have continued to hold in order to generate cash to satisfy the distribution requirements. Certain Portfolios may invest in an entity that is classified as a "passive foreign investment company" ("PFIC") for federal income tax purposes, the operation of certain provisions of the Code applying to PFICs could result in the imposition of certain federal income taxes on the Portfolios. In addition, gain realized from the sale or other disposition of PFIC securities held beyond the end of the Portfolio's taxable year may be treated as ordinary income. Income received by a Portfolio from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the effective rate of foreign tax in advance, since the amount of each Portfolio's assets to be invested in various countries is not known. If you are neither a resident nor a citizen of the United States, or if you are a foreign entity, the Portfolio's ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies; provided, however, that for taxable years of the Portfolio beginning after December 31, 2004, but not beginning after December 31, 2007, your interest-related dividends and short-term capital gain dividends from the Portfolio generally will not be subject to such U.S. withholding tax if the Fund receives prescribed certifications from you as to your non-U.S. status. If more than 50% of the value of a Portfolio's total assets at the close of its taxable year consists of the stock or securities of foreign corporations, the Portfolio may elect to "pass through" to its shareholders the amount of foreign income taxes paid by the Portfolio. Pursuant to such election, shareholders would be required: (i) to include in gross income, even though not actually received, their respective pro rata shares of the foreign taxes paid by the Portfolio; (ii) treat their income from the Portfolio as being from foreign sources to the extent that the Portfolio's income is from foreign sources; and (iii) either to deduct their pro rata share of foreign taxes in computing their taxable income, or to use it as a foreign tax credit against federal income (but not both). No deduction for foreign taxes could be claimed by a shareholder who does not itemize deductions. It is anticipated that each of International Equity, International Equity Select, International Strategic Equity, International Small Cap and Emerging Markets Portfolios, will be operated so as to meet the requirements of the Code to "pass through" to shareholders of the Portfolio credits for foreign taxes paid, although there can be no assurance that these requirements will be met. Each shareholder will be notified within 45 days after the close of each taxable year of the Portfolio whether the foreign taxes paid by the Portfolio will "pass through" for that year, and, if so, the amount of each shareholder's pro rata share of (i) the foreign taxes paid, and (ii) the Portfolio's gross income from foreign sources. Of course, shareholders who are not liable for federal income taxes, such as retirement plans qualified under Section 401 of the Code, will not be affected by any such "pass through" of foreign tax credits. The foregoing is only a general summary of some of the important federal income tax considerations generally affecting the Portfolios and their shareholders. No attempt is made to present a complete explanation of the federal tax treatment of the Portfolios' activities or to discuss state and local tax matters affecting the Portfolios. 48 ADDITIONAL INFORMATION ABOUT THE FUND AND PORTFOLIOS As of February 17, 2006, no person owned of record or was known by the Fund to own beneficially 5% or more of a class of the indicated Portfolio's outstanding voting securities except the following: PERCENTAGE OF TOTAL INSTITUTIONAL SHARES NAME AND ADDRESS OUTSTANDING - ---------------- -------------------- EQUITY PORTFOLIO Nationwide Trust Co Lazard Freres & Co. LLC Employees Savings Plan 98 San Jacinto Blvd. Ste 1100 Austin, TX 78701-4255 22% Citigroup Global Markets Inc. 388 Greenwich Street New York, NY 10013 19% Lazard Capital Markets LLC Iron Workers Local 40 361 & 417 Topping Out Fund Joint Board of Trustees 583 Route 32 Wallkill, NY 12589-2708 9% Bank of America TTEE for the International Union Of Operating Engineers Local 57 Annuity P.O. Box 831575 Dallas, TX 75283-1575 8% Lazard Capital Markets LLC Runneymede Enterprises LTD Mr. Adrian Crosbie Jones Private Trust Co Charlotte House Charlotte Street PO Box N-65 Nassau, Bahamas 5% U.S. STRATEGIC EQUITY PORTFOLIO Lazard Capital Markets LLC Lazard Freres & Co LLC Employee Pension Trust 30 Rockefeller Plaza, 60th Floor New York, NY 10112 24% Lazard Capital Markets LLC Lazard Freres & Co LLC Profit Sharing Plan Trust 30 Rockefeller Plaza, 60th Floor New York, NY 10112 11% Lazard Capital Markets LLC Robinson Brog Leinwand Greene 30 Rockefeller Plaza, 60th Floor New York, NY 10112 8% 49 Lazard Capital Markets LLC Paul Possick 30 Rockefeller Plaza, 60th Floor New York, NY 10112 7% MID CAP PORTFOLIO Lazard Capital Markets LLC Sprinkler Industry 30 Rockefeller Plaza, 60th Floor New York, NY 10112 28% Suntrust Bank, Trustee Suntrust Bank Inc. 401k Plan P.O. Box 4655, Dept. 210 Atlanta, GA 30302 19% Northern Trust Company, Trustee FBO Advocate-DV P.O. Box 92994 Chicago, IL 60675 16% SMALL CAP PORTFOLIO National Financial Services Corp. FBO Our Customers 200 Liberty Street New York, NY 10281 28% Lazard Capital Markets LLC Soft Drink Worker Union Local 812 188 Summerfield Street Scarsdale, NY 10583 9% Citigroup Global Markets Inc. 388 Greenwich Street New York, NY 10013 5% Patterson & Co FBO City of Allentown 1525 West Wt Harris Blvd. Charlotte, NC 28288 5% INTERNATIONAL EQUITY PORTFOLIO 50 Savings Plan for the Employees and Partners of PriceWaterhouseCoopers LLP One Wall Street-12th Floor New York, NY 10286-0001 13% Citigroup Global Markets Inc. 388 Greenwich Street New York, NY 10013 7% Retirement Benefits Accummulation Plan for Employees of PricewaterhouseCoopers LLP One Wall Street - 12th Floor New York, NY 10286-0001 6% INTERNATIONAL EQUITY SELECT PORTFOLIO National Financial Services LLC 200 Liberty Street New York, NY 10281 27% Lazard Capital Markets LLC Peter W Quesada 30 Rockefeller Plaza, 60th Fl. New York, NY 10112 5% Lazard Capital Markets LLC James T Lee Foundation Inc. 30 Rockefeller Plaza, 60th Fl. New York, NY 10112 5% INTERNATIONAL STRATEGIC EQUITY PORTFOLIO Lazard Capital Markets LLC Market Street International 30 Rockefeller Plaza, 60th Floor New York, NY 10112 33% First Union National Bank Omnibus Reinvest 1525 West Wt Harris Blvd Charlotte, NC 28288-0001 18% Wendel & Company 1 c/o The Bank of New York Mutual Fund PO Box 1066 Wall Street Trust New York, NY 10268-1066 14% Wendel & Company 2 c/o The Bank of New York Mutual Fund PO Box 1066 Wall Street Trust New York, NY 10268-1066 9% Wendel & Company 3 c/o The Bank of New York Mutual Fund PO Box 1066 Wall Street Trust New York, NY 10268-1066 7% Pershing LLC PO Box 2052 Jersey City, NJ 07303-2052 7% INTERNATIONAL SMALL CAP PORTFOLIO Lazard Asset Management LLC as Agent for Oregon Investment Council 30 Rockefeller Plaza New York, NY 10112 22% Northern Trust Company Custodian FBO Public School Teachers Pension Fund of Chicago P.O. Box 92956 Chicago, IL 60675 9% State Street Bank, Trustee Mississippi Public Employees Retirement System 1 Enterprise Drive Quincy, MA 02171 8% Alaska Retirement Management Board State Street Bank & Trust Co. 2 Avenue De Lafayette Boston, MA 02111-1724 7% EMERGING MARKETS PORTFOLIO Lazard Asset Management LLC as Agent Oregon Investment Council 30 Rockefeller Plaza New York, NY 10112 10% Savings Plan for Employees & Partners of PricewaterhouseCoopers LLP 1 Wall Street-12th Floor New York, NY 10286-0001 9% Merrill Lynch For The Sole Benefit of Its Customers 4800 Deer Lake Dr. East 2nd Fl. Jacksonville, FL 32246-6484 8% 51 Retirement Benefit Accumulation Plan For Employees Of PricewaterhouseCoopers LLP Bank of New York Cust Attn: Y Smith 1 Wall Street Floor 12th New York, NY 10286-0001 6% Citigroup Global Markets Inc. 388 Greenwich Street New York, NY 10013-2375 6% Northern Trust Company Custodian FBO Public School Teachers Pension Fund of Chicago P.O. Box 92956 Chicago, IL 60675 5% Pershing LLC PO Box 2052 Jersey City, NJ 07303-2052 5% HIGH YIELD PORTFOLIO Mac & Co. Mutual Funds Operations TC P.O. Box 3198 Pittsburgh, PA 15230-3198 24% Lazard Capital Markets LLC Employee Security Fund of the Electrical Products Industry Pension Plan 30 Rockefeller Plaza New York, NY 10112 9% North Dakota Board of University & School Lands P.O. Box 5523 Bismarck ND 58506-5523 8% The Bernard Heller Foundation 1621 Bushgrove Court Westlake Village, CA 91361 7% Pershing LLC P.O. Box 2052 Jersey City, NJ 07303 6% 52 PERCENTAGE OF TOTAL NAME AND ADDRESS OPEN SHARES OUTSTANDING EQUITY PORTFOLIO Prudential Retirement Insurance & Annuity Co. 801 Pennsylvania Ave Kansas City, MO 64105-1307 57% Merrill Lynch, Pierce, Fenner & Smith Incorporated 4800 Deer Lake Drive East Jacksonville, FL 32246 8% US STRATEGIC EQUITY PORTFOLIO Lazard Capital Markets LLC Lazard Asset Management LLC LTI Account 30 Rockefeller Plaza, 60th Floor New York, NY 10112-0002 36% Lazard Capital Markets LLC Mary Clark Makepeace 30 Rockefeller Plaza, 60th Floor New York, NY 10112-0002 23% National City Bank TTEE John J. Emery PO Box 94984 Cleveland, OH 44101-4984 14% Lazard Capital Markets LLC George B Reese Trust 30 Rockefeller Plaza, 60th Floor New York, NY 10112-0002 14% Lazard Capital Markets LLC Drew Taylor 30 Rockefeller Plaza, 60th Floor New York, NY 10112-0002 7% MID CAP PORTFOLIO Prudential Retirement Insurance & Annuity Co. 801 Pennsylvania Ave Kansas City, MO 64105-1307 26% Nationwide Trust Company, Custodian FBO IPO Portfolio Accounting P.O. Box 182029 Columbus, OH 43218-2029 21% Wachovia Bank FBO Various Retirement Plans 1525 West WT Harris Blvd. Charlotte, NC 26288 10% Investors ABNK & Trust 4 Manhattanville Rd. Purchase, NY 10577-2139 8% Merrill Lynch FBO its Customers 4800 Deer Lake Drive East Jacksonville, FL 32246 7% SMALL CAP PORTFOLIO Prudential Retirement Insurance & Annuity Co. 801 Pensylvania Ave Kansas City, MO 64105-1307 27% Nationwide Life Insurance, QVPA c/o IPO Portfolio Account P.O. Box 182029 Columbus, OH 43218-2029 15% Nationwide Life Ins NWVA C/O IPO Port Acct P.O. Box 182029 Columbus, OH 43218-2029 8% ING Life Insurance and Annuity Company 151 Farmington Avenue Hartford, CT 06156 6% Mercer Trust FBO Savings Plan For Employees of Furniture Brands Intl 1 Investors Way #2 Norwood, MA 02062-1599 6% Nationwide Trust Co FBO IPO Portfolio Accounting PO Box 182029 Columbus, OH 43218-2029 5% 53 INTERNATIONAL EQUITY PORTFOLIO Prudential Retirement Insurance & Annuity Co. 801 Pennsylvania Ave Kansas City, MO 64105-1307 26% Charles Schwab & Co. Inc. Special Custody Account for the Benefit of its Customers 101 Montgomery Street San Francisco, CA 94104 25% Smith Barney 401k Advisor Group Trust Smith Barney Corporate Trust Co. 2 Tower Center, P.O. Box 1063 East Brunswick, NJ 08816-1063 8% Merrill Lynch FBO its Customers 4800 Deer Lake Dr. East Jacksonville, FL 32246-6484 5% INTERNATIONAL EQUITY SELECT PORTFOLIO Charles Schwab & Co. Inc. Special Custody Account for the Benefit of its Customers 101 Montgomery St. San Francisco, CA 94104 42% Turtle & Co. c/o State Street Bank & Trust P.O. Box 5489 Boston, MA 02206-5489 21% INTERNATIONAL STRATEGIC EQUITY PORTFOLIO Post & Co c/o The Bank of New York Mutual Fund PO Box 1066 Wall Street Station New York, NY 10286-0001 99% INTERNATIONAL SMALL CAP PORTFOLIO Charles Schwab & Co. Inc. Special Custody Account for the benefit of its Customers 101 Montgomery St. San Francisco, CA 94104 57% EMERGING MARKETS PORTFOLIO Charles Schwab & Co., Inc. Special Custody Account for the Benefit of Customers 101 Montgomery Street San Francisco, CA 94104 20% 54 National Investor Services Corp. FBO 097-50000-19 55 Water Street, 32nd Floor New York, NY 10041-3299 7% HIGH YIELD PORTFOLIO Lazard Capital Markets LLC OCF Foundation Inc. 30 Rockefeller Plaza New York, NY 10112 12% State Street Bank & Trust Company Custodian for IRA for the benefit of Richard J. Urowsky 125 Broad Street New York, NY 10004 9% Lehman Brothers, Inc. 70 Hudson Street, 7th Floor Jersey City, NJ 07302 8% A shareholder who beneficially owns, directly or indirectly, more than 25% of the Fund's voting securities may be deemed a "control person" (as defined in the 1940 Act) of the Fund. Certain of the shareholders are investment management clients of the Investment Manager that have entered into agreements with the Investment Manager pursuant to which the Investment Manager has investment discretion and voting power over any assets held in the clients' accounts, including shares of the Portfolios. For purposes of the list above, the Fund considers the Investment Manager to be a beneficial owner of Portfolio shares held in management accounts on behalf of its investment management clients. Generally, all shares have equal voting rights and will be voted in the aggregate, and not by class, except where voting by Class is required by law or where the matter involved affects only one Class. As used in this Statement of Additional Information, the vote of a majority of the outstanding voting securities means, with respect to the Fund or a Portfolio, the vote of the lesser of (i) 67% of the shares represented at a meeting if the holders of more than 50% of the outstanding shares of the Fund or Portfolio, as the case may be, are present in person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund or Portfolio, as the case may be. Shareholders are entitled to one vote for each full share held, and fractional votes for fractional shares held. 55 Shareholders are not entitled to any preemptive, subscription or conversion rights and are freely transferable. All shares, when issued and paid for in accordance with the terms of the offering, will be fully paid and non-assessable by the Fund. Each share of the applicable Class of a Portfolio is entitled to such dividends and distributions out of the income earned on the assets belonging to that Portfolio as are declared in the discretion of the Fund's Board of Directors. In the event of the liquidation of a Portfolio, shares of each Class of the Portfolio are entitled to receive the assets attributable to such Class of that Portfolio that are available for distribution based upon the relative net assets of the applicable Class. Unless otherwise required by the 1940 Act, ordinarily it will not be necessary for the Fund to hold annual meetings of shareholders. As a result, shareholders may not consider each year the election of Directors or the appointment of independent auditors. However, the holders of at least 10% of the shares outstanding and entitled to vote may require the Fund to hold a special meeting of shareholders for purposes of removing a Director from office. Shareholders may remove a Director by the affirmative vote of two-thirds of the Fund's outstanding voting shares. In addition, the Board of Directors will call a meeting of shareholders for the purpose of electing Directors if, at any time, less than a majority of the Directors then holding office have been elected by shareholders. The Fund is a "series fund," which is a mutual fund divided into separate portfolios, each of which is treated as a separate entity for certain matters under the 1940 Act and for other purposes. A shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. For certain matters shareholders vote together as a group; as to others they vote separately by portfolio. To date, the Board of Directors has authorized the creation of twelve Portfolios of shares. All consideration received by the Fund for shares of one of the Portfolios, and all assets in which such consideration is invested, will belong to that Portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The income attributable to, and the expenses of, one Portfolio would be treated separately from those of the other Portfolios. The Fund has the ability to create, from time to time, new series without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of each portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. The Rule exempts the selection of independent auditors and the election of Directors from the separate voting requirements of the rule. Each Portfolio will send annual and semi-annual financial statements to its shareholders. The Fund's Registration Statement, including the Prospectus, the Statement of Additional Information and the exhibits filed therewith, may be examined at the office of the Commission in Washington, D.C. Statements contained in the Prospectus or this Statement of Additional Information as to the content of any contract or other document referred to herein or in the Prospectus are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A special service is available to banks, brokers, investment advisers, trust companies and others who have a number of accounts in the Fund. In addition to the regular Statement of Account furnished to 56 the registered holder after each transaction, a monthly summary of accounts can be provided. The monthly summary will show for each account the account number, the month-end share balance and the dividends and distributions paid during the month. For information on the special monthly summary of accounts, contact the Fund. COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Legal matters in connection with the issuance of the shares of the Fund offered hereby have been passed upon by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038-4982. Anchin, Block & Anchin LLP, 1375 Broadway, New York, New York 10018, is the independent registered public accounting firm for the Fund. 57 APPENDIX Rating Categories Description of certain ratings assigned by S&P and Moody's: S&P LONG-TERM AAA An obligation rated 'AAA' has the highest rating assigned by S&P. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. AA An obligation rated 'AA' differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. BB, B, CCC, CC, AND C Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. BB An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. 58 CC An obligation rated 'CC' is currently highly vulnerable to nonpayment. C A subordinated debt or preferred stock obligation rated 'C' is currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying. D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. r The symbol 'r' is attached to the ratings of instruments with significant noncredit risks. It highlights risks to principal or volatility of expected returns which are not addressed in the credit rating. Examples include: obligations linked or indexed to equities, currencies, or commodities; obligations exposed to severe prepayment risk--such as interest-only or principal-only mortgage securities; and obligations with unusually risky interest terms, such as inverse floaters. N.R. The designation 'N.R.' indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a matter of policy. Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign designation to show relative standing within the major rating categories. SHORT-TERM A-1 A short-term obligation rated 'A-1' is rated in the highest category by S&P. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are given a plus sign (+) designation. This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory. A-3 A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. 59 B A short-term obligation rated 'B' is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet is financial commitment on the obligation. C A short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. D A short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. MOODY'S LONG-TERM Aaa Bonds rated 'Aaa' are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." 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 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 risk appear somewhat larger than the 'Aaa' securities. A Bonds 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 some time in the future. Baa Bonds rated 'Baa' are considered as medium-grade obligations (I.E., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. 60 Ba Bonds rated 'Ba' are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds rated 'B' generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds rated 'Caa' are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds rated 'Ca' represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds rated 'C' are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from 'Aa' through 'Caa.' The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. PRIME RATING SYSTEM (SHORT-TERM) Issuers rated PRIME-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: o Leading market positions in well-established industries. o High rates of return on funds employed. o Conservative capitalization structure with moderate reliance on debt and ample asset protection. o Broad margins in earnings coverage of fixed financial charges and high internal cash generation. o Well-established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated PRIME-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. 61 Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated PRIME-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. 62 THE LAZARD FUNDS, INC. PART C. OTHER INFORMATION Item 23. Exhibits (a)(1) Articles of Incorporation, Articles of Amendment and Articles Supplementary(1), (2), (3), (7), (8) and * (b) Amended and Restated By-Laws* (d)(1) Investment Management Agreement(9) (d)(2) Investment Management Agreement, as revised* (e) Distribution Agreement, as revised(8) (g) Amended and Restated Custodian Contract(1) (h)(1) Revised Transfer Agency and Service Agreement(1) (h)(2) Amendment to Revised Transfer Agency and Service Agreement(1) (h)(3) Administration Agreement(4) (i) Opinion and Consent of Counsel(5) (j) Consent of Independent Registered Public Accounting Firm* (m)(1) Distribution and Servicing Plan, as revised* (m)(2) Form of Servicing Agreement* (n) Rule 18f-3 Plan, as revised* (p) Code of Ethics* Other Exhibits: (s) Power of Attorney of Board Members(1), (6) and (9) - -------------------------------------------------------------------------------- * Filed herewith. 1. Incorporated by reference from Registrant's Post-Effective Amendment No. 28 filed with the Securities and Exchange Commission (the "SEC") on April 29, 2003. 2. Incorporated by reference from Registrant's Post-Effective Amendment No. 22 filed with the SEC on December 29, 2000. 3. Incorporated by reference from Registrant's Post-Effective Amendment No. 25 filed with the SEC on April 30, 2001. 4. Incorporated by reference from Registrant's Post-Effective Amendment No. 8 filed with the SEC on October 13, 1995. 5. Incorporated by reference from Registrant's Post-Effective Amendment No. 9 filed with the SEC on December 27, 1995. 6. Incorporated by reference from Registrant's Post-Effective Amendment No. 30 filed with the SEC on October 15, 2004. 7. Incorporated by reference from Registrant's Post-Effective Amendment No. 31 filed with the SEC on December 3, 2004. 8. Incorporated by reference from Registrant's Post-Effective Amendment No. 34 filed with the SEC on July 20, 2005. 9. Incorporated by reference from Registrant's Post-Effective Amendment No. 36 filed with the SEC on September 28, 2005. Item 24. Persons Controlled by or under Common Control with Registrant. None. Item 25. Indemnification. Reference is made to Article EIGHTH of Registrant's Articles of Incorporation filed as Exhibit (a) and to Section 2-418 of the Maryland General Corporation Law. The application of these provisions is limited by Article VIII of Registrant's By-Laws filed as Exhibit (b) and by the following undertaking set forth in the rules promulgated by the SEC: Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in such Act and is, therefore, unenforceable. In such event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue. Reference also is made to the Investment Management Agreements and the Distribution Agreement filed as Exhibits (d)(1) and (d)(2) and Exhibit (e), respectively. Item 26. Business and Other Connections of Investment Advisers. The description of the Investment Manager under the Captions "Fund Management" in the Prospectus and "Management" in the Statement of Additional Information constituting Parts A and B, respectively, of this Registration Statement is incorporated by reference herein. Registrant is fulfilling the requirement of this Item 26 to provide a list of the officers and directors of Lazard Asset Management LLC, Registrant's investment adviser ("LAM"), together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by LAM or those of its officers and members during the past two years by incorporating by reference the information contained in the Form ADV filed with the SEC pursuant to the Investment Advisers Act of 1940, as amended, by LAM (SEC File No. 801-61701). Item 27. Principal Underwriters. (a) Lazard Asset Management Securities LLC, ("Lazard") currently serves as principal underwriter for the Registrant and Lazard Retirement Series, Inc. (b) Registrant is fulfilling the requirement of this Item 27 by incorporating by reference the information contained in the Form BD filed pursuant to the Securities Exchange Act of 1934, as amended, by Lazard (SEC File No. 129119). (c) Not applicable. Item 28. Location of Accounts and Records. The majority of the accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules thereunder are maintained as follows: journals, ledgers, securities records and other original records are maintained primarily at the offices of Registrant's custodian, State Street Bank and Trust Company. All other records so required to be maintained are maintained at the offices of LAM, 30 Rockefeller Plaza, New York, New York 10112. Item 29. Management Services. Not applicable. Item 30. Undertakings. None. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, Registrant certifies that it meets all of the requirements for effectiveness of the Registration Statement under Rule 485(b) of the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 27th day of February, 2006. THE LAZARD FUNDS, INC. By: /s/ Charles Carroll ---------------------------------------- Charles Carroll, Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. /s/ Charles Carroll President and Director February 27, 2006 - ------------------------ Charles Carroll /s/ Stephen W. St. Clair Treasurer and Chief February 27, 2006 - ------------------------ Financial Officer Stephen W. St. Clair /s/ Ashish Bhutani* Director February 27, 2006 - ------------------------ Ashish Bhutani /s/ John J. Burke* Director February 27, 2006 - ------------------------ John J. Burke /s/ Lester Z. Lieberman* Director February 27, 2006 - ------------------------ Lester Z. Lieberman /s/ Richard Reiss, Jr.* Director February 27, 2006 - ------------------------ Richard Reiss, Jr. /s/ Kenneth S. Davidson* Director February 27, 2006 - ------------------------ Kenneth S. Davidson /s/ Robert M. Solmson* Director February 27, 2006 - ------------------------ Robert M. Solmson *By: /s/ Nathan A. Paul ------------------------------------ Attorney-in-fact, Nathan A. Paul Exhibit Index ------------- (a)(1) Articles Supplementary (b) Amended and Restated By-Laws (d)(2) Investment Management Agreement, as revised (j) Consent of Independent Registered Public Accounting Firm (m)(1) Distribution and Servicing Plan, as revised (m)(2) Form of Servicing Agreement (n) Rule 18f-3 Plan, as revised (p) Code of Ethics EX-99.(A)(1) 2 c40137_exh99a1.txt THE LAZARD FUNDS, INC. ARTICLES SUPPLEMENTARY THE LAZARD FUNDS, INC., a Maryland corporation having its principal office in the State of Maryland at 300 East Lombard Street, Baltimore, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: All of the unissued shares of capital stock of the Corporation are hereby classified and reclassified, with the result that the total number of shares of stock that the Corporation has authority to issue is one billion seven hundred fifty million (1,750,000,000) shares, all of which are shares of Common Stock, with a par value of one tenth of one cent ($0.001) per share, having an aggregate par value of one million seven hundred fifty thousand dollars ($1,750,000), classified as shares of Institutional Common Stock and Open Common Stock of each of the following Portfolios (each, a "Portfolio") or remain unclassified as follows: SHARES PORTFOLIO AUTHORIZED - --------- ---------- LAZARD EQUITY PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD U.S. EQUITY VALUE PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD U.S. STRATEGIC EQUITY PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD MID CAP PORTFOLIO Institutional Common Stock 100,000,000 Open Common Stock 50,000,000 LAZARD SMALL CAP PORTFOLIO Institutional Common Stock 150,000,000 Open Common Stock 50,000,000 LAZARD U.S. SMALL CAP EQUITY GROWTH PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD INTERNATIONAL EQUITY PORTFOLIO Institutional Common Stock 150,000,000 Open Common Stock 50,000,000 LAZARD INTERNATIONAL EQUITY SELECT PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD INTERNATIONAL STRATEGIC EQUITY PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD INTERNATIONAL SMALL CAP PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD EMERGING MARKETS PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD HIGH YIELD PORTFOLIO Institutional Common Stock 50,000,000 Open Common Stock 50,000,000 LAZARD BOND PORTFOLIO Institutional Common Stock 50,000,000 UNCLASSIFIED 250,000,000 -------------- TOTAL 1,750,000,000 SECOND: The shares of Institutional Common Stock and Open Common Stock of each Portfolio of the Corporation as classified and reclassified immediately hereby (and all shares of Institutional Common Stock and Open Common Stock, respectively, of any Portfolio issued after these Articles Supplementary become effective regardless of whether such shares are currently unissued or become unissued as a result of the subsequent redemption or repurchase by the Corporation of such shares) shall have the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption as previously set forth in the Charter with respect to any particular Portfolio and otherwise as set forth in Article FIFTH of Corporation's Charter and shall be subject to all provisions of the Corporation's Charter relating to stock of the Corporation generally, and to the following: (1) Assets of the Corporation attributable to the Open Common Stock and to the Institutional Common Stock of each Portfolio shall be invested in the same respective Portfolio. (2) At such times (which may vary between and among the holders of Institutional Common Stock of the Portfolios) as may be determined by the Board of Directors (or, with the authorization of the Board of Directors, by the officers of the Corporation) in accordance with the Investment Company Act of 1940, as amended, applicable rules and regulations thereunder, and applicable rules and regulations of the National Association of Securities Dealers, Inc., and reflected in the pertinent registration statement of the Corporation (the "Registration Statement"), certain of the shares of Institutional Common Stock of each Portfolio may be automatically converted into shares of the Open Common Stock of the respective Portfolio, based on the relative net asset values of such classes at the time of conversion, subject to any conditions of conversion that may be imposed by the Board of Directors (or, with the authorization of the Board of Directors, by the officers of the Corporation) and reflected in the Registration Statement. (3) Proceeds from the redemption of a share of Institutional Common Stock or Open Common Stock of a Portfolio, including fractional shares, shall be reduced by the amount of any redemption fee, liquidation fee or other amount payable on such redemption as may be approved by the Board of Directors of the Corporation and reflected in the Registration Statement from time to time. - 2 - THIRD: The Board of Directors of the Corporation has classified and reclassified the unissued shares of the Corporation as provided herein pursuant to authority provided in the Corporation's Charter. FOURTH: These Articles Supplementary do not increase the total number of authorized shares of the Corporation, or the aggregate par value thereof. IN WITNESS WHEREOF, The Lazard Funds, Inc. has caused these presents to be signed as of February 13, 2006, in its name and on its behalf by its duly authorized officers who acknowledge that these Articles Supplementary are the act of the Corporation, and states that to the best of their knowledge, information and belief, all matters and facts set forth herein relating to the authorization and approval of these Articles Supplementary are true in all material respects, and that this statement is made under the penalties of perjury. THE LAZARD FUNDS, INC. By: /s/ Nathan A. Paul ----------------------- Name: Nathan A. Paul Title: Vice President WITNESS: /s/ David A. Kurzweil - ----------------------------- Name: David A. Kurzweil Title: Assistant Secretary - 3 - EX-99.(B) 3 c40137_exh99b.txt AMENDED AND RESTATED BY-LAWS OF THE LAZARD FUNDS, INC. ---------------------- ARTICLE I Offices Section 1. PRINCIPAL OFFICE IN MARYLAND. The corporation shall have a principal office in the City of Baltimore, State of Maryland. Section 2. OTHER OFFICES. The Corporation may have offices also at such other places within and without the State of Maryland as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II Meetings of Stockholders Section 1. PLACE OF MEETING. Meetings of stockholders shall be held at such place, either within the State of Maryland or at such other place within the United States, as shall be fixed from time to time by the Board of Directors. Section 2. ANNUAL MEETINGS. The Corporation shall not be required to hold an annual meeting of stockholders in any year in which the election of directors is not required to be acted on by stockholders under the Investment Company Act of 1940, as amended (the "1940 Act"). If the Corporation is required to hold a meeting of stockholders to elect directors, the meeting shall be designated as the annual meeting of stockholders for that year and shall be held no later than 120 days after the occurrence of the event requiring the meeting. Any business may be considered at an annual meeting of stockholders without the purpose of the meeting having been specified in the notice. Section 3. Notice of Annual Meeting. Written or printed notice of the annual meeting, stating the place, date and hour thereof, shall be given to each stockholder entitled to vote thereat and each other stockholder entitled to notice thereof not less than ten nor more than ninety days before the date of the meeting. Section 4. SPECIAL MEETINGS. Special meetings of stockholders may be called by the chairman, the president or by the Board of Directors and shall be called by the secretary upon the written request of holders of shares entitled to cast not less than 25% of all the votes entitled to be cast at such meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat. In the case of such request for a special meeting, upon payment by such stockholders to the Corporation of the estimated reasonable cost of preparing and mailing a notice of such meeting, the secretary shall give the notice of such meeting. The secretary shall not be required to call a special meeting to consider any matter which is substantially the same as a matter acted upon at any special meeting of stockholders held within the preceding twelve months unless requested to do so by holders of shares entitled to cast not less than a majority of all votes entitled to be cast at such meeting. Notwithstanding the foregoing, to the extent required by the 1940 Act, special meetings of stockholders for the purpose of voting upon the question of removal of any director or directors of the Corporation shall be called by the secretary upon the written request of holders of shares entitled to cast not less than ten percent of all the votes entitled to be cast at such meeting. Section 5. Notice of Special Meeting. Written or printed notice of a special meeting of stockholders, stating the place, date, hour and purpose thereof, shall be given by the secretary to each stockholder entitled to vote thereat and each other stockholder entitled to notice thereof not less than ten nor more than ninety days before the date fixed for the meeting. 2 Section 6. BUSINESS OF SPECIAL MEETINGS. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice thereof. Section 7. QUORUM. The holders of shares entitled to cast one-third of the votes entitled to be cast thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except with respect to any matter which, under applicable statutes or regulatory requirements or the Corporation's charter, requires approval by a separate vote of one or more classes of stock, in which case the presence in person or by proxy of the holders of shares entitled to cast one-third of the votes entitled to be cast on the matter shall constitute a quorum. A meeting of stockholders convened on the date for which it is called may be adjourned from time to time without further notice to a date not more than 120 days after the record date. Section 8. VOTING. When a quorum is present at any meeting, the affirmative vote of a majority of the votes cast by stockholders entitled to vote on the matter, shall decide any question brought before such meeting (except that directors may be elected by the affirmative vote of a plurality of the votes cast), unless the question is one upon which by express provision of the 1940 Act, as from time to time in effect, or other statutes or rules or orders of the Securities and Exchange Commission or any successor thereto or of the Articles of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 9. PROXIES. Each stockholder shall at every meeting of stockholders be entitled to vote in person or by written proxy signed by the stockholder or by his duly authorized attorney-in-fact. No proxy shall be voted after eleven months from its date, unless otherwise provided in the proxy. 3 Section 10. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date which shall be not more than ninety days and, in the case of a meeting of stockholders, not less than ten days prior to the date on which the particular action requiring such determination of stockholders is to be taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period, but not to exceed, in any case, twenty days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days immediately preceding such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders: (1) The record date for the determination of stockholders entitled to notice of, or to vote at, a meeting of stockholders shall be at the close of business on the day on which notice of the meeting of stockholders is mailed or the day thirty days before the meeting, whichever is the closer date to the meeting; and (2) The record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any rights shall be at the close of business on the day on which the resolution of the Board of Directors, declaring the dividend or allotment of rights, is adopted, provided that the payment or allotment date shall not be more than sixty days after the date of the adoption of such resolution. If a record date has been fixed for the determination of stockholders entitled to vote at a meeting, only the stockholders of record on the record date shall be entitled to vote at the meeting and 4 such stockholders shall be entitled to vote at the meeting notwithstanding the subsequent transfer or redemption of the shares owned of record on such date. Section 11. Inspectors of Election. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, may be required to take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting or any stockholder, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. Section 12. Informal Action by Stockholders. Except to the extent prohibited by the 1940 Act, as from time to time in effect, or rules or orders of the Securities and Exchange Commission or any successor thereto, any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting if a consent in writing, setting forth 5 such action, is signed by all the stockholders entitled to vote on the subject matter thereof and any other stockholders entitled to notice of a meeting of stockholders (but not to vote thereat) have waived in writing any rights which they may have to dissent from such action, and such Consent and waiver are filed with the records of the Corporation. ARTICLE III Board of Directors Section 1. NUMBER OF DIRECTORS. The number of directors constituting the entire Board of Directors (which initially was fixed at one in the Corporation's Articles of Incorporation) may be increased or decreased from time to time by the vote of a majority of the entire Board of Directors within the limits permitted by law but at no time may be more than twenty, but the tenure of office of a director in office at the time of any decrease in the number of directors shall not be affected as a result thereof. The directors shall be elected to hold offices at the annual meeting of stockholders, and each director shall hold office until the next annual meeting of stockholders or until his successor is elected and qualifies. Any director may resign at any time upon written notice to the Corporation. Any director may be removed, either with or without cause, at any meeting of stockholders duly called and at which a quorum is present by the affirmative vote of the majority of the votes entitled to be cast thereon, and the vacancy in the Board of Directors caused by such removal may be filled by the stockholders at the time of such removal. Directors need not be stockholders. Section 2. VACANCIES AND NEWLY-CREATED DIRECTORSHIPS. Any vacancy occurring in the Board of Directors for any cause other than by reason of an increase in the number of directors may be filled by a majority of the remaining members of the Board of Directors although such majority is less than a quorum. Any vacancy occurring by reason of an increase in the number of directors may be filled by a majority of the entire Board of Directors. 6 A director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next annual meeting of stockholders or until his successor is elected and qualifies. Section 3. POWERS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-Laws conferred upon or reserved to the stockholders. Section 4. AUTHORITY TO RETAIN EXPERTS AND ADVISERS. The Directors who are not "interested persons" (as that term is defined in the 1940 Act) of the Corporation may hire employees and retain experts and advisers, including independent legal counsel, at the expense of the Corporation, to the extent such Directors deem necessary to carry out their duties as Directors. Section 5. MEETINGS. The Board of Directors of the Corporation or any committee thereof may hold meetings, both regular and special, either within or without the State of Maryland. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the chairman, the president or by two or more directors. Notice of special meetings of the Board of Directors shall be given by the secretary to each director at least three days before the meeting if by mail or at least 24 hours before the meeting if given in person or by telephone or by telegraph. The notice need not specify the business to be transacted. Section 6. QUORUM AND VOTING. During such times when the Board of Directors shall consist of more than one director, a quorum for the transaction of business at meetings of the Board of Directors shall consist of one-third of the entire Board of Directors, but 7 in no event less than two directors. The action of a majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 7. COMMITTEES. The Board of Directors may appoint from among its members an executive committee and other committees of the Board of Directors, each committee to be composed of two or more of the directors of the Corporation. The Board of Directors may delegate to such committees any of the powers of the Board of Directors except those which may not by law be delegated to a committee. Such committee or committees shall have the name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless the Board of Directors designates one or more directors as alternate members of any committee, who may replace an absent or disqualified member at any meeting of the committee, the members of any such committee present at any meeting and not disqualified from voting may, whether or not they constitute a quorum, appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member of such committee. At meetings of any such committee, a majority of the members or alternate members of such committee shall constitute a quorum for the transaction of business and the act of a majority of the members or alternate members present at any meeting at which a quorum is present shall be the act of the committee. Section 8. CHAIRMAN OF THE BOARD OF DIRECTORS. The Board of Directors may appoint a Chairman of the Board of Directors, who shall preside at all meetings of the stockholders and of the Board of Directors. He shall be ex officio a member of all committees 8 designated by the Board of Directors except as otherwise determined by the Board of Directors. He shall have authority to execute bonds, instruments and contracts on behalf of the Corporation, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some officer or agent of the Corporation. Section 9. MINUTES OF COMMITTEE MEETINGS. The committees shall keep regular minutes of their proceedings. Section 10. INFORMAL ACTION BY BOARD OF DIRECTORS AND COMMITTEES. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or committee, provided, however, that such written consent shall not constitute approval of any matter which pursuant to the 1940 Act and the rules thereunder requires the approval of directors by vote cast in person at a meeting. Section 11. MEETINGS BY CONFERENCE TELEPHONE. The members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and such participation shall constitute presence in person at such meeting, provided, however, that such participation shall not constitute presence in person with respect to matters which pursuant to the 1940 Act and the rules thereunder require the approval of directors by vote cast in person at a meeting. 9 Section 12. FEES AND EXPENSES. The directors may be paid their expenses of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors, a stated salary as director or such other compensation as the Board of Directors may approve. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like reimbursement and compensation for attending committee meetings. ARTICLE II Notices Section 1. GENERAL. Notices to directors and stockholders mailed to them at their post office addresses appearing on the books of the Corporation shall be deemed to be given at the time when deposited in the United States mail. Section 2. WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of the statutes, of the Articles of Incorporation or of these By-Laws, each person entitled to said notice waives notice if, before or after the meeting he signs a written waiver of notice and such waiver is filed with the records of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE III Officers Section 1. GENERAL. The officers of the Corporation shall be chosen by the Board of Directors and shall be a president, a secretary and a treasurer. The Board of Directors may choose also such vice presidents and additional officers or assistant officers as it may deem 10 advisable. Any number of offices, except the offices of president and vice president may be held by the same person. No officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law to be executed, acknowledged or verified by two or more officers. Section 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it desires who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 3. TENURE OF OFFICERS. The officers of the Corporation shall hold office at the pleasure of the Board of Directors. Each officer shall hold his office until his successor is elected and qualifies or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors when, in its judgment, the best interests of the Corporation will be served thereby. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors. Section 4. PRESIDENT. In the absence or disability of the chairman, the president shall perform the duties and exercise the powers of the chairman. The president shall be the chief executive officer and shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall perform such other duties and have such other powers as the chairman or the Board of Directors may from time to time prescribe. He shall have authority to execute instruments and contracts on behalf of the Corporation except where required by law to be 11 otherwise signed and where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Section 5. VICE PRESIDENTS. The vice presidents shall act under the direction of the chairman and the president and in the absence or disability of the president shall perform the duties and exercise the powers of the president. They shall perform such other duties and have such other powers as the chairman, the president or the Board of Directors may from time to time prescribe. The Board of Directors may designate one or more executive vice presidents or may otherwise specify the order of seniority of the vice presidents and, in that event, the duties and powers of the president shall descend to the vice presidents in the specified order of seniority. Section 6. SECRETARY. The secretary shall act under the direction of the chairman and the president. Subject to the direction of the chairman and the president he shall attend all meetings of the Board of Directors and all meetings of stockholders and record the proceedings in a book to be kept for that purpose and shall perform like duties for the committees designated by the Board of Directors when required. He shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the chairman or the Board of Directors. He shall keep in safe custody the seal of the Corporation and shall affix the seal or cause it to be affixed to any instrument requiring it. Section 7. ASSISTANT SECRETARIES. The assistant secretaries in the order of their seniority, unless otherwise determined by the chairman or the Board of Directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary. 12 They shall perform such other duties and have such other powers as the chairman, the president or the Board of Directors may from time to time prescribe. Section 8. TREASURER. The treasurer shall act under the direction of the chairman and the president. Subject to the direction of the chairman and the president he shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the chairman, the president or the Board of Directors, taking proper vouchers for such disbursements, and shall render to the chairman, the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. Section 9. ASSISTANT TREASURERS. The assistant treasurers in the order of their seniority, unless otherwise determined by the chairman, the president or the Board of Directors, shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer. They shall perform such other duties and have such other powers as the chairman, the president or the Board of Directors may from time to time prescribe. ARTICLE IV Certificates of Stock Section 1. GENERAL. Every holder of stock of the Corporation who has made full payment of the consideration for such stock shall be entitled upon request to have a certificate, signed by, or in the name of the Corporation by, the chairman, the president or a vice president and countersigned by the treasurer or an assistant treasurer or the secretary or an 13 assistant secretary of the Corporation, certifying the number of whole shares of each class of stock owned by him in the Corporation. Section 2. FRACTIONAL SHARE INTERESTS. The Corporation may issue fractions of a share of stock. Fractional shares of each class of stock shall have proportionately to the respective fractions represented thereby all the rights of whole shares of that class of stock, including the right to vote, the right to receive dividends and distributions and the right to participate upon liquidation of the Corporation, excluding, however, the right to receive a stock certificate representing such fractional shares. Section 3. SIGNATURES ON CERTIFICATES. Any of or all the signatures on a certificate may be a facsimile. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall cease to be such officer before such certificate is issued, it may be issued with the same effect as if he were such officer at the date of issue. The seal of the Corporation or a facsimile thereof may, but need not, be affixed to certificates of stock. Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of any affidavit of that fact by the person claiming the certificate or certificates to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed. 14 Section 5. TRANSFER OF SHARES. Upon request by the registered owner of shares, and if a certificate has been issued to represent such shares upon surrender to the Corporation or a transfer agent of the Corporation of a certificate for shares of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation, if it is satisfied that all provisions of the Articles of Incorporation, of the By-Laws and of the law regarding the transfer of shares have been duly complied with, to record the transaction upon its books, issue a new certificate to the person entitled thereto upon request for such certificate, and cancel the old certificate, if any. Section 6. REGISTERED OWNERS. The Corporation shall be entitled to recognize the person registered on its books as the owner of shares to be the exclusive owner for all purposes including voting and dividends, and the Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Maryland. ARTICLE V Miscellaneous Section 1. RESERVES. There may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for such other purpose as the Board of Directors shall think conducive to the interest of the Corporation, and the Board of Directors may modify or abolish any such reserve. Section 2. DIVIDENDS. Dividends upon the stock of the Corporation may, subject to the provisions of the Articles of Incorporation and of applicable law, be declared by the Board of Directors at any time. Dividends may be paid in cash, in property or in shares of 15 the Corporation's stock, subject to the provisions of the Articles of Incorporation and of applicable law. Section 3. CAPITAL GAINS DISTRIBUTIONS. The amount and number of capital gains distributions paid to the stockholders during each fiscal year shall be determined by the Board of Directors. Each such payment shall be accompanied by a statement as to the source of such payment, to the extent required by law. Section 4. CHECKS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 5. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 6. SEAL. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Maryland." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in another manner reproduced or by placing the word "(seal)" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation. ARTICLE VI Indemnification Section 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Corporation shall indemnify its directors to the fullest extent that indemnification of directors is permitted by the Maryland General Corporation Law. The Corporation shall indemnify its officers to the same extent as its directors and to such further extent as is consistent with law. The Corporation shall indemnify its directors and officers who while serving as directors or officers also serve at the request of the Corporation as a director, officer, partner, trustee, employee, agent or fiduciary of 16 another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan to the fullest extent consistent with law. The indemnification and other rights provided by this Article shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. This Article shall not protect any such person against any liability to the Corporation or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office ("disabling conduct") Section 2. ADVANCES. Any current or former director or officer of the Corporation seeking indemnification within the scope of this Article shall be entitled to advances from the Corporation for payment of the reasonable expenses incurred by him in connection with the matter as to which he is seeking indemnification without requiring a preliminary determination of ultimate entitlement to indemnification except as provided below, to the fullest extent permissible under the Maryland General Corporation Law. The person seeking indemnification shall provide to the Corporation a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met and a written undertaking to repay any such advance if it should ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following additional conditions shall be met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Corporation for his undertaking; (b) the Corporation is insured against losses arising by reason of the advance; or (c) a majority of a quorum of directors of the Corporation who are neither "interested persons" as defined in Section 2(a) (19) of the 1940 Act, nor parties to the proceeding ("disinterested non-party directors"), or independent legal counsel, 17 in a written opinion, shall have determined, based on a review of facts readily available to the Corporation at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. Section 3. PROCEDURE. At the request of any person claiming indemnification under this Article, the Board of Directors shall determine, or cause to be determined, in a manner consistent with the Maryland General Corporation Law, whether the standards required by this Article have been met. Indemnification shall be made only following: (a) a final decision on the merits by a court or other body before whom the proceeding was brought that the person to be indemnified was not liable by reason of disabling conduct or (b) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the person to be indemnified was not liable by reason of disabling conduct by (i) the vote of a majority of a quorum of disinterested non-party directors or (ii) an independent legal counsel in a written opinion. Section 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS. Employees and agents who are not officers or directors of the Corporation may be indemnified, and reasonable expenses may be advanced to such employees or agents, as may be provided by action of the Board of Directors or by contract, subject to any limitations imposed by the 1940 Act. Section 5. OTHER RIGHTS. The Board of Directors may make further provision consistent with law for indemnification and advance of expenses to directors, officers, employees and agents by resolution, agreement or otherwise. The indemnification provided by this Article shall not be deemed exclusive of any other right, with respect to indemnification or otherwise, to which those seeking indemnification may be entitled under any insurance or other agreement or resolution of stockholders or disinterested directors or otherwise. The rights provided to any 18 person by this Article shall be enforceable against the Corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as a director, officer, employee, or agent as provided above. Section 6. AMENDMENTS. References in this Article are to the Maryland General Corporation Law and to the 1940 Act as from time to time amended. No amendment of these By-laws shall effect any right of any person under this Article based on any event, omission or proceeding prior to the amendment. ARTICLE VII Amendments The Board of Directors shall have the power to make, alter and repeal by-laws of the Corporation. Amended and Restated: January 16, 2006 19 EX-99.(D)(2) 4 c40137_exh99d2.txt THE LAZARD FUNDS, INC. INVESTMENT MANAGEMENT AGREEMENT Agreement, made the 11th day of August, 2005, between The Lazard Funds, Inc., a Maryland corporation (the "Fund"), on behalf of the portfolios named on Schedule 1 hereto, as such Schedule may be revised from time to time (each, a "Portfolio"), and Lazard Asset Management LLC, a New York limited liability company (the "Investment Manager"). W I T N E S S E T H WHEREAS, the Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), authorized to reclassify and issue any unissued shares to any number of additional classes or series each having its own investment objective, policies and restrictions; and WHEREAS, the Fund desires to retain the Investment Manager to render investment advisory services to each Portfolio and the Investment Manager is willing to render such investment advisory services; NOW, THEREFORE, the parties agree as follows: 1. The Fund hereby appoints the Investment Manager to act as manager of each Portfolio for the period and on the terms set forth in this Agreement. The Investment Manager accepts such appointment and agrees to render the services herein described, for the compensation herein provided. 2. Subject to the supervision of the Board of Directors of the Fund, the Investment Manager shall manage the investment operations of each Portfolio and the assets of each Portfolio, including the purchase, retention and disposition thereof, in accordance with the Portfolio's investment objective, policies and restrictions as stated in the Fund's Prospectus (hereinafter defined) and subject to the following understandings: (a) The Investment Manager shall provide supervision of each Portfolio's investments and determine from time to time what investments or securities will be purchased, retained, sold or loaned by the Portfolio, and what portion of the assets will be invested or held uninvested as cash. (b) The Investment Manager shall use its best judgment in the performance of its duties under this Agreement. (c) The Investment Manager, in the performance of its duties and obligations under this Agreement, shall act in conformity with the Articles of Incorporation, By-Laws and Prospectus of the Fund (each hereinafter defined) and with the instructions and directions of the Board of Directors of the Fund and will conform to and comply with the requirements of the 1940 Act and all other applicable federal and state laws and regulations. (d) The Investment Manager shall determine the securities to be purchased or sold by each Portfolio and will place orders pursuant to its determinations with or through such persons, brokers or dealers (including Lazard Freres & Co. LLC) to carry out the policy with respect to brokerage as set forth in the Fund's Prospectus or as the Fund's Board of Directors may direct from time to time. In providing a Portfolio with investment supervision, it is recognized that the Investment Manager will give primary consideration to securing the most favorable price and efficient execution. On occasions when the Investment Manager deems the purchase or sale of a security to be in the best interest of a Portfolio as well as other clients, the Investment Manager, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so sold or purchased in order to obtain the most favorable price or lower brokerage commissions and 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 - 2 - the Investment Manager in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. (e) The Investment Manager shall render to the Fund's Board of Directors such periodic and special reports with respect to each Portfolio's securities transactions as the Board may reasonably request. (f) The Investment Manager shall provide the Fund's custodian on each business day with information relating to all transactions concerning a Portfolio's assets. 3. The Fund has delivered to the Investment Manager copies of each of the following documents and will deliver to it all future amendments and supplements, if any: (a) Articles of Incorporation of the Fund, filed with the State Department of Assessments and Taxation of Maryland (such Articles of Incorporation, as in effect on the date hereof and as amended from time to time, are herein called the "Articles of Incorporation"); (b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof and as amended from time to time, are herein called the "By-Laws"); (c) Resolutions of the Board of Directors of the Fund authorizing the appointment of the Investment Manager and approving the form of this Agreement; (d) Registration Statement under the 1940 Act and the Securities Act of 1933, as amended, on Form N-lA (the "Registration Statement"), as filed with the Securities and Exchange Commission (the "Commission") relating to the Fund and shares of the Fund's Common Stock; (e) Notification of Registration of the Fund under the 1940 Act on Form N-8A as filed with the Commission; and - 3 - (f) Prospectus of the Fund (such prospectus and the statement of additional information, each as currently in effect and as amended or supplemented from time to time, being herein called the "Prospectus"). 4. The Investment Manager shall authorize and permit any of the general members, officers and employees of the Investment Manager, and any of the general members, directors, officers and employees of any of its affiliates, who may be elected as Directors or officers of the Fund to serve in the capacities in which they are elected. All services to be furnished by the Investment Manager under this Agreement may be furnished through the medium of any such general members, directors, officers or employees of the Investment Manager or any of its affiliates. 5. The Investment Manager shall keep the books and records of the Fund and the Portfolios required to be maintained by it pursuant to this Agreement and by the Fund pursuant to the 1940 Act. The Investment Manager agrees that all records which it maintains for the Fund or the Portfolios are the property of the Fund or the relevant Portfolio and it will surrender promptly to the Fund or such Portfolio any of such records upon the request of the Fund or such Portfolio. The Investment Manager further agrees to preserve such records as prescribed by Rule 3la-2 under the 1940 Act. 6. The Investment Manager will bear all of its expenses incurred in connection with the services to be rendered by the Investment Manager to the Portfolios under this Agreement, including without limitation, the compensation of all personnel of the Fund and the Investment Manager, except the fees of Directors of the Fund who are not affiliated persons of the Investment Manager or its affiliates. The Fund or the relevant Portfolio assumes and will pay all other expenses in connection with the Fund or such Portfolio not assumed by the Investment Manager, including but not limited to: (a) the fees and expenses of Directors who are not affiliated persons of the Investment Manager or any of its affiliates; (b) the fees and expenses of the Fund's administrator, if any; - 4 - (c) the fees and expenses of the custodian which relate to (i) the custodial function and the recordkeeping connected therewith, (ii) the maintenance of the required accounting records of the Fund, (iii) the pricing of the shares of the Portfolio, including the cost of any pricing service or services which may be retained pursuant to the authorization of the Directors of the Fund and (iv) for both mail and wire orders, the cashiering function in connection with the issuance and redemption of the Portfolio's securities; (d) the fees and expenses of the Fund's transfer agent, which may be the custodian, which relate to the maintenance of, and communications with respect to, each stockholder account; (e) the charges and expenses of legal counsel and independent accountants for the Fund; (f) brokers' commissions, any issue or transfer taxes and any other charges in connection with portfolio transactions on behalf of the Portfolio; (g) all taxes and corporate fees payable by the Fund or the Portfolio to federal, state or other governmental agencies, and all costs of maintaining corporate existence; (h) the allocable share of the fees of any trade association of which the Fund may be a member; (i) the cost of share certificates, if any, representing shares of the Portfolio; (j) the fees and expenses involved in registering and maintaining registrations of the Fund and of its shares with the Commission and, if required, qualifying the shares of the Portfolio under state securities laws, including the preparation and printing of the Fund's registration statements and Prospectuses for filing under federal and state securities laws for such purposes; - 5 - (k) all expenses of stockholders' and Directors' meetings and of preparing, printing and mailing Prospectuses and reports to stockholders in quantities required for distribution to the stockholders, and communications expenses with respect to individual stockholder accounts; (l) the cost of obtaining fidelity insurance and any liability insurance covering the Directors and officers of the Fund as such; (m) litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Fund's business; (n) expenses of issue, repurchase or redemption of shares of the Fund; (o) fees payable to the Investment Manager hereunder; (p) interest expenses of the Fund; and (q) all other expenses properly payable by the Fund. 7. For the services provided to the Portfolios and the expenses assumed pursuant to this Agreement, each Portfolio will pay monthly to the Investment Manager as full compensation therefor a management fee, accrued daily, at the annual rate set forth opposite the Portfolio's name on Schedule 1 hereto. 8. The Investment Manager shall not be liable for any error of judgment or for any loss suffered by a Portfolio in connection with the matters to which this Agreement relates, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services (in which case any award of damages shall be limited to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. The federal securities laws may impose liabilities even, under certain circumstances, on persons who act in good faith, and therefore nothing herein shall in any way constitute a waiver or limitation of any right which a Portfolio may have under any federal securities law. - 6 - 9. As to each Portfolio, this Agreement shall continue until the date set forth opposite such Portfolio's name on Schedule 1 hereto (the "Reapproval Date") and thereafter shall continue automatically for successive annual periods ending on the day of each year set forth opposite the Portfolio's name on Schedule 1 hereto (the "Reapproval Day"), provided such continuance is specifically approved at least annually by (i) the Fund's Board of Directors or (ii) vote of a majority (as defined in the 1940 Act) of such Portfolio's outstanding voting securities, provided that in either event its continuance also is approved by a majority of the Fund's Directors who are not "interested persons" (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. As to each Portfolio, this Agreement may be terminated at any time, without payment of penalty by the Portfolio, on 60 days' written notice to the Investment Manager, by vote of the Board of Directors of the Fund, or by vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of such Portfolio. This Agreement shall automatically terminate, as to the relevant Portfolio, in the event of its assignment (as defined in the 1940 Act). 10. Nothing in this Agreement shall limit or restrict the right of any general member, officer or employee of the Investment Manager or any general member, director, officer or employee of any of its affiliates who may also be a Director, officer or employee of the Fund to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any business, whether of a similar or dissimilar nature, nor limit or restrict the right of the Investment Manager to engage in any other business or to render services of any kind to any other corporation, firm, individual or association. 11. During the term of this Agreement, the Fund agrees to furnish to the Investment Manager at its principal office all Prospectuses, proxy statements, reports to stockholders, sales literature, or other material prepared for distribution to stockholders of the Fund or the public, which refer in any way to the Investment Manager, prior to use thereof and not to use such material if the Investment Manager reasonably objects in writing within five business days (or such other time as may be mutually agreed) after receipt thereof. In the event of termination of this Agreement, the Fund will continue to - 7 - furnish to the Investment Manager copies of any of the above-mentioned materials which refer in any way to the Investment Manager. The Fund shall furnish or otherwise make available to the Investment Manager such other information relating to the business affairs of the Fund as the Investment Manager at any time, or from time to time, reasonably requests in order to discharge its obligations hereunder. 12. This Agreement may be amended by mutual consent, but the consent of the Fund must be approved in conformity with the requirements of the 1940 Act. 13. Any notice or other communication required to be given pursuant to this Agreement shall be deemed duly given if delivered or mailed by registered mail, postage prepaid, (1) to the Investment Manager at 30 Rockefeller Plaza, New York, New York 10112, Attention: Secretary, or (2) to the Fund at 30 Rockefeller Plaza, New York, New York 10112, Attention: President. 14. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. THE LAZARD FUNDS, INC. By: ----------------------- Name: Title: LAZARD ASSET MANAGEMENT LLC By: ----------------------- Name: Title: - 8 - SCHEDULE 1
Annual Fee as a Percentage of Average Daily Reapproval Reapproval NAME OF PORTFOLIO NET ASSETS DATE DAY ----------------- --------------------- ----------------- ----------- U.S. Equity Value Portfolio .75% December 31, 2006 December 31 U.S. Strategic Equity Portfolio .85% December 31, 2006 December 31 Mid Cap Portfolio .75% December 31, 2006 December 31 Small Cap Portfolio .75% December 31, 2006 December 31 U.S. Small Cap Equity Growth Portfolio 1.00% December 31, 2007 December 31 International Equity Portfolio .75% December 31, 2006 December 31 International Equity Select Portfolio .85% December 31, 2006 December 31 International Strategic Equity Portfolio .75% December 31, 2006 December 31 International Small Cap Portfolio .75% December 31, 2006 December 31 Emerging Markets Portfolio 1.00% December 31, 2006 December 31 High Yield Portfolio .75% December 31, 2006 December 31 As Revised: February 7, 2006
- 9 - EX-99.(J) 5 c40137_exh99j.txt [LOGO] ESTABLISHED 1923 ANCHIN, BLOCK & ANCHIN LLP Accountants and Consultants 1375 Broadway New York, New York 10018 (212) 840-3456 FAX (212) 840-7066 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the reference to our firm under the captions "Independent Registered Public Accounting Firm" in the Prospectus and "Counsel and Independent Registered Public Accounting Firm" in the Statement of Additional Information constituting part of The Lazard Funds, Inc., Lazard U.S. Small Cap Equity Growth Portfolio, Post-Effective Amendment No. 38 to the Registration Statement on Form N-1A. ANCHIN, BLOCK & ANCHIN LLP February 23, 2006 [GRAPHIC] e-mail: info@anchin.com www.anchin.com EX-99.(M)(1) 6 c40137_exh99m1.txt THE LAZARD FUNDS, INC. DISTRIBUTION AND SERVICING PLAN INTRODUCTION: It has been proposed that the above-captioned investment company (the "Fund") adopt a Distribution and Servicing Plan (the "Plan") relating to its Open Shares in accordance with Rule 12b-1, promulgated under the Investment Company Act of 1940, as amended (the "1940 Act"), with respect to each series of the Fund set forth on Exhibit A hereto, as such Exhibit may be revised from time to time (each, a "Portfolio"). Under the Plan, the Fund would pay the Fund's distributor (the "Distributor") for (a) advertising, marketing and distributing Open Shares of each Portfolio and (b) providing services to holders of Open Shares of each Portfolio. The Distributor would be permitted to pay third parties in respect of these services. If this proposal is to be implemented, the 1940 Act and said Rule 12b-1 require that a written plan describing all material aspects of the proposed financing be adopted by the Fund. The Fund's Board, in considering whether the Fund should implement a written plan, has requested and evaluated such information as it deemed necessary to an informed determination as to whether a written plan should be implemented and has considered such pertinent factors as it deemed necessary to form the basis for a decision to use assets attributable to each Portfolio's Open Shares for such purposes. In voting to approve the implementation of such a plan, the Board members have concluded, in the exercise of their reasonable business judgment and in light of their respective fiduciary duties, that there is a reasonable likelihood that the plan set forth below will benefit each Portfolio and holders of its Open Shares. THE PLAN: The material aspects of this Plan are as follows: 1. As to each Portfolio, the Fund shall pay to the Distributor a fee at the annual rate set forth opposite each Portfolio's name on Exhibit A hereto of the value of the relevant Portfolio's average daily net assets attributable to its Open Shares for (a) advertising, marketing and distributing such shares and (b) the provision of personal services to holders of Open Shares and/or the maintenance of such shareholder accounts. The Distributor may pay third parties a fee in respect of these services. The Distributor shall determine the amounts to be paid to third parties and the basis on which such payments will be made. Payments to third parties are subject to compliance by each such party with the terms of any related Plan agreement between it and the Distributor. 2. For the purpose of determining the fees payable under this Plan, the value of the net assets of a Portfolio's Open Shares shall be computed in the manner specified in the Fund's charter documents and registration statement for the computation of net asset value. 3. The Board shall be provided, at least quarterly, with a written report of all amounts expended with respect to each Portfolio pursuant to this Plan. The report shall state the purpose for which the amounts were expended. 4. As to each Portfolio, this Plan will become effective upon approval by a majority of the Board members, including a majority of the Board members who are not "interested persons" (as defined in the 1940 Act) of the Fund and have no direct or indirect financial interest in the operation of this Plan or in any agreements entered into in connection with this Plan, pursuant to a vote cast in person at a meeting called for the purpose of voting on the approval of this Plan. 5. As to each Portfolio, this Plan shall continue for a period of one year from its effective date, unless earlier terminated in accordance with its terms, and thereafter shall continue automatically for successive annual periods, provided such continuance is approved at least annually in the manner provided in paragraph 4 hereof. 6. As to each Portfolio, this Plan may be amended at any time by the Board, provided that (a) any amendment to increase materially the costs which a Portfolio may bear pursuant to this Plan shall be effective only upon approval by a vote of the holders of a majority of the Portfolio's outstanding Open Shares, and (b) any material amendments of the terms of this Plan shall become effective only upon approval as provided in paragraph 4 hereof. 7. As to each Portfolio, this Plan is terminable without penalty at any time by (a) vote of a majority of the Board members who are not "interested persons" (as defined in the 1940 Act) of the Fund and have no direct or indirect financial interest in the operation of this Plan or in any agreements entered into in connection with this Plan, or (b) vote of the holders of a majority of the Portfolio's outstanding Open Shares. Effective: July 23, 1996 EXHIBIT A Fee as a Percentage of Average Daily NAME OF PORTFOLIO NET ASSETS - ----------------- ------------- Lazard Emerging Markets Portfolio .25% Lazard Equity Portfolio .25% Lazard High Yield Portfolio .25% Lazard International Equity Portfolio .25% Lazard International Equity Select Portfolio .25% Lazard International Small Cap Portfolio .25% Lazard Mid Cap Portfolio .25% Lazard Small Cap Portfolio .25% Lazard U.S. Small Cap Equity Growth Portfolio .25% Lazard U.S. Strategic Equity Portfolio .25% Lazard U.S. Equity Value Portfolio .25% Lazard International Strategic Equity Portfolio .25% As Revised: February 7, 2006 EX-99.(M)(2) 7 c40137_exh99m2.txt THE LAZARD FUNDS, INC. SERVICING AGREEMENT Lazard Asset Management Securities LLC 30 Rockefeller Plaza New York, New York 10112 Ladies and Gentlemen: We wish to enter into this Agreement with you for distribution and/or certain other services with respect to shares (the "Shares") of the series of The Lazard Funds, Inc. (the "Fund") set forth on Schedule A attached hereto, as such Schedule may be revised from time to time (each, a "Series"), of which you are the principal underwriter as defined in the Investment Company Act of 1940, as amended (the "1940 Act"). The terms and conditions of this Agreement are as follows: 1. PROVISION OF SERVICES. We agree to provide reasonable assistance in connection with the sale of the Shares and/or to provide shareholder and administrative services for our clients who own Shares ("Clients") through accounts in the Series (as specified on Schedule B attached hereto; each, an "Account"). Such services are as specified on Schedule C attached hereto. 2. LIMITED AGENCY; OPERATIONAL PROCEDURES. (a) You hereby appoint us as the Fund's agent for the limited purpose of accepting Clients' purchase and redemption orders for Shares. Other than as specifically provided herein, nothing in this Agreement shall be construed to establish a joint venture between us or establish either of us as an agent, partner or employee of the other, nor shall anything in this Agreement be construed to establish us or the Fund as an agent, partner or employee of the other. (b) Client orders for the purchase or redemption of Shares through the Accounts shall be processed in accordance with the Operating Procedures specified on Schedule D attached hereto. (i) We represent that we have adopted, and will at all times during the term of this Agreement maintain, reasonable and appropriate procedures ("Late Trading Procedures") designed to ensure that any and all orders for the purchase, sale or exchange of Shares communicated by us to you or the Fund's transfer agent to be treated in accordance with Schedule D as having been received on a Business Day (as defined in Schedule D) have been received by us by the Close of Trading (as defined in Schedule D) on such Business Day and were not modified after the Close of Trading, and that all Share orders received from Clients but not rescinded by the Close of Trading were communicated to you or the Fund's transfer agent as received for that Business Day. (ii) Each transmission of Share orders by us shall constitute a representation by us that such orders are accurate and complete and are as received by us by the Close of Trading on the Business Day for which the order is to be priced and that such transmission includes all Share orders received from Clients but not rescinded by the Close of Trading. (iii) We will provide you with (A) a copy of our Late Trading Procedures and (B) such certifications and representations regarding our Late Trading Procedures as you may reasonably request. We will ensure the ability of appropriate regulatory authorities to obtain information and records relating to our Late Trading Procedures and the ability of you and the Fund or your agents to inspect our records and facilities regarding compliance with our Late Trading Procedures. We will notify you in writing of any material change in our Late Trading Procedures within 60 days of such change. 3. OFFERING OF SHARES. In no way shall the provisions of this Agreement limit your or the Fund's authority and discretion to take such action as you or it may deem appropriate or advisable, without notice, in connection with all matters relating to the operation of the Fund or any Series and the sale of Shares, including the right to suspend sales or withdraw the offering of Shares of one or more Series. You will advise us of any U.S. states and other U.S. jurisdictions where the Shares are not qualified for sale. 4. ADVERTISING MATERIALS AND SALES LITERATURE; FUND DOCUMENTATION. (a) We agree that neither we nor any of our employees or agents are authorized to make any statement or representation concerning the Shares except those contained (i) in the relevant Series' then-current prospectus and/or statement of additional information, as amended or supplemented (collectively, the "Prospectus"), copies of which will be supplied by you to us, or (ii) in such advertising material or sales literature as may be supplied by you or authorized by you in writing. We understand that any supplemental sales literature, if distributed, must be preceded or accompanied by the relevant Series' then-current prospectus. Advertising material and sales literature provided by you that are designated as being for broker-dealer use only may not be disseminated to the public. (b) You shall, as applicable, provide us upon request reasonably sufficient copies, at a single address, of: Prospectuses, proxy or information statements, shareholder reports and any other materials required to be delivered to record holders of Shares (collectively, "Fund Documentation"). Neither you nor the Fund shall be responsible for the cost of distributing such materials to Clients. (c) Each party will provide the other party with such information or documentation necessary for the other party to fulfill its obligations hereunder and such other information or documentation as each party may reasonably request, and each party is entitled to rely on any written records or instructions provided to it by the other party. 5. FEES. In consideration of the services described herein, we shall be entitled to receive from you fees at the annual rate and frequency set forth on Schedule A, paid based on the average daily net asset value of Clients' Shares held during relevant period (computed in the manner specified in the Fund's charter documents and Prospectus). Our acceptance of any fees for such services shall constitute our representation (which shall survive any payment of such fees and any termination of this Agreement and shall be reaffirmed at each acceptance) that our receipt of such fees is lawful. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS. The following representations, warranties and covenants are in addition to those made elsewhere in this Agreement. (a) Each party hereto hereby represents, warrants and covenants, as applicable, to the other party that: - 2 - (i) it will comply with all laws, rules and regulations of governmental authorities and regulatory agencies applicable to it by virtue of entering into and performing this Agreement; (ii) the execution, performance and delivery of this Agreement by it will not violate any of its contractual obligations or any applicable laws, rules and regulations of governmental authorities and regulatory agencies; (iii) it has full power and authority under applicable law, and has taken all necessary actions, to enter into and perform this Agreement; the person executing this Agreement on its behalf is duly authorized and empowered to execute and deliver this Agreement; and this Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms; and (iv) no consent or authorization of, filing with, or other act by or in respect of any governmental authority is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. (b) You hereby represent and warrant to us that: (i) you are duly registered as a broker-dealer pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (ii) the Fund is registered as an investment company under the 1940 Act and the Shares are registered under the Securities Act of 1933, as amended. (c) We hereby represent, warrant and covenant to you, as applicable, that: (i) if we are not registered as a broker-dealer pursuant to the Exchange Act, we are not required to be so registered in order to perform the services specified in this Agreement; (ii) if we are not registered as a transfer agent pursuant to the Exchange Act, we are not required to be so registered in order to perform the services specified in this Agreement; (iii) if we are required to be a member of the National Association of Securities Dealers, Inc. (the "NASD"), we are a member in good standing and will comply with the NASD's Conduct Rules, including any requirements as to suitability of Shares for Clients; (iv) we will not be a "fiduciary" with respect to the performance of this Agreement for any Plan, as such term is defined in Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"); (v) our receipt of fees under and the performance of the services specified in this Agreement will not constitute a non-exempt "prohibited transaction" as such term is defined in Section 406 of ERISA and Section 4975 of the Code; - 3 - (vi) we have full authority to act on behalf of Clients in the manner contemplated by this Agreement, and each time we so act we shall be deemed to have restated this representation and warranty; (vii) we will impose any applicable redemption fee as described in the Fund's prospectus; (viii) we will not enter into any arrangements, formal or informal, with any Client to permit or facilitate the use of market timing or excessive trading strategies, we have implemented reasonable procedures to monitor for such activities, and we will cooperate with your reasonable requests in taking steps to deter and to detect the use of market timing or excessive trading strategies by any Client, including providing identity information (solely for the purpose of deterring and detecting the use of market timing or excessive trading strategies by Clients) and other information you reasonably request; and (ix) we will maintain insurance coverage issued by a qualified insurance carrier appropriate in light of our duties under this Agreement. 7. CLIENT INFORMATION. (a) Each party agrees that it will comply with all applicable laws and regulations relating to consumer privacy ("Privacy Law") and that it is prohibited from using or disclosing any nonpublic personal information (as defined in Regulation S-P, or any similar term or terms as defined in other applicable Privacy Law, "Client Information") received from the other party other than (i) as required by law, regulation or rule; (ii) as permitted in writing by the disclosing party; (iii) to its affiliates; or (iv) as necessary to perform this Agreement or to service Clients, in each case in compliance with the reuse and redisclosure provisions of Privacy Law. Each party shall use its best efforts to (A) cause its employees and agents to be informed of and to agree to be bound by Privacy Law and the provisions of this Agreement and (B) maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of, Client Information. (b) We have adopted and implemented compliance policies and procedures to comply with all money laundering and currency transaction reporting laws, regulations, requirements and guidance applicable to the Fund or to us (if applicable, as record holder of Fund shares for which we maintain information regarding beneficial holders of Fund shares), including those relating to Client identification and verification; monitoring for Specially Designated Nationals and Blocked Persons named on the U.S. Treasury Department's Office of Foreign Assets Control list or other similar governmental lists; suspicious activity reporting; and recordkeeping requirements (collectively, "AML Requirements"), and with any "money laundering" guidelines as may be provided by you or the Fund or agreed with you and the Fund. We will ensure the ability of federal examiners to obtain information and records relating to AML Requirements and the ability of you and the Fund or your agents to inspect our records and facilities regarding compliance with AML Requirements. (c) We will provide you with such information, representations and certifications regarding compliance with AML Requirements as you may reasonably request. (d) We will notify you if any of our representations with respect to our compliance with AML Requirements ceases to be true. - 4 - 8. INDEMNIFICATION; ADJUSTMENTS. (a) You shall release, indemnify and hold harmless us and each of our affiliates, trustees, directors, members, officers, employees and agents from and against any and all losses, claims, damages, demands, actions, liabilities, costs and expenses (including reasonable attorneys' fees) ("Losses") arising out of or attributable to (i) any material misstatements in or omissions of material facts from any Prospectus, periodic report, or proxy statement of the Fund or any advertising material or sales literature supplied by you or the Fund or (ii) any breach by you of any representation, warranty or covenant made by you in this Agreement. (b) We shall release, indemnify and hold harmless you and the Fund and each of your or the Fund's affiliates, directors, members, officers, employees and agents (the "Lazard Indemnitees") from and against any and all Losses arising out of or attributable to (i) our bad faith, negligence or willful misconduct in the performance of our duties and obligations under this Agreement; (ii) any breach by us of any representation, warranty or covenant made by us in this Agreement; (iii) any statement or representation that we or our agents or employees make concerning the Fund that is inconsistent with the Prospectus or advertising material or sales literature supplied by you or authorized by you in writing; and (iv) any sale of the Shares outside of the U.S. or in any U.S. state or other U.S. jurisdiction where you have indicated to us that the Shares were not properly qualified for sale. (c) We agree not to seek a net asset value per Share of a Series as of a time other than the next calculated net asset value per Share following our receipt of a Client order ("As of Trade") or to cancel or change a previously placed Account order without the prior approval of the Fund. We acknowledge that the Fund shall have complete and sole discretion as to whether or not to accept an As of Trade or to make a cancellation or change. If an As of Trade is authorized by the Fund to be processed as of a particular Business Day (as defined in Schedule D), we hereby warrant that such trade relates only to Client orders received by us by the Close of Trading (as defined in Schedule D) on that Business Day. (d) In the event that we (i) with approval of the Fund, place an As of Trade other than to correct your or the Fund's error, (ii) place or adjust trades after the latest time for the placement of orders through the Fund/SERV service of the National Securities Clearing Corporation (the "NSCC") or, for manual transactions, the Order Deadline (as defined in Schedule D), or (iii) fail to settle trades in the manner described on Schedule D, we do hereby release, indemnify and hold harmless the Lazard Indemnitees from and against any and all Losses any of them may incur which arise out of or are attributable to such actions. (e) We understand that, in accordance with established Fund procedures for correction of errors in the computation of the net asset value of Shares, the Fund or its agent will make adjustments to the number of Shares owned in the Accounts and distribute underpayments to us for credit to the Accounts. If we, on behalf of Clients, receive amounts in excess of the amounts to which we otherwise would have been entitled in the absence of any error in the computation of the net asset value of Shares or otherwise as a result of an error of the Fund or its agent, we will use best efforts to collect such amounts from Clients. If, after such efforts, we are not able to recover all of such overpayment, we will cooperate with your or the Fund's attempt to recover any portion of the overpayment, including providing you or the Fund with information reasonably available to us as to the identity of the Client(s) from whom the remainder has not been recovered. (f) In no event shall either party be liable for special, consequential or incidental damages. - 5 - 9. NON-EXCLUSIVITY. You and we acknowledge and agree that this Agreement and the arrangements described herein are intended to be non-exclusive and that each of us may enter into similar agreements and arrangements with other entities. 10. TERM. (a) We acknowledge that this Agreement shall become effective as of the date indicated by you below. We understand that if our compensation is subject (as indicated on Schedule A) to the Fund's plan adopted pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plan"), as to each Series, this Agreement: (i) shall continue until the last day of the calendar year of execution and thereafter shall continue automatically for successive annual periods ending on the last day of each calendar year, provided such continuance is approved at least annually by a vote of a majority of the Fund's Board and the Board members who are not "interested persons" (as defined in the 1940 Act) of the Fund and have no direct or indirect financial interest in the operation of the 12b-1 Plan or any agreement related to the 12b-1 Plan ("Independent Board Members"), cast in person for the purpose of voting on such approval; (ii) is terminable without penalty, at any time, by vote of a majority of the Independent Board Members; (iii) is terminable on not more than 60 days' written notice by vote of holders of a majority of the Series' outstanding voting securities (as defined in the 1940 Act); and (iv) is terminable upon 15 days' notice by you. If our compensation is not subject to a 12b-1 Plan, either party may terminate this Agreement on 15 days' notice to the other party. (b) You shall have the right to terminate this Agreement, without prior notice, if: (i) we or any of our registered principals become the subject of any investigation or disciplinary action by any governmental, regulatory or judicial authority that has resulted, or for which it appears reasonably likely will result, in the loss or suspension of any required registration, membership or license; (ii) our ability to perform our obligations under this Agreement has become or is reasonably likely to become impaired; (iii) we otherwise breach any of the representations, warranties or covenants set forth in this Agreement; (iv) we fail to perform the services contemplated by this Agreement; or (v) if our compensation is subject to the 12b-1 Plan, if the 12b-1 Plan is terminated by the Fund's Board, or the 12b-1 Plan, or any part thereof, is found invalid or is ordered terminated by any regulatory or judicial authority. (c) This Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). 11. COMPLETE AGREEMENT; AMENDMENT. (a) This Agreement and the Schedules hereto (which are incorporated by reference) contain the full and complete understanding between the parties with respect to the matters covered and contemplated hereunder and supersede all prior agreements or understandings between the parties relating to the subject matter hereof, whether oral or written, express or implied. (b) No modification or waiver of any provisions of this Agreement will be binding unless in writing and executed by the party to be bound thereby, except that, notwithstanding anything in this Agreement to the contrary, our placement of an order to purchase Shares subsequent to our receipt of written notice of amendment of Schedule A by you shall constitute our agreement to the amendment. 12. NOTICES. All communications to you shall be sent to you at the address set forth above, attention: Lazard Asset Management LLC, Director, Legal Affairs. Any notice to us shall be duly given if delivered (via hand delivery, commercial courier service or certified mail) or sent by confirmed facsimile to us at the address or number set forth below. - 6 - 13. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of New York, without giving effect to conflict of laws principles. 14. SURVIVAL. The provisions of sections 7, 8 and 14 (and any other provisions expressly stating their survival) will survive the termination of the Agreement. Very truly yours, Date: By: ------------------------------ ---------------------------------- Name: Title: PLEASE RETURN TWO SIGNED COPIES OF THIS AGREEMENT TO LAZARD ASSET MANAGEMENT SECURITIES LLC. UPON ACCEPTANCE, ONE COUNTERSIGNED COPY WILL BE RETURNED FOR YOUR FILES. Accepted: LAZARD ASSET MANAGEMENT SECURITIES LLC Date: By: ------------------------------ ---------------------------------- Name: Title: - 7 - SCHEDULE A OPEN SHARES Annual Percentage RATE NAME OF SERIES CUSIP (PAID MONTHLY)* - -------------- ----- --------------- Lazard Emerging Markets Portfolio 52106N764 % Lazard Equity Portfolio 52106N848 Lazard High Yield Portfolio 52106N681 Lazard International Equity Portfolio 52106N830 Lazard International Equity Select Portfolio 52106N657 Lazard International Small Cap Portfolio 52106N772 Lazard Mid Cap Portfolio 52106N715 Lazard Small Cap Portfolio 52106N780 Lazard U.S. Small Cap Equity Growth Portfolio 52106N566 Lazard U.S. Strategic Equity Portfolio 52106N632 Lazard U.S. Equity Value Portfolio 52106N574 Lazard International Strategic Equity Portfolio 52106N582 - ---------- * The Fund pays 0.25% pursuant to the 12b-1 Plan, and the remainder is paid by Lazard Asset Management Securities LLC or its affiliates. Payment is subject to continued effectiveness of the 12b-1 Plan. We understand that the Fund's Board will review, at least quarterly, a written report of the amounts expended pursuant to this Agreement and the purposes for which such expenditures were made. In connection with such reviews, we will furnish you or your designees with such information or reports as you or they may reasonably request, which reports shall be accurate and complete. INSTITUTIONAL SHARES Annual Percentage Rate NAME OF SERIES * CUSIP (PAID QUARTERLY) - ---------------- ----- ---------------- Lazard Emerging Markets Portfolio 52106N889 % Lazard Equity Portfolio 52106N608 Lazard High Yield Portfolio 52106N699 Lazard International Equity Portfolio 52106N400 Lazard International Equity Select Portfolio 52106N665 Lazard International Small Cap Portfolio 52106N806 Lazard Mid Cap Portfolio 52106N723 Lazard Small Cap Portfolio 52106N509 Lazard U.S. Small Cap Equity Growth Portfolio 52106N590 Lazard U.S. Strategic Equity Portfolio 52106N624 Lazard U.S. Equity Value Portfolio 52106N616 Lazard International Strategic Equity Portfolio 52106N590 SCHEDULE B OMNIBUS ACCOUNTS o We will maintain sub-accounts for each Client through one or more omnibus or master Accounts in each Series. o We will perform all sub-accounting for Clients investing in Shares through the Accounts. o We will be responsible for all administration and maintenance of our Clients' investments in Shares through the Accounts. o We will provide to you, by the tenth day of each calendar quarter, (a) a report which indicates the number of Clients holding Shares of a Series through each Account as of the last day of the prior month and (b) such other information as you or your designee may reasonably request. SCHEDULE B NETWORKING o Each party (a) represents that it has executed the NSCC's standard Networking Agreement (the "Networking Agreement") and (b) agrees to perform all duties assigned to it by the NSCC and to conduct its activities in accordance with the rules, regulations, policies and procedures of the NSCC, as applicable. o The terms of the Networking Agreement shall be incorporated by reference herein. The term "Firm" as used in the Networking Agreement shall refer to us, and the term "Fund Agent" as used in the Networking Agreement shall refer to you. o Each party agrees that its responsibilities with respect to accounts maintained through Networking shall be allocated in accordance with the Matrix Level agreed between the parties. SCHEDULE C SERVICES We shall be responsible for the following, unless an item is the responsibility of you or the Fund pursuant to the relevant Matrix Level for Accounts maintained through Networking: 1. establishing and maintaining the Accounts; 2. accepting orders for the purchase and redemption of Shares and transmitting such orders to you; 3. tracking, collecting from Clients and remitting to you any applicable redemption fee to be deducted from Clients' Share redemption proceeds in accordance with the Prospectus; 4. disbursing dividends and distributions to Clients and/or arranging for reinvestment in Shares; 5. delivering Fund Documentation to Clients and prospective Clients as required by applicable law; 6. providing Clients with a schedule of services and any fees that we may charge Clients directly for such services; 7. maintaining a record of each Client's name, address (including zip code) and taxpayer identification number; the time, date and price for all Share transactions; and the number of Shares held by such Client; 8. preparing, filing and transmitting all federal, state and local government returns and reports as required by law; 9. providing the Fund or its designee with Account registration and other information and updates to such information, including addresses, tax identification numbers, tax withholding information and the selection of Account options and privileges (registration information must be received prior to any trade activity and the Fund may reject any form of pending registration); 10. monitoring and maintaining Client accounts, including verifying account information and documentation and delivering confirmations in compliance with Rule 10b-10 under the Exchange Act; 11. as required by law, preparing and transmitting to Clients periodic account statements showing, among other appropriate information, the total number of Shares owned and the net asset value of Shares as of the statement closing date, purchases and redemptions of Shares during the period and other distributions during the statement period (whether paid in cash or reinvested); 12. making our employees available during normal business hours to consult with you or your designees concerning the performance of our responsibilities under this Agreement; and 13. maintaining all other records as required by law. We also shall perform some or all of the following services: 1. marketing, advertising and distributing Shares in accordance with this Agreement; 2. answering Client inquiries about the Fund; 3. assisting Clients in changing dividend options and other account designations and addresses; 4. integrating Client statements with those of other transactions and balances in Clients' other accounts serviced by us; 5. arranging for bank wires; and 6. providing such other information and services as the Fund reasonably may request, to the extent we are permitted by applicable law, rule or regulation. SCHEDULE D OPERATING PROCEDURES GENERAL o Orders that we receive from Clients by the close of regular trading (the "Close of Trading") on the New York Stock Exchange (the "NYSE") (usually 4:00 p.m., Eastern time) on each day on which a Series calculates its net asset value (as described in the Prospectus, a "Business Day") shall be treated by you and us as though received on that Business Day. Orders that we receive after the Close of Trading shall be treated by you and us as though received on the next Business Day. All orders are subject to acceptance or rejection in the sole discretion of you and/or the Fund or its agent, and orders shall be effective only upon receipt in proper form. o You will use commercially reasonable efforts to make available to us each Series' net asset value per share on each Business Day as soon as reasonable practicable after calculation--usually 6:30 p.m., Eastern time. o The Fund or its agent will furnish notice of the declaration of any dividends or distributions payable by the Fund's Series. This information will include the record and payable dates. o Dividends and distributions will be automatically reinvested at net asset value in accordance with the Prospectus unless otherwise instructed by us. FOR TRANSACTIONS THROUGH THE NSCC'S FUND/SERV SERVICE o Each party (a) represents that it has entered into a membership agreement with the NSCC and it is eligible to participate in the NSCC's Fund/SERV system and (b) agrees to perform all duties assigned to it by the NSCC and to conduct its activities in accordance with the rules, regulations, policies and procedures of the NSCC, as applicable. o We shall use our best efforts to transmit all Account transactions through Fund/SERV by 8:00 p.m., Eastern time each Business Day or, if we are using the Defined Contribution Clearing Service of the NSCC ("DCCS") and use the settlement override indicator, 6:00 a.m. on the next Business Day ("T+1"). If we fail to transmit such transactions through Fund/SERV by 12:00 a.m., Eastern time on T+1, or, if we are using DCCS and use the settlement override indicator, by 6:00 a.m. on T+1, we shall notify you by 9:00 a.m., Eastern time on T+1 of such failure. FOR MANUAL TRANSACTIONS Unless processed using the NSCC's Fund/SERV interfaces in the customary manner as prescribed by the NSCC, operational responsibilities will be executed as follows: o For trades placed on T+1 for investment at the prior Business Day's net asset value: (a) Trade orders for the Accounts must be communicated to you by us prior to 9:00 a.m., Eastern time on T+1 (the "Order Deadline") in the manner agreed between the parties; (b) We will wire, or arrange for the wire of, the purchase price of each purchase order to the Funds' custodian (the "Custodian") as you shall direct in writing so that either (i) such funds are received by the Custodian prior to 11:30 a.m., Eastern time on T+1, or (ii) we provide you or your designee a federal funds wire system reference number prior to 11:30 a.m., Eastern time on T+1 evidencing the entry of the wire transfer of the purchase price prior to such time; and (c) You or your designee shall transmit by wire the proceeds of net redemption orders placed by the Order Deadline by us to the appropriate custodial account. o You will make available confirmations of each executed trade the next Business Day following receipt of the trade from us. We shall promptly inform you of any discrepancies. o You will make Account statements available no less frequently than each calendar quarter. EX-99.(N) 8 c40137_exh99n.txt THE LAZARD FUNDS, INC. RULE 18F-3 PLAN Rule 18f-3 under the Investment Company Act of 1940, as amended (the "1940 Act"), requires that the Board of an investment company desiring to offer multiple classes pursuant to said Rule adopt a plan setting forth the separate arrangement and expense allocation of each class, and any related conversion features or exchange privileges. The Board of Directors (the "Board") of The Lazard Funds, Inc. (the "Fund"), including a majority of the Board members who are not "interested persons" (as defined in the 1940 Act), which desires to offer multiple classes with respect to each series of the Fund listed on Schedule A attached hereto, as such Schedule may be revised from time to time, has determined that the following plan is in the best interests of each class individually and the Fund as a whole: 1. CLASS DESIGNATION: Fund shares shall be divided into Institutional Shares and Open Shares. 2. DIFFERENCES IN SERVICES: The services offered to shareholders of each Class shall be substantially the same, except for certain services provided to Open Shares pursuant to a Distribution and Servicing Plan. 3. DIFFERENCES IN DISTRIBUTION ARRANGEMENTS: Institutional Shares and Open Shares shall be offered at net asset value. Neither Class shall be subject to any front-end or contingent sales charges. Open Shares shall be subject to an annual distribution and servicing fee at the rate of .25% of the value of the average daily net assets of the Open Class pursuant to a Distribution and Servicing Plan adopted in accordance with Rule 12b-1 under the 1940 Act. 4. EXPENSE ALLOCATION. The following expenses shall be allocated, to the extent practicable, on a Class-by-Class basis: (a) fees under the Distribution and Servicing Plan; (b) transfer agent fees identified by the Fund's transfer agent as being attributable to a specific Class; (c) litigation or other legal expenses relating solely to a specific Class; and (d) fees and expenses of an administration that are identified and approved by the Board as being attributable to a specific Class. Dated: July 23, 1996 SCHEDULE A NAME OF PORTFOLIO - ----------------- Lazard Emerging Markets Portfolio Lazard Equity Portfolio Lazard High Yield Portfolio Lazard International Equity Portfolio Lazard International Equity Select Portfolio Lazard International Small Cap Portfolio Lazard International Strategic Equity Portfolio Lazard Mid Cap Portfolio Lazard Small Cap Portfolio Lazard U.S. Small Cap Equity Growth Portfolio Lazard U.S. Equity Value Portfolio Lazard U.S. Strategic Equity Portfolio As Revised: February 7, 2006 A-1 EX-99.(P) 9 c40137_exh99p.txt CODE OF ETHICS AND PERSONAL INVESTMENT POLICY FOR LAZARD ASSET MANAGEMENT LLC LAZARD ASSET MANAGEMENT SECURITIES LLC LAZARD ASSET MANAGEMENT (CANADA) INC. LAZARD ALTERNATIVES LLC AND CERTAIN REGISTERED INVESTMENT COMPANIES Lazard Asset Management LLC, Lazard Asset Management Securities LLC, Lazard Asset Management (Canada) Inc., Lazard Alternatives LLC (collectively "LAM"), and those U.S.-registered investment companies advised or managed by LAM that have adopted this policy ("Funds"), have adopted this policy in order to accomplish two primary goals: FIRST, to minimize conflicts and potential conflicts of interest between LAM employees and LAM's clients (including the Funds and shareholders of the Funds), and between Fund directors or trustees ("Directors") and their Funds, and SECOND, to provide policies and procedures consistent with applicable law, including Rule 204-2 under the Investment Advisers Act of 1940 (the "Advisers Act") and Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act"), to prevent fraudulent or manipulative practices with respect to purchases or sales of securities held or to be acquired by client accounts. In addition, it is LAM's policy that LAM employees should not be engaging in short-term investing, including so-called market timing of any mutual funds, whether or not managed by LAM. This Policy therefore prohibits certain short-term trading activity by LAM employees. ALL EMPLOYEES OF LAM, INCLUDING EMPLOYEES WHO SERVE AS FUND OFFICERS OR DIRECTORS, ARE "COVERED PERSONS" UNDER THIS POLICY AND ARE REQUIRED TO COMPLY WITH ALL APPLICABLE FEDERAL SECURITIES LAWS. Additionally, all Directors are subject to this policy as indicated below. I. STATEMENT OF PRINCIPLES. All Covered Persons owe a fiduciary duty to LAM's clients when conducting their personal investment transactions. Covered Persons must place the interest of clients first and avoid activities, interests and relationships that might interfere with the duty to make decisions in the best interests of the clients. All Directors owe a fiduciary duty to each Fund of which they are a director and to that Fund's shareholders when conducting their personal investment transactions. At all times and in all matters Directors shall place the interests of their Funds before their personal interests. The fundamental standard to be followed in personal securities transactions is that Covered Persons and Directors may not take inappropriate advantage of their positions. Covered Persons are reminded that they also are subject to other policies of LAM, including policies on insider trading, and the receipt of gifts and service as a director of a publicly traded company. COVERED PERSONS MUST NEVER TRADE IN A SECURITY WHILE IN POSSESSION OF MATERIAL, NON-PUBLIC INFORMATION ABOUT THE ISSUER OR THE MARKET FOR THOSE SECURITIES, EVEN IF THE COVERED PERSON HAS SATISFIED ALL OTHER REQUIREMENTS OF THIS POLICY. LAM's Chief Executive Officer has appointed the Chief Compliance Officer as the person who shall be responsible for the implementation of this Code of Ethics and Personal Investment Policy and all record-keeping functions mandated hereunder, including the review of all initial and annual holding reports as well as the quarterly transactions reports described below. The Chief Compliance Officer may delegate this function to others in the Legal and Compliance 1 Revised: February 2006 Department, and shall promptly report to LAM's General Counsel or the Chief Executive Officer all material violations of, or deviations from, this policy. II. PERSONAL SECURITIES ACCOUNTS. For purposes of this Policy, "PERSONAL SECURITIES ACCOUNTS" INCLUDE: 1. Any account in or through which securities (including open end mutual funds) can be purchased or sold, which includes, but is not limited to, a brokerage account, 401k account, or variable annuity or variable life insurance policy; 2. Accounts in the Covered Person's or Director's name or accounts in which the Covered Person or Director has a direct or indirect beneficial interest (a definition of Beneficial Ownership is included in Exhibit A); 3. Accounts in the name of the Covered Person's or Director's spouse; 4. Accounts in the name of children under the age of 18, whether or not living with the Covered Person or Director, and accounts in the name of relatives or other individuals living with the Covered Person or Director or for whose support the Covered Person or Director is wholly or partially responsible (together with the Covered Person's or Director's spouse and minor children, "Related Persons"); (1) 5. Accounts in which the Covered Person or Director or any Related Person directly or indirectly controls, participates in, or has the right to control or participate in, investment decisions. For purposes of this Policy, PERSONAL SECURITIES ACCOUNTS DO NOT INCLUDE: 1. Estate or trust accounts in which a Covered Person, Director, or Related Person has a beneficial interest, but no power to affect investment decisions. There must be no communication between the account(s) and the Covered Person, Director or Related Person with regard to investment decisions prior to execution; 2. Fully discretionary accounts managed by LAM or another registered investment adviser are permitted if, (i) for Covered Persons and Related Persons, the Covered Persons receives permission from the Legal and Compliance Department, and (ii) for all persons covered by this Code, there is no communication between the adviser to the account and such person with regard to investment decisions prior to execution. Covered Persons with managed accounts must designate that copies of trade confirmations and monthly statements be sent to the Legal and Compliance Department; 3. Direct investment programs, which allow the purchase of securities directly from the issuer without the intermediation of a broker/dealer, provided that the timing and size of the purchases are established by a pre-arranged, regularized schedule (e.g., dividend reinvestment plans). Covered Persons must pre-clear the transaction at the time that the dividend reinvestment plan is being set up. Covered Persons also must provide documentation of these arrangements and direct periodic (monthly or quarterly) statements to the Legal and Compliance Department; 4. 401k and similar retirement accounts that permit the participant to change their investments no more frequently than once per quarter. Such accounts that allow - ---------- (1) Unless otherwise indicated, all provisions of this Code apply to Related Persons. 2 Revised: February 2006 participants to trade more frequently (such as, for example, an "Individually Directed Account"), are Personal Securities Accounts for purposes of this Code. 5. Other accounts over which the Covered Person or Director has no direct or indirect influence or control; 6. Qualified state tuition programs (also known as "529 Programs") where investment options and frequency of transactions are limited by state or federal laws. III. OPENING AND MAINTAINING EMPLOYEE ACCOUNTS. All Covered Persons and their Related Persons must maintain their Personal Securities Accounts at Lazard Capital Markets LLC ("LCM"). If your account is a mutual fund only account, you do not need to maintain it at LCM. Additionally, if LCM does not offer a particular investment product or service, or for Related Persons who, by reason of their employment, are required to conduct their securities transactions in a manner inconsistent with this policy, or in other exceptional circumstances, Covered Persons may submit a request for exemption to the Legal and Compliance Department. FOR ANY PERSONAL SECURITIES ACCOUNT NOT MAINTAINED AT LCM COVERED PERSONS AND THEIR RELATED PERSONS MUST ARRANGE TO HAVE DUPLICATE COPIES OF TRADE CONFIRMATIONS AND STATEMENTS PROVIDED TO THE LEGAL AND COMPLIANCE DEPARTMENT AT THE FOLLOWING ADDRESS: LAZARD ASSET MANAGEMENT LLC, ATTN: CHIEF COMPLIANCE OFFICER, 30 ROCKEFELLER PLAZA, 59TH FLOOR, NEW YORK, NY 10112. All other provisions of this policy will continue to apply to any Personal Securities Account not maintained at LCM. IV. SECURITIES. For purposes of this Policy, "SECURITY" INCLUDES, in general, any interest or instrument commonly known as a security including the following: 1. stocks 2. bonds 3. shares of open and closed-end funds (including exchange-traded funds) and unit investment trusts 4. hedge funds 5. private equity funds 6. limited partnerships 7. private placements or unlisted securities 8. debentures, and other evidences of indebtedness, including senior debt, subordinated debt 9. investment, commodity or futures contracts 10. all derivative instruments such as options, warrants and indexed instruments "SECURITY" also includes securities that are "related" to a security being purchased or sold by a LAM client. A "RELATED SECURITY" is one whose value is derived from the value of another security (e.g., a warrant, option, or an indexed instrument). For purposes of this Policy, SECURITY DOES NOT INCLUDE: 1. money market mutual funds 2. U.S. Treasury obligations 3. mortgage pass-throughs (e.g., Ginnie Maes) that are direct obligations of the U.S. government 4. bankers' acceptances 5. bank certificates of deposit 6. commercial paper 7. high quality short-term debt instruments (meaning any instrument that has a maturity at issuance of less than 366 days and that is rated in one of the two 3 Revised: February 2006 highest rating categories by a nationally recognized statistical rating organization, such as S&P or Moody's), including repurchase agreements. V. RESTRICTIONS. The following restrictions apply to trading for Personal Securities Accounts of Covered Persons and Related Persons: 1. CONFLICTS WITH CLIENT ACTIVITY. No security, excluding open end mutual funds, may be purchased or sold in any Personal Securities Account seven (7) calendar days before or after a LAM client account trades in the same security. 2. 60 DAY HOLDING PERIOD. Securities transactions, including transactions in mutual funds other than money-market mutual funds, must be for investment purposes rather than for speculation. Consequently, Covered Persons or their Related Persons may not profit from the purchase and sale, or sale and purchase, of the same or equivalent securities within sixty (60) calendar days (i.e., the security may be purchased or sold on the 61st day), calculated on a First In, First Out (FIFO) basis. All profits from short-term trades are subject to disgorgement. However, with the prior written approval of the Chief Compliance Officer, or in his absence another senior member of the Legal and Compliance Department, and only in the case of hardship, or other rare and/or unusual circumstances, a Covered Person or a Related Person may execute a short-term trade that results in a loss or in break-even status. Notwithstanding the above, the 60-day holding period will not apply (although the obligation to pre-clear trades will apply) to shares of exchange traded funds, options on exchange traded funds and open-end mutual funds that seek to track the performance of U.S. broad-based large-capitalization indices (i.e., the QQQ or an S&P 500 Index fund). Nevertheless, short-term trading in shares of these funds is discouraged. If a pattern of frequent trading is detected, the Legal and Compliance Department may reject any order to buy or sell these shares. 3. INITIAL PUBLIC OFFERINGS (IPOS). No transaction for a Personal Securities Account may be made in securities offered pursuant to an initial public offering. 4. PRIVATE PLACEMENTS. Securities offered pursuant to a private placement (e.g., hedge funds, private equity funds or any other pooled investment vehicle the interests or shares of which are offered in a private placement) may not be purchased or sold by a Covered Person without the prior approval of LAM's Chief Executive Officer and the Chief Compliance Officer; however, purchases or sales of Lazard sponsored hedge funds DO NOT require such approval. The Alternative Investments Operations Department instead -- --- provides the Legal and Compliance Department on at least a quarterly basis with a report for their review of all Covered Persons' investments in Lazard sponsored hedge funds. In connection with any decision to approve such a private placement, the Legal and Compliance Department will prepare a report of the decision that explains the reasoning for the decision and an analysis of any potential conflict of interest. Any Covered Person receiving approval to acquire securities in a private placement must disclose that investment when the Covered Person participates in a LAM client's subsequent consideration of an investment in such issuer and any decision by or made on behalf of the LAM client to invest in such issuer will be subject to an independent review by investment personnel of LAM with no personal interest in the issuer. 5. HEDGE FUNDS. Hedge funds are sold on a private placement basis and as noted above, with the exception of Lazard sponsored hedge funds, are subject to prior approval by LAM's Chief Executive Officer and Chief Compliance Officer. In considering whether or not to approve an investment in a hedge fund, the Chief Compliance Officer or his designee, will review a copy of the fund's offering memorandum, subscription documents and other governing documents ("Offering Documents") in order to ensure that the proposed 4 Revised: February 2006 investment is being made on the same terms generally available to all other investors in the hedge fund. The Chief Compliance Officer may grant exceptions to this general rule under certain circumstances. For example, such as when a family relationship exists between the Covered Person and the hedge fund manager. Upon receipt of a request by a Covered Person to invest in a hedge fund, the Legal and Compliance Department will contact the Fund of Funds Group (the "Team") and identify the fund in which the Covered Person has requested permission to invest. The Team will advise the Legal and Compliance Department if the fund is on the Team's approved list or if the Team is otherwise interested in investing clients assets in the fund. If the fund is not on the Team's approved list and the Team is not interested in investing in the fund, the Chief Compliance Officer and the Chief Executive Officer will generally approve the Covered Person's investment, unless other considerations warrant disapproving the investment. If the fund is on the approved list or the Team may be interested in investing in the fund, then the Legal and Compliance Department will determine whether the fund is subject to capacity constraints. If the fund is subject to capacity constraints, then the Covered Person's request will be denied and priority will be given to the Team to invest client assets in the fund. If the fund is not subject to capacity constraints, then the Covered Person will generally be permitted to invest along with the Team. If the fund is on the approved list or the Team may be interested in investing in the fund, then the Covered Person's investment must be made generally on the same terms available to all investors as set forth in the fund's Offering Documents. 6. SPECULATIVE TRADING. Absent approval from the appropriate compliance personnel, Covered Persons are prohibited from engaging in the trading of options or futures and from engaging in speculative trading, as opposed to investment activity. The Covered Person must wait 60 days from the date of the opening transaction before effecting the closing transaction. 7. SHORT SALES. Covered Persons are prohibited from engaging in short sales of any security. However, provided the investment is otherwise permitted under this Policy and has received all necessary approvals, an investment in a hedge fund that engages in short selling is permitted. 8. INSIDE INFORMATION. No transaction may be made in violation of the Material Non-Public Information Policies and Procedures ("Inside Information") as outlined in Section XXVII of the LAM Compliance Manual; and 9. DIRECTORSHIPS. Covered Persons may not serve on the board of directors of any corporation (other than a not-for-profit corporation or a related Lazard entity) without the prior approval of LAM's Chief Compliance Officer or General Counsel. 10. CONTROL OF ISSUER. Covered Persons and Related Persons may not acquire any security, directly or indirectly, for purposes of obtaining control of the issuer. VI. PROHIBITED RECOMMENDATIONS. No Covered Person shall recommend or execute any securities transaction for any client account, or, in the case of a Director, for the Director's Fund, without having disclosed, in writing, to the Chief Compliance Officer, or in his absence another senior member of the Legal and Compliance Department, any direct or indirect interest in such securities or issuers (including any such interest held by a Related Person). Prior written approval of such recommendation or execution also must be received from the Chief Compliance Officer, or in his absence another senior member of the Legal and Compliance Department. The interest in personal accounts could be in the form of: 1. Any direct or indirect beneficial ownership of any securities of such issuer; 5 Revised: February 2006 2. Any contemplated transaction by the person in such securities; 3. Any position with such issuer or its affiliates; or 4. Any present or proposed business relationship between such issuer or its affiliates and the person or any party in which such person has a significant interest. VII. TRANSACTION APPROVAL PROCEDURES. All transactions by Covered Persons (including Related Persons) in Personal Securities Accounts must receive prior approval as described below. To pre-clear a transaction, Covered Persons must: 1. Electronically complete and "sign" a "New Equity Order", "New Bond Order" or "New Mutual Fund Order" trade ticket located in the Firm's Lotus-Notes e-mail application under the heading "Employee Trades." 2. The ticket is then automatically transmitted to the Legal and Compliance Department where it will be processed. If approved, the Legal and Compliance Department will route mutual fund orders directly to Securities Processing and will route equity and bond orders directly to the trading desk for execution, provided the employee selected the "Direct Execution" option when completing the equity or bond order ticket. For any account not maintained at LCM, the ticket will be returned to the employee. NOTE: IN COMPLETING AN EQUITY OR BOND ORDER TICKET, IF THE EMPLOYEE DOES NOT SELECT THE "DIRECT EXECUTION" BUTTON, THE TICKET WILL BE RETURNED TO HER/HIM AFTER COMPLIANCE APPROVAL FOR SUBMISSION TO THE TRADING DESK, OR IN THE CASE OF AN ACCOUNT NOT MAINTAINED AT LCM, TO THE LEGAL AND COMPLIANCE DEPARTMENT TO INDICATE THAT THE TRADE WILL BE EXECUTED. IN SUCH CASE, THE TRADE MUST BE SUBMITTED WITHIN 2 BUSINESS DAYS OR IT WILL EXPIRE AND BE NULL AND VOID. The Legal and Compliance Department endeavors to preclear transactions promptly; however, transactions may not always be approved on the day in which they are received. Certain factors such as time of day the order is submitted or length of time it takes a LAM portfolio manager to confirm there is no client activity, all play a role in the length of time it takes to preclear a transaction. Mutual Fund Orders that are not received by the Legal and Compliance Department by 2:00 p.m. on any business day will most likely not be processed until the next business day (i.e., the order will not receive that business days' net asset value for the relevant mutual fund). VIII. ACKNOWLEDGMENT AND REPORTING. 1. INITIAL CERTIFICATION. Within 10 days of becoming a Covered Person or Director, such Covered Person or Director must submit to the Legal and Compliance Department an acknowledgement that they have received a copy of this policy, and that they have read and understood its provisions. See Exhibit B for the form of Acknowledgement. 2. INITIAL HOLDINGS REPORT. Within 10 days of becoming a Covered Person, all LAM personnel must submit to the Legal and Compliance Department a statement of all securities in which such Covered Person has any direct or indirect beneficial ownership. This statement must include (i) the title, number of shares and principal amount of each security, (ii) the name of any broker, dealer, insurance company, mutual fund or bank with whom the Covered Person maintained an account in which any securities were held for the direct or indirect benefit of such Covered Person and (iii) the date of submission by the Covered Person. The information provided in this statement must be current as of a date no more than 45 days prior to the Covered Person's date of employment at LAM. Such information should be provided on the form attached as Exhibit B. 6 Revised: February 2006 3. QUARTERLY REPORT. Within 30 days after the end of each calendar quarter, provide information to the Legal and Compliance Department relating to securities transactions executed during the previous quarter for all securities accounts. 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 or she has any direct or indirect beneficial ownership in the security to which the report relates. NOTE: COVERED PERSONS SATISFY THIS REQUIREMENT BY HOLDING THEIR PERSONAL SECURITIES ACCOUNTS AT LCM. 4. ANNUAL REPORT. Each Covered Person shall submit an annual report to the Legal and Compliance Department showing as of a date no more than 45 days before the report is submitted (1) all holdings in securities in which the person had any direct or indirect beneficial ownership and (2) the name of any broker, dealer, insurance company, mutual fund or bank with whom the person maintains an account in which any securities are held for the direct or indirect benefit of the Covered Person or Related Persons. NOTE: COVERED PERSONS SATISFY THIS REQUIREMENT BY CERTIFYING ANNUALLY THAT ALL TRANSACTIONS DURING THE YEAR WERE EXECUTED IN INTERNAL ACCOUNTS OR OUTSIDE ACCOUNTS FOR WHICH THE LEGAL AND COMPLIANCE DEPARTMENT RECEIVES CONFIRMATIONS AND PERIODIC STATEMENTS. 5. ANNUAL CERTIFICATION. All Covered Persons and Directors are required to certify annually that they have (i) read and understand this policy and recognize that they are subject to its terms and conditions, (ii) complied with the requirements of this policy and (iii) disclosed or reported all personal securities accounts and transactions required to be disclosed or reported pursuant to this Code of Ethics and Personal Investment Policy. IX. FUND DIRECTORS. A Director who is not an "interested person" of the Fund within the meaning of Section 2(a)(19) of the 1940 Act, and who would be required to make reports solely by reason of being a Director, is required to make the quarterly transactions reports required by Section VIII (3.) as to any security if at the time of a transaction by the Director in that security, he/she knew, or in the ordinary course of fulfilling his/her official duties as a Fund Director, should have known that during the 15-day period immediately preceding or following the date of that transaction, that security was purchased or sold by that Director's Fund or was being considered for purchase or sale by that Director's Fund. If a Director introduces a hedge fund to the Team, as previously defined in Section V (5.), the Director is required to inform the Team whether the Director or an affiliated person of the Director has invested in the fund and the terms of such investment. If a Director decides to invest in a hedge fund that he knew or, in the ordinary course of fulfilling his responsibilities as a Director should have known that the hedge fund is held by or is being considered for purchase or sale by the Team, the Director is required, before making the investment, to disclose this to the Team and any different terms or rights that have been granted to the Director. If a Director learns, in the ordinary course of fulfilling his responsibilities as a Director, that the Team has invested in a fund in which the Director has an investment, the Director should advise the Chief Compliance Officer of such investment. X. EXEMPTIONS. 1. Purchases or sales of securities which receive the prior approval of the Chief Compliance Officer, or in his absence another senior member of the Legal and Compliance Department, may be exempted from certain restrictions if such purchases or sales are determined to be unlikely to have any material negative economic impact on any client account managed or advised by LAM. 7 Revised: February 2006 2. Section V (1) (blackout period) shall not apply to any securities transaction, or series of related transactions, involving up to 500 shares of a security, but not to exceed an aggregate transaction amount of $25,000 of any security, provided the issuer has a market capitalization greater than US $5 billion ("Large Cap/De Minimus exemption"). This exemption does not apply to shares of mutual funds or to option contracts on indices or other types of securities whose value is derived from a broad-based index. XI. SANCTIONS. The Legal and Compliance Department shall report all material violations of this Code of Ethics and Personal Investment Policy to LAM's Chief Executive Officer, who may impose such sanctions as deemed appropriate, including, among other things, a letter of censure, fine or suspension or termination of the employment of the violator. XII. CONFIDENTIALITY. All information obtained from any person pursuant to this policy shall be kept in strict confidence, except that such information will be made available to the Securities and Exchange Commission or any other regulatory or self-regulatory organization or to the Fund Boards of Directors to the extent required by law, regulation or this policy. XIII. RETENTION OF RECORDS. All records relating to personal securities transactions hereunder and other records meeting the requirements of applicable law, including a copy of this policy and any other policies covering the subject matter hereof, shall be maintained in the manner and to the extent required by applicable law, including Rule 204-2 under the Advisers Act and Rule 17j-1 under the 1940 Act. The Legal and Compliance Department shall have the responsibility for maintaining records created under this policy. XIV. BOARD REVIEW. Fund management shall provide to the Board of Directors of each Fund, on a quarterly basis, a written report of all material violations of this policy, and at least annually, a written report and certification meeting the requirements of Rule 17j-1 under the 1940 Act. XV. OTHER CODES OF ETHICS. To the extent that any officer of any Fund is not a Covered Person hereunder, or an investment subadviser of or principal underwriter for any Fund and their respective access persons (as defined in Rule 17j-1) are not Covered Persons hereunder, those persons must be covered by separate codes of ethics which are approved in accordance with applicable law. XVI. AMENDMENTS. 1. COVERED PERSONS. Unless otherwise noted herein, this policy shall become effective as to all Covered Persons on April 1, 2005. This policy may be amended as to Covered Persons from time to time by the Legal and Compliance Department. Any material amendment of this policy shall be submitted to the Board of Directors of each Fund for approval in accordance with Rule 17j-1 under the 1940 Act. 2. FUND DIRECTORS. This policy shall become effective as to a Fund upon the approval and adoption of this policy by the Board of Directors of that Fund in accordance with Rule 17j-1 under the 1940 Act or at such earlier date as determined by the Secretary of the Fund. Any material amendment of this policy that applies to the Directors of a Fund shall become effective as to the Directors of that Fund only when the Board of Directors of that Fund has approved the amendment in accordance with Rule 17j-1 under the 1940 Act or at such earlier date as determined by the Secretary of the Fund. 8 Revised: February 2006 EXHIBIT A EXPLANATION OF BENEFICIAL OWNERSHIP You are considered to have "Beneficial Ownership" of Securities if you have or share a direct or indirect "PECUNIARY INTEREST" in the Securities. You have a "Pecuniary Interest" in Securities if you have the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the Securities. The following are examples of an indirect Pecuniary Interest in Securities: 1. Securities held by members of your IMMEDIATE FAMILY sharing the same household; however, this presumption may be rebutted by convincing evidence that profits derived from transactions in these Securities will not provide you with any economic benefit. "Immediate family" means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and includes any adoptive relationship. 2. Your interest as a general partner in Securities held by a general or limited partnership. 3. Your interest as a manager-member in the Securities held by a limited liability company. You do NOT have an indirect Pecuniary Interest in Securities held by a corporation, partnership, limited liability company or other entity in which you hold an equity interest, UNLESS you are a controlling equityholder or you have or share investment control over the Securities held by the entity. The following circumstances constitute Beneficial Ownership by you of Securities held by a trust: 1. Your ownership of Securities as a trustee where either you or members of your immediate family have a vested interest in the principal or income of the trust. 2. Your ownership of a vested interest in a trust. 3. Your status as a settlor of a trust, unless the consent of all of the beneficiaries is required in order for you to revoke the trust. THE FOREGOING IS A SUMMARY OF THE MEANING OF "BENEFICIAL OWNERSHIP". FOR PURPOSES OF THE ATTACHED POLICY, "BENEFICIAL OWNERSHIP" SHALL BE INTERPRETED IN THE SAME MANNER, AS IT WOULD BE IN DETERMINING WHETHER A PERSON IS SUBJECT TO THE PROVISIONS OF SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934 AND THE RULES AND REGULATIONS THEREUNDER. 9 Revised: February 2006 EXHIBIT B LAM ACKNOWLEDGEMENT & INITIAL HOLDINGS REPORT PURSUANT TO CODE OF ETHICS AND PERSONAL INVESTMENT POLICY (THE "POLICY") THIS REPORT MUST BE COMPLETED AND RETURNED TO THE LEGAL AND COMPLIANCE DEPARTMENT WITHIN 10 DAYS OF EMPLOYMENT. NAME: ______________________________ DATE OF EMPLOYMENT: _______________ (PLEASE PRINT) ACCOUNT INFORMATION: |_| I do not have a BENEFICIAL INTEREST in any account(s) with any financial services firm. |_| I maintain the following account(s). Please list any broker, dealer, insurance company, mutual fund or bank, which holds securities for your direct or indirect benefit as of the date of your employment. This includes 401k accounts, insurance company variable insurance contracts, mutual fund-only accounts.*
- -------------------------------------------------------------------------------------------------------------------- Type of Account Is this a (Brokerage, Managed Name of Financial Services Firm Mutual Fund, Name on Account Account Number Account? Variable Annuity, 401k.) - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
*401k accounts and similar retirement accounts that permit the participant to change their investments no more frequently than once per quarter need not be reported. SECURITIES HOLDINGS INFORMATION: FOR EACH OF THE ACCOUNTS LISTED ABOVE, ATTACH TO THIS REPORT A COPY OF YOUR MOST RECENT STATEMENTS(S) LISTING ALL OF YOUR SECURITIES HOLDINGS. ALL STATEMENTS MUST BE CURRENT AS OF A DATE NO MORE THAN 45 PRIOR TO YOUR DATE OF EMPLOYMENT AT LAM. In addition, please list in the 10 Revised: February 2006 space provided below holdings in hedge funds, private equity funds, limited partnerships or any other type of security that may not be held in an account listed above.
- ------------------------------------------------------------------------------------------------------------ Description of Security Type of Security No. of Shares Principal Amount Invested - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
|_| I have no securities holdings to report. I CERTIFY THAT I HAVE RECEIVED A COPY OF THE POLICY, AND THAT I HAVE READ AND UNDERSTOOD ITS PROVISIONS. I FURTHER CERTIFY THAT THIS REPORT REPRESENTS A COMPLETE AND ACCURATE DESCRIPTION OF MY ACCOUNT(S) AND SECURITIES HOLDINGS AS OF MY INITIAL DATE OF EMPLOYMENT. THE INFORMATION PROVIDED IS CURRENT AS OF A DATE NO MORE THAN 45 DAYS PRIOR TO MY EMPLOYMENT AT LAM. Signature: _________________________________ Date: _______________________ 11 Revised: February 2006 -----END PRIVACY-ENHANCED MESSAGE-----