Investment Risks
This section contains a discussion of the general risks of investing in the Fund. The Investment Objectives and Policies section in the Statement of
Additional Information (the SAI) also includes more information about the Fund, its investments and the related risks. As with any fund, there can be no guarantee that the Fund will meet its investment
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objective or that the Funds performance will be positive for any period of time. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or by
any bank or governmental agency.
The Fund is subject to risks due to its
structure as a fund of funds, as well as the same risks as the underlying funds and ETFs in which it invests. The Fund is also subject to the risks associated with the securities in which it invests directly. The Fund invests in underlying funds and
ETFs which invest in fixed-income and equity securities. The principal risks set forth below are the principal risks of investing in the Fund, the underlying funds and/or the ETFs. In the following discussion, references to the Fund
shall mean any one or more of the relevant underlying funds or the ETFs and the Fund, where applicable.
Principal Risks of Investing in the Fund, the Underlying Funds and/or the ETFs
Affiliated Fund Risk
In managing the Fund, BlackRock will have authority to select and substitute underlying funds and/or ETFs. BlackRock may
be subject to potential conflicts of interest in selecting underlying funds and/or ETFs because the fees paid to BlackRock by some underlying funds and/or ETFs are higher than the fees paid by other underlying funds and/or ETFs. However, BlackRock
is a fiduciary to the Fund and is legally obligated to act in the Funds best interests when selecting underlying funds and/or ETFs. If an underlying fund or ETF holds interests in an affiliated fund, the Fund may be prohibited from purchasing
shares of that underlying fund or ETF.
Allocation Risk
The Funds ability to achieve its investment goal depends upon BlackRocks skill in determining the Funds strategic asset class allocation and in selecting the best mix of underlying funds and/or ETFs and direct investments.
There is a risk that BlackRocks evaluations and assumptions regarding asset classes, underlying funds and/or ETFs may be incorrect in view of actual market conditions. In addition, there is no guarantee that the underlying funds and/or ETFs
will achieve their investment objectives, and the underlying funds and/or ETFs performance may be lower than the performance of the asset class which they were selected to represent. The underlying funds and/or ETFs may change their
investment objectives or policies without the approval of the Fund. If an underlying fund or ETF were to change its investment objective or policies, the Fund might be forced to withdraw its investment from the underlying fund or ETF at a
disadvantageous time and price.
Bank Loan Risk
The
market for bank loans may not be highly liquid and a Fund may have difficulty selling them. These investments expose a Fund to the credit risk of both the financial institution and the underlying borrower.
Borrowing Risk
Borrowing may exaggerate changes in the net asset
value of underlying fund and/or ETF shares and in the return on an underlying funds and/or ETFs portfolio. Borrowing will cost the underlying funds and/or ETFs interest expense and other fees. The costs of borrowing may reduce an
underlying funds and/or ETFs return. Borrowing may cause an underlying fund and/or ETF to liquidate positions when it may not be advantageous to do so to satisfy its obligations.
Collateralized Bond Obligation Risk
The pool of high yield securities underlying collateralized bond obligations is
typically separated into groupings called tranches representing different degrees of credit quality. The higher quality tranches have greater degrees of protection and pay lower interest rates. The lower tranches, with greater risk, pay higher
interest rates.
Concentration Risk
To the extent that
an underlying funds and/or ETFs portfolio reflects concentration in the securities of issuers in a particular region, market, industry, group of industries, country, group of countries, sector or asset class, an underlying fund and/or
ETF may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that region, market, industry,
group of industries, country, group of countries, sector or asset class.
Convertible Securities Risk
The market value of a convertible security performs like that of a regular debt security; that is, if market
interest rates rise, the value of a convertible security usually falls. In addition, convertible securities are subject to the risk that the issuer will not be able to pay interest or dividends when due, and their market value may change based on
changes in the issuers credit rating or the markets perception of the issuers creditworthiness. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject to
the same types of market and issuer risks that apply to the underlying common stock.
Corporate Loans Risk
Commercial banks and other financial institutions or institutional investors make corporate loans to companies that need capital to grow or restructure. Borrowers generally
pay interest on corporate loans at rates that change in response to changes in market interest rates such as the London Interbank Offered Rate (LIBOR) or the prime rates of U.S. banks. As a result, the value of corporate loan investments
is generally less exposed to the adverse effects of shifts in market interest rates than investments that pay a fixed rate of interest. However, because the trading market for certain corporate loans may be less developed than the secondary market
for bonds and notes, the underlying fund and/or ETF may experience difficulties in selling its corporate loans. Leading financial institutions often act as agent for a broader group of lenders, generally referred to as a syndicate. The
syndicates agent arranges the corporate loans, holds collateral and accepts payments of principal and interest. If the agent develops financial problems, the underlying fund and/or ETF may not recover its investment or recovery may be delayed.
By investing in a corporate loan, the underlying fund and/or ETF may become a member of the syndicate.
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The corporate loans in which the underlying fund and/or ETF invests are subject to the risk of loss of principal and
income. Although borrowers frequently provide collateral to secure repayment of these obligations they do not always do so. If they do provide collateral, the value of the collateral may not completely cover the borrowers obligations at the
time of a default. If a borrower files for protection from its creditors under the U.S. bankruptcy laws, these laws may limit the underlying funds and/or ETFs rights to its collateral. In addition, the value of collateral may erode
during a bankruptcy case. In the event of a bankruptcy, the holder of a corporate loan may not recover its principal, may experience a long delay in recovering its investment and may not receive interest during the delay.
Counterparty Risk
The counterparty to an over-the-counter
derivatives contract or a borrower of the Funds securities may be unable or unwilling to make timely principal, interest or settlement payments, or otherwise to honor its obligations.
Credit Risk
Credit risk refers to the possibility that the issuer of a security will not be able to make principal
and interest payments when due. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of the Funds investment in that issuer. The degree of credit risk depends
on both the financial condition of the issuer and the terms of the obligation.
Defensive Investing Risk
For defensive purposes, the Fund may, as part of its proprietary volatility control process, allocate assets into cash or short-term fixed income securities without
limitation. In doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective. Further, the value of short-term fixed income securities may be affected by changing interest rates and by changes in credit
ratings of the investments. If the Fund holds cash uninvested it will be subject to the credit risk of the depositary institution holding the cash.
Deflation Risk
Deflation risk is the possibility that prices throughout the economy decline over time the opposite of inflation. If
inflation is negative, the principal and income of an inflation-protected bond will decline and could result in losses for the underlying fund and/or ETF.
Derivatives Risk
Derivatives are volatile and involve significant risks, including:
Volatility Risk
The Funds use of derivatives may reduce the Funds returns and/or increase
volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the Funds use of derivatives is that the fluctuations in their values may not
correlate perfectly with the overall securities markets.
Counterparty Risk
Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will
not fulfill its contractual obligation.
Market and
Liquidity Risk
Some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the Fund to
sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately. The Fund could also suffer losses related to its derivatives positions as a result of
unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the Funds
derivatives positions to lose value.
Valuation Risk
Valuation may be more difficult in times of market turmoil since many investors and market makers may be reluctant to purchase complex instruments or quote prices for them. Derivatives may also expose the Fund to greater risk and increase
its costs. Certain transactions in derivatives involve substantial leverage risk and may expose the Fund to potential losses that exceed the amount originally invested by the Fund.
Hedging Risk
When a derivative is used as a hedge against a position that the Fund holds, any loss
generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect
matching between the derivative and the underlying security, and there can be no assurance that the Funds hedging transactions will be effective. The use of hedging may result in certain adverse tax consequences noted below.
Tax Risk
The federal income tax treatment of a
derivative may not be as favorable as a direct investment in an underlying asset and may adversely affect the timing, character and amount of income the Fund, the underlying funds and/or ETFs realizes from its investments. As a result, a larger
portion of the Funds, the underlying funds and/or the ETFs distributions may be treated as ordinary income rather than capital gains. In addition, certain derivatives are subject to mark-to-market or straddle provisions of the
Internal Revenue Code. If such provisions are applicable, there could be an increase (or decrease) in the amount of taxable dividends paid by the Fund, the underlying funds and/or ETFs. In addition, the tax treatment of certain derivatives, such as
swaps, is unsettled and may be subject to future legislation, regulation or administrative pronouncements issued by the IRS.
Regulatory Risk
Recent legislation calls for new regulation of the derivatives markets. The extent and impact of the regulation is not
yet known and may not be known for some time. In particular, the Dodd-Frank Wall Street Reform Act (the Reform Act) may make derivatives more costly, may limit the availability of derivatives, or may
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otherwise adversely affect the value or performance of derivatives. The Reform Act substantially increases regulation of the over-the-counter derivatives market and participants in that market,
including imposing clearing and reporting requirements on transactions involving instruments that fall within the Reform Acts definition of swap and security-based swap, which terms generally include over-the-counter
derivatives and imposing registration and potential substantive requirements on certain swap and security-based swap market participants. In addition, under the Reform Act, the Fund may be subject to additional recordkeeping and reporting
requirements.
Risks Specific to Certain Derivatives
Used by the Fund
Swaps
Swap agreements are two-party
contracts entered into for periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments, which can be adjusted for an interest factor. Swap agreements involve the risk that the party with whom the Fund, the underlying funds and/or ETFs has entered into the swap will default on its obligation to
pay the Fund, the underlying funds and/or ETFs and the risk that the Fund, the underlying funds and/or ETFs will not be able to meet its obligations to pay the other party to the agreement.
Credit Default Swaps
Credit default swaps may have as reference obligations one or more securities that are not currently
held by the Fund, the underlying funds and/or ETFs. The protection buyer may be obligated to pay the protection seller an up-front payment or a periodic stream of payments over the term of the contract, provided generally
that no credit event on a reference obligation has occurred. Credit default swaps involve special risks in addition to those mentioned above because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay
a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).
Forward Foreign Currency Exchange Contracts
Forward foreign currency
exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Forward foreign currency exchange contracts do not
eliminate fluctuations in the value of non-U.S. securities but rather allow the Fund, the underlying funds and/or ETFs to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and
minimizing opportunities for gain.
Indexed and Inverse Securities
Indexed and inverse securities provide a potential return based on a particular index of value or interest rates. The Funds, the underlying funds and/or the ETFs return on these securities will be subject to risk with
respect to the value of the particular index. These securities are subject to leverage risk and correlation risk. Certain indexed and inverse securities have greater sensitivity to changes in interest rates or index levels than other securities, and
the Funds, the underlying funds and/or the ETFs investment in such instruments may decline significantly in value if interest rates or index levels move in a way Fund management does not anticipate.
Futures
Futures are standardized, exchange-traded contracts that
obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of an asset at a specified future date at a specified price. The primary risks associated with the use of futures contracts and options are (a) the
imperfect correlation between the change in market value of the instruments held by a Fund, the underlying funds and/or ETFs and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the investment advisors inability to predict correctly the direction of
securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Options
An option is an agreement that, for a premium payment or fee, gives the option holder (the purchaser) the right but
not the obligation to buy (a call option) or sell (a put option) the underlying asset (or settle for cash an amount based on an underlying asset, rate, or index) at a specified price (the exercise price) during a
period of time or on a specified date. Investments in options are considered speculative. When the Fund, the underlying funds and/or ETFs purchases an option, it may lose the premium paid for it if the price of the underlying security or other
assets decreased or remained the same (in the case of a call option) or increased or remained the same (in the case of a put option). If a put or call option purchased by the Fund, the underlying funds and/or ETFs were permitted to expire without
being sold or exercised, its premium would represent a loss to the Fund, the underlying funds and/or ETFs. To the extent that the Fund, the underlying funds and/or ETFs writes or sells an option, if the decline or increase in the underlying asset is
significantly below or above the exercise price of the written option, the Fund, the underlying funds and/or ETFs could experience a substantial loss.
Distressed Securities Risk
Distressed securities are speculative and involve substantial risks in addition to the risks of investing in junk
bonds. The Fund will generally not receive interest payments on the distressed securities and may incur costs to protect its investment. In addition, distressed securities involve the substantial risk that principal will not be repaid. These
securities may present a substantial risk of default or may be in default at the time of investment. The Fund may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal of or interest on
its portfolio holdings. In any reorganization or liquidation proceeding relating to a portfolio company, the Fund may lose its entire investment or may be required to accept cash or securities with a value less than its original investment.
Distressed securities and any securities received in an exchange for such securities may be subject to restrictions on resale.
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Dividend Risk
Because most of the corporate loans held by the underlying funds and/or ETFs will
have floating or variable interest rates, the amounts of the underlying funds and/or ETFs monthly distributions to its stockholders are expected to vary with fluctuations in market interest rates. Generally, when market interest rates
fall, the amount of the distributions to stockholders will likewise decrease.
Dollar Rolls Risk
A dollar roll transaction involves a sale by the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar security
at a later date at an agreed-upon price. Dollar roll transactions involve the risk that the market value of the securities the Fund is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer
to whom the Fund sells securities becomes insolvent, the Funds right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the advisers ability to correctly predict interest rates
and prepayments. There is no assurance that dollar rolls can be successfully employed.
Emerging Markets Risk
The risks of foreign investments are usually much greater for emerging markets. Investments in emerging markets may be considered speculative. Emerging markets include
those in countries defined as emerging or developing by the World Bank, the International Finance Corporation or the United Nations. Emerging markets are riskier than more developed markets because they tend to develop unevenly and may never fully
develop. They are more likely to experience hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In addition, many emerging markets have far lower trading volumes and less liquidity than developed markets.
Since these markets are often small, they may be more likely to suffer sharp and frequent price changes or long-term price depression because of adverse publicity, investor perceptions or the actions of a few large investors. In addition,
traditional measures of investment value used in the United States, such as price to earnings ratios, may not apply to certain small markets. Also, there may be less publicly available information about issuers in emerging markets than would be
available about issuers in more developed capital markets, and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject.
Many emerging markets have histories of political instability and abrupt changes in
policies. As a result, their governments are more likely to take actions that are hostile or detrimental to private enterprise or foreign investment than those of more developed countries, including expropriation of assets, confiscatory taxation,
high rates of inflation or unfavorable diplomatic developments. In the past, governments of such nations have expropriated substantial amounts of private property, and most claims of the property owners have never been fully settled. There is no
assurance that such expropriations will not reoccur. In such an event, it is possible that the Fund could lose the entire value of its investments in the affected market. Some countries have pervasiveness of corruption and crime that may hinder
investments. Certain emerging markets may also face other significant internal or external risks, including the risk of war, and ethnic, religious and racial conflicts. In addition, governments in many emerging market countries participate to a
significant degree in their economies and securities markets, which may impair investment and economic growth. National policies that may limit the Funds investment opportunities include restrictions on investment in issuers or industries
deemed sensitive to national interests.
Emerging markets may also have
differing legal systems and the existence or possible imposition of exchange controls, custodial restrictions or other foreign or U.S. governmental laws or restrictions applicable to such investments. Sometimes, they may lack or be in the relatively
early development of legal structures governing private and foreign investments and private property. Many emerging markets do not have income tax treaties with the United States, and as a result, investments by the Fund may be subject to higher
withholding taxes in such countries. In addition, some countries with emerging markets may impose differential capital gains taxes on foreign investors.
Practices in relation to settlement of securities transactions in emerging markets involve higher risks than those in developed markets, in part because the Fund
will need to use brokers and counterparties that are less well capitalized, and custody and registration of assets in some countries may be unreliable. The possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to
recognize that ownership exists in some emerging markets, and, along with other factors, could result in ownership registration being completely lost. The Fund would absorb any loss resulting from such registration problems and may have no
successful claim for compensation. In addition, communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates.
Equity Securities Risk
Common and preferred stocks represent
equity ownership in a company. Stock markets are volatile. The price of equity securities will fluctuate and can decline and reduce the value of a portfolio investing in equities. The value of equity securities purchased by the Fund could decline if
the financial condition of the companies the Fund invests in declines or if overall market and economic conditions deteriorate. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or an
increase in production costs and competitive conditions within an industry. In addition, they may decline due to general market conditions that are not specifically related to a company or industry, such as real or perceived adverse economic
conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or generally adverse investor sentiment.
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Event Risk
Event risk is the risk that corporate issuers may undergo restructurings, such as
mergers, leveraged buyouts, takeovers, or similar events financed by increased debt. As a result of the added debt, the credit quality and market value of a companys bonds and/or other debt securities may decline significantly.
Extension Risk
When interest rates rise, certain obligations will
be paid off by the obligor more slowly than anticipated, causing the value of these obligations to fall. Rising interest rates tend to extend the duration of securities, making them more sensitive to changes in interest rates. The value of
longer-term securities generally changes more in response to changes in interest rates than shorter-term securities. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value.
Fiscal Policy Risk
Any repeal of or failure to extend the current
federal tax treatment of qualified dividend income could make dividend-paying securities less appealing to investors and could have a negative impact on the performance of the underlying funds and/or ETFs.
Foreign Securities Risk
Securities traded in foreign markets have
often (though not always) performed differently from securities traded in the United States. However, such investments often involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In
particular, the Fund is subject to the risk that because there may be fewer investors on foreign exchanges and a smaller number of securities traded each day, it may be more difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of securities traded in the United States.
Certain Risks of Holding Fund Assets Outside the United States
The Fund generally holds its foreign securities and cash in foreign banks and
securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight of their operations. Also, the laws of certain
countries limit the Funds ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in
certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than for
investment companies invested only in the United States.
Currency
Risk
Securities and other instruments in which the Fund invests may be denominated or quoted in currencies other than the U.S. dollar. For this reason, changes in foreign currency exchange rates can affect the value of the Funds
portfolio.
Generally, when the U.S. dollar rises in value against a
foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains
value because the currency is worth more U.S. dollars. This risk, generally known as currency risk, means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.
Foreign Economy Risk
The economies of certain foreign markets may not
compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain foreign economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or
retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive
taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries. Any of these actions could severely affect securities prices or impair
the Funds ability to purchase or sell foreign securities or transfer the Funds assets or income back into the United States, or otherwise adversely affect the Funds operations.
Other potential foreign market risks include foreign exchange controls, difficulties
in pricing securities, defaults on foreign government securities, difficulties in enforcing legal judgments in foreign courts and political and social instability. Diplomatic and political developments, including rapid and adverse political changes,
social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of the Funds investments, in non-U.S. countries. These factors are extremely difficult, if not
impossible, to predict and take into account with respect to the Funds investments.
Governmental Supervision and Regulation/Accounting Standards
Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as such
regulations exist in the United States. They also may not have laws to protect investors that are comparable to U.S. securities laws. For example, some foreign countries may have no laws or rules against insider trading. Insider trading occurs when
a person buys or sells a companys securities based on material non-public information about that company. In addition, some countries may have legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights,
and pursue legal remedies with respect to its foreign investments. Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and accurately determine a companys financial condition.
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Settlement Risk
Settlement and clearance procedures in certain foreign markets differ significantly from
those in the United States. Foreign settlement and clearance procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically associated with the settlement of U.S. investments.
At times, settlements in certain foreign countries have not kept pace with
the number of securities transactions. These problems may make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and
certain of its assets may be uninvested with no return earned thereon for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable for any losses incurred.
European Economic Risk
The European financial markets have recently experienced volatility and adverse trends due to concerns about economic downturns in, or rising government debt levels of, several
European countries. These events may spread to other countries in Europe. These events may affect the value and liquidity of certain of the Funds investments.
Responses to the financial problems by European governments, central banks and others,
including austerity measures and reforms, may not work, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt
could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the Euro, the common currency of the European Union, and/ or withdraw from the European
Union. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far reaching.
High Portfolio Turnover Risk
An underlying fund and/or ETF may engage in active and frequent trading of its portfolio securities. High
portfolio turnover (more than 100%) may result in increased transaction costs to an underlying fund and/or ETF, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of underlying fund and/or ETF portfolio securities may result in the realization and/or distribution to shareholders of higher capital gains or losses as compared to a fund with less active trading policies. These effects of
higher than normal portfolio turnover may adversely affect underlying fund and/or ETF performance. In addition, investment in mortgage dollar rolls and participation in TBA transactions may significantly increase an underlying funds and/or
ETFs portfolio turnover rate. A TBA transaction is a method of trading mortgage-backed securities where the buyer and seller agree upon general trade parameters such as agency, settlement date, par amount, and price.
Income Producing Stock Availability Risk
Depending upon
market conditions, income producing common stock that meets an underlying funds and/or ETFs investment criteria may not be widely available and/or may be highly concentrated in only a few market sectors. This may limit the ability of the
underlying fund and/or ETF to produce current income while remaining fully diversified.
Indexed and Inverse Securities Risk
Certain indexed and inverse securities have greater sensitivity to changes in interest rates or index levels than other securities, and an underlying
funds and/or ETFs investment in such instruments may decline significantly in value if interest rates or index levels move in a way the underlying funds and/or ETFs management does not anticipate.
Inflation Indexed Bonds Risk
The principal value of an investment
is not protected or otherwise guaranteed by virtue of an underlying funds and/or ETFs investments in inflation-indexed bonds.
Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation. If the index measuring
inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced.
Repayment of the original bond principal upon maturity (as adjusted for inflation) is
guaranteed in the case of TIPS. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal value.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to
the relationship between nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation, real interest rates may rise, leading to a decrease in value of inflation-indexed bonds. Short-term
increases in inflation may lead to a decline in value. Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Periodic adjustments for inflation to the principal amount of an inflation-indexed
bond may give rise to original issue discount, which will be includable in an underlying funds and/or ETFs gross income. Due to original issue discount, the underlying fund and/or ETF may be required to make annual distributions to
shareholders that exceed the cash
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received, which may cause the underlying fund and/or ETF to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation-indexed bond is
adjusted downward due to deflation, amounts previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
Interest Rate Risk
Interest rate risk is the risk that prices of fixed-income securities generally increase when interest rates decline and
decrease when interest rates increase. Prices of longer-term securities generally change more in response to interest rate changes than prices of shorter-term securities. The Fund may lose money if short-term or long-term interest rates rise sharply
or otherwise change in a manner not anticipated by Fund management.
Investment in Other Investment Companies Risk
As with other investments, investments in other investment companies, including the underlying
funds and/or ETFs, are subject to market risk and, for non-index strategies, selection risk. In addition, if the Fund acquires shares of investment companies, including ETFs advised by BlackRock or other investment advisers, shareholders bear both
their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of the investment companies (including management and advisory fees). If the Fund acquires shares of one or more underlying
funds and/or ETFs, shareholders bear both their proportionate share of expenses in the Fund (excluding management and advisory fees attributable to those assets of the Fund invested in the underlying funds and/or ETFs) and, indirectly, the expenses
of the underlying funds and/or ETFs (including management and advisory fees). To the extent the Fund is held by an affiliated fund, the ability of the Fund itself to hold other investment companies may be limited.
Investing in an ETF will give the Fund exposure to the securities comprising the index
on which the ETF is based. Shares of ETFs are traded on an exchange throughout a trading day, and bought and sold based on market values and not at the ETFs net asset value. For this reason, shares of an ETF could trade at either a premium or
discount to its net asset value. However, the trading prices of index-based ETFs tend to closely track the actual net asset value of the ETF. The Fund will pay brokerage commissions in connection with the purchase and sale of shares of ETFs, in
addition to a spread (i.e., the difference between what professional investors are willing to pay for ETF shares (the bid price) and the price at which they are willing to sell ETF shares (the ask price)).
Investment Style Risk
Because different kinds of stocks go in and
out of favor depending on market conditions, an underlying funds and/or ETFs performance may be better or worse than other funds with different investment styles (e.g., growth vs. value, large cap vs. small cap).
Junk Bonds Risk
Although junk bonds generally pay higher rates of
interest than investment grade bonds, junk bonds are high risk investments that may cause income and principal losses for the Fund. The major risks of junk bond investments include:
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Junk bonds may be issued by less creditworthy issuers. Issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers
of investment grade bonds. In the event of an issuers bankruptcy, claims of other creditors may have priority over the claims of junk bond holders, leaving few or no assets available to repay junk bond holders.
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Prices of junk bonds are subject to extreme price fluctuations. Adverse changes in an issuers industry and general economic conditions may have a greater
impact on the prices of junk bonds than on other higher rated fixed-income securities.
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Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments, or the
unavailability of additional financing.
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Junk bonds frequently have redemption features that permit an issuer to repurchase the security from the Fund before it matures. If the issuer redeems junk
bonds, the Fund may have to invest the proceeds in bonds with lower yields and may lose income.
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Junk bonds may be less liquid than higher rated fixed-income securities, even under normal economic conditions. There are fewer dealers in the junk bond market,
and there may be significant differences in the prices quoted for junk bonds by the dealers. Because they are less liquid, judgment may play a greater role in valuing certain of the Funds securities than is the case with securities trading in
a more liquid market.
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The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
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The credit rating of a high yield security does not
necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer.
Leverage Risk
Some transactions may give rise to a form of
economic leverage. These transactions may include, among others, derivatives, and may expose the Fund to greater risk and increase its costs. As an open-end investment company registered with the Securities and Exchange Commission (SEC),
the Fund is subject to the federal securities laws, including the Investment Company Act, the rules thereunder, and various SEC and SEC staff interpretive positions. In accordance with these laws, rules and positions, the Fund must set
aside liquid assets (often referred to as asset segregation), or engage in other SEC- or staff-approved measures, to cover open
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positions with respect to certain kinds of instruments. The use of leverage may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations
or to meet any required asset segregation requirements. Increases and decreases in the value of the Funds portfolio will be magnified when the Fund uses leverage.
Liquidity Risk
Liquidity risk exists when particular investments
are difficult to purchase or sell. The Funds investments in illiquid securities may reduce the returns of the Fund because it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Funds
principal investment strategies involve derivatives or securities with substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity risk. Liquid investments may become illiquid after purchase by the Fund,
particularly during periods of market turmoil. Illiquid investments may be harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash needs, the Fund may suffer
a loss. In addition, when there is illiquidity in the market for certain securities, the Fund, due to limitations on illiquid investments, may be subject to purchase and sale restrictions.
Market Risk and Selection Risk
Market risk is the risk that one or more markets in which the Fund invests will go
down in value, including the possibility that the markets will go down sharply and unpredictably. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the securities
selected by other funds with similar investment objectives and investment strategies. This means you may lose money.
Master Limited Partnerships Risk
The common units of an MLP are listed and traded on U.S. securities exchanges and their value fluctuates
predominantly based on prevailing market conditions and the success of the MLP. Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability annually to elect directors. In the event of
liquidation, common units have preference over subordinated units, but not over debt or preferred units, to the remaining assets of the MLP.
Mezzanine Securities Risk
Mezzanine securities generally are rated below investment grade and frequently are unrated and present many of the
same risks as senior loans, second lien loans and non-investment grade bonds. However, unlike senior loans and second lien loans, mezzanine securities are not a senior or secondary secured obligation of the related borrower. They typically are the
most subordinated debt obligation in an issuers capital structure. Mezzanine securities also may often be unsecured. Mezzanine securities therefore are subject to the additional risk that the cash flow of the related borrower and the property
securing the loan may be insufficient to repay the scheduled obligation after giving effect to any senior obligations of the related borrower. Mezzanine securities are also expected to be a highly illiquid investment. Mezzanine securities will be
subject to certain additional risks to the extent that such loans may not be protected by financial covenants or limitations upon additional indebtedness. Investment in mezzanine securities is a highly specialized investment practice that depends
more heavily on independent credit analysis than investments in other types of debt obligations.
Mid- and Large-Capitalization Investing
An underlying fund and/or ETF may invest a relatively large percentage of its assets in the securities of mid- and large-capitalization companies. While
securities in these capitalization ranges represent a significant percentage of the market, an underlying funds and/or ETFs performance may be adversely affected if securities of mid- and large- capitalization companies underperform
securities of small-capitalization companies or the market as a whole. Securities of small-capitalization companies are often more vulnerable to market volatility than securities of mid- and large-capitalization companies, but also offer greater
potential for capital appreciation.
Mortgage- and Asset-Backed
Securities Risks
Mortgage-backed securities (residential and commercial) and asset-backed securities represent interests in pools of mortgages or other assets, including consumer loans or receivables held in trust.
Although asset-backed and commercial mortgage-backed securities (CMBS) generally experience less prepayment than residential mortgage-backed securities, mortgage-backed and asset-backed securities, like traditional fixed-income
securities, are subject to credit, interest rate, prepayment and extension risks.
Small movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain mortgage-backed securities. The Funds investments in asset-backed securities are
subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated with the nature of the assets and the servicing of those assets. These securities also are subject to the risk of default on the
underlying mortgage or assets, particularly during periods of economic downturn. Certain CMBS are issued in several classes with different levels of yield and credit protection. The Funds investments in CMBS with several classes may be in the
lower classes that have greater risks than the higher classes, including greater interest rate, credit and prepayment risks.
Mortgage-backed securities may be either pass-through securities or collateralized mortgage obligations (CMOs). Pass-through securities represent a
right to receive principal and interest payments collected on a pool of mortgages, which are passed through to security holders. CMOs are created by dividing the principal and interest payments collected on a pool of mortgages into several revenue
streams (tranches) with different priority rights to portions of the underlying mortgage payments. Certain CMO tranches may represent a right to receive interest only (IOs), principal only (POs) or an amount that remains
after floating-rate tranches are paid (an inverse floater). These securities are
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frequently referred to as mortgage derivatives and may be extremely sensitive to changes in interest rates. Interest rates on inverse floaters, for example, vary inversely with a
short-term floating rate (which may be reset periodically). Interest rates on inverse floaters will decrease when short-term rates increase, and will increase when short-term rates decrease. These securities have the effect of providing a degree of
investment leverage. In response to changes in market interest rates or other market conditions, the value of an inverse floater may increase or decrease at a multiple of the increase or decrease in the value of the underlying securities. If the
Fund invests in CMO tranches (including CMO tranches issued by government agencies) and interest rates move in a manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its investment.
The mortgage market in the United States recently has experienced
difficulties that may adversely affect the performance and market value of certain of the Funds mortgage-related investments. Delinquencies and losses on mortgage loans (including subprime and second-lien mortgage loans) generally have
increased recently and may continue to increase, and a decline in or flattening of real-estate values (as has recently been experienced and may continue to be experienced in many housing markets) may exacerbate such delinquencies and losses. Also, a
number of mortgage loan originators have recently experienced serious financial difficulties or bankruptcy. Reduced investor demand for mortgage loans and mortgage-related securities and increased investor yield requirements have caused limited
liquidity in the secondary market for mortgage-related securities, which can adversely affect the market value of mortgage-related securities. It is possible that such limited liquidity in such secondary markets could continue or worsen.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities, including the risk that in certain states it may be difficult to perfect the liens securing the collateral backing certain asset-backed securities. In addition, certain asset-backed securities are based on loans that are unsecured, which
means that there is no collateral to seize if the underlying borrower defaults. Certain mortgage-backed securities in which the Fund may invest may also provide a degree of investment leverage, which could cause the Fund to lose all or substantially
all of its investment.
Municipal Securities Risk
Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the market for
and value of municipal securities. These risks include:
General Obligation Bonds Risks
The full faith, credit and taxing power of the municipality that issues a general obligation bond
secures payment of interest and repayment of principal. Timely payments depend on the issuers credit quality, ability to raise tax revenues and ability to maintain an adequate tax base.
Revenue Bonds Risks
Payments of interest and principal on revenue bonds are made only from the revenues
generated by a particular facility, class of facilities or the proceeds of a special tax or other revenue source. These payments depend on the money earned by the particular facility or class of facilities, or the amount of revenues derived from
another source.
Private Activity Bonds Risks
Municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private enterprise. The private enterprise pays the principal and interest on the bond, and the issuer does not
pledge its full faith, credit and taxing power for repayment. If the private enterprise defaults on its payments, the Fund may not receive any income or get its money back from the investment.
Moral Obligation Bonds Risks
Moral obligation bonds are
generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality.
Municipal Notes Risks
Municipal notes are
shorter term municipal debt obligations. They may provide interim financing in anticipation of, and are secured by, tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, the notes may not be fully
repaid and an underlying fund and/or ETF may lose money.
Municipal Lease Obligations Risks
In a municipal lease obligation, the issuer agrees to make payments when due on the lease
obligation. The issuer will generally appropriate municipal funds for that purpose, but is not obligated to do so. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by
the leased property. However, if the issuer does not fulfill its payment obligation it may be difficult to sell the property and the proceeds of a sale may not cover an underlying funds and/or ETFs loss.
Tax-Exempt Status Risk
In making investments, the Fund,
an underlying fund and/or ETF and their respective investment managers will rely on the opinion of issuers bond counsel and, in the case of derivative securities, sponsors counsel, on the tax-exempt status of interest on municipal
obligations and payments under tax-exempt derivative securities. Neither the Fund, an underlying fund nor an ETF nor their respective investment managers will independently review the bases for those tax opinions. If any of those tax opinions are
ultimately determined to be incorrect or if events occur after the security is acquired that impact the securitys tax-exempt status, the Fund and its shareholders could be subject to substantial tax liabilities. The Internal Revenue Service
(the IRS) has generally not ruled on the taxability of the securities. An assertion by the IRS that a portfolio security is not exempt from
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federal income tax (contrary to indications from the issuer) could affect the Funds and its shareholders income tax liability for the current or past years and could create liability
for information reporting penalties. In addition, an IRS assertion of taxability may impair the liquidity and the fair market value of the securities.
New Issues Risk
New issues are initial public offerings of equity securities. Investments in companies that have
recently gone public have the potential to produce substantial gains for the Fund. However, there is no assurance that the Fund will have access to profitable IPOs and therefore investors should not rely on these past gains as an indication of
future performances. The investment performance of the Fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the Fund is able to do so. In addition, as the Fund increases in size, the
impact of IPOs on the Funds performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history,
and information about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering. When an initial public offering is
brought to the market, availability may be limited and the Fund may not be able to buy any shares at the offering price, or, if it is able to buy shares, it may not be able to buy as many shares at the offering price as it would like.
Non-Diversification Risk
The Fund is a non-diversified fund.
Because the Fund may invest in securities of a smaller number of issuers, it may be more exposed to the risks associated with and developments affecting an individual issuer than a fund that invests more widely.
Preferred Securities Risk
Preferred securities may pay fixed or
adjustable rates of return. Preferred securities are subject to issuer-specific and market risks applicable generally to equity securities. In addition, a companys preferred securities generally pay dividends only after the company makes
required payments to holders of its bonds and other debt. For this reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or perceived changes in the companys financial condition or
prospects. Preferred securities of smaller companies may be more vulnerable to adverse developments than preferred stock of larger companies.
Prepayment Risk
When interest rates fall, certain obligations will be paid off by the obligor more quickly than originally anticipated, and the
Fund may have to invest the proceeds in securities with lower yields. In periods of falling interest rates, the rate of prepayments tends to increase (as does price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower
rates. During such periods, reinvestment of the prepayment proceeds by Fund management will generally be at lower rates of return than the return on the assets that were prepaid. Prepayment reduces the yield to maturity and the average life of the
security.
Real Estate Related Securities Risk
The
main risk of real estate related securities is that the value of the underlying real estate may go down. Many factors may affect real estate values. These factors include both the general and local economies, the amount of new construction in a
particular area, the laws and regulations (including zoning and tax laws) affecting real estate and the costs of owning, maintaining and improving real estate. The availability of mortgages and changes in interest rates may also affect real estate
values. If an underlying funds and/or ETFs real estate related investments are concentrated in one geographic area or in one property type, the underlying fund and/or ETF will be particularly subject to the risks associated with that
area or property type.
Reinvestment Risk
Proceeds
from a current investment of an underlying fund and/or ETF, both interest payments and principal payments, may be reinvested in instruments that offer lower yields than the current investment due in part to market conditions and the interest rate
environment at the time of reinvestment. Reinvestment risk is greater on short- to intermediate-term loans.
REIT Investment Risk
In addition to the risks facing real estate related securities, such as a decline in property values due to increasing vacancies, a decline in rents resulting from
unanticipated economic, legal or technological developments or a decline in the price of securities of real estate companies due to a failure of borrowers to pay their loans or poor management, investments in REITs involve unique risks. REITs may
have limited financial resources, may trade less frequently and in limited volume and may be more volatile than other securities.
Repurchase Agreements and Purchase and Sale Contracts Risks
If the other party to a repurchase agreement or purchase and sale contract defaults
on its obligation under the agreement, the Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in either situation and the market value of the security
declines, the Fund may lose money.
Reverse Repurchase Agreements
Risk
Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement to repurchase the securities at an agreed-upon price, date and interest payment. Reverse repurchase agreements involve the risk that
the other party may fail to return the securities in a timely manner or at all. The Fund could lose money if it is unable to recover the securities and the value of the collateral held by the Fund, including the value of the investments made with
cash collateral, is less than the value of the securities. These events could also trigger adverse tax consequences for the Fund.
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Rights Risk
The failure to exercise subscription rights to purchase common stock would result in
the dilution of an underlying funds and/or ETFs interest in the issuing company. The market for such rights is not well developed, and, accordingly, an underlying fund and/or ETF may not always realize full value on the sale of rights.
Risks of Investing in Closed-End Funds
The shares of
closed-end funds may trade at a discount or premium to, or at, their NAV. To the extent that an underlying fund and/or ETF invests a portion of its assets in closed-end funds, those assets will be subject to the risks of the closed-end funds
portfolio securities, and a shareholder in the underlying fund and/or ETF will bear not only his or her proportionate share of the expenses of the underlying fund and/or ETF, but also, indirectly, the expenses of the closed-end fund. The securities
of closed-end funds in which the underlying fund and/or ETF may invest may be leveraged. As a result, the underlying fund and/or ETF may be indirectly exposed to leverage through an investment in such securities. An investment in securities of
closed-end funds that use leverage may expose the underlying fund and/or ETF to higher volatility in the market value of such securities and the possibility that the underlying funds and/or ETFs long-term returns on such securities (and,
indirectly, the long-term returns of the shares) will be diminished.
Risks of Loan Assignments and Participations
As the purchaser of an assignment, the underlying fund and/or ETF typically succeeds to all the
rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the underlying fund and/or ETF may not be able unilaterally to enforce all rights and remedies under
the loan and with regard to any associated collateral. Because assignments may be arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the underlying fund and/or ETF as the
purchaser of an assignment may differ from, and be more limited than, those held by the assigning lender. In addition, if the loan is foreclosed, the underlying fund and/or ETF could become part owner of any collateral and could bear the costs and
liabilities of owning and disposing of the collateral. The underlying fund and/or ETF may be required to pass along to a purchaser that buys a loan from the underlying fund and/or ETF by way of assignment a portion of any fees to which the
underlying fund and/or ETF is entitled under the loan. In connection with purchasing participations, the underlying fund and/or ETF generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to
the loan, nor any rights of set-off against the borrower, and the underlying fund and/or ETF may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, the underlying fund and/or ETF
will be subject to the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the lender selling a participation, the underlying fund and/or ETF may be treated as a general creditor of
the lender and may not benefit from any set-off between the lender and the borrower.
Savings Associations Risk
Savings associations are affected by extensive regulations, interest rate increases, loan losses, decreased availability of money or asset valuation and market
conditions. Recently, the deterioration of the credit market has had an adverse impact on savings associations.
Second Lien Loans Risk
Second lien loans generally are subject to similar risks as those associated with investments in senior loans. Because second lien loans are subordinated or unsecured and
thus lower in priority of payment to senior loans, they are subject to the additional risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the
senior secured obligations of the borrower. This risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Second lien loans generally have greater price volatility
than senior loans and may be less liquid.
There is also a possibility that
originators will not be able to sell participations in second lien loans, which would create greater credit risk exposure for the holders of such loans. Second lien loans share the same risks as other below investment grade securities.
Securities Lending Risk
Securities lending involves the risk that
the borrower may fail to return the securities in a timely manner or at all. As a result, an underlying fund and/or ETF may lose money and there may be a delay in recovering the loaned securities. An underlying fund and/or ETF could also lose money
if it does not recover the securities and/or the value of the collateral falls, including the value of investments made with cash collateral. These events could trigger adverse tax consequences for an underlying fund and/or ETF.
Senior Loans Risk
There is less readily available, reliable
information about most senior loans than is the case for many other types of securities. In addition, there is no minimum rating or other independent evaluation of a borrower or its securities limiting an underlying funds and/or ETFs
investments, and BlackRock relies primarily on its own evaluation of a borrowers credit quality rather than on any available independent sources. As a result, an underlying fund and/or ETF is particularly dependent on the analytical abilities
of BlackRock.
An economic downturn generally leads to a higher non-payment
rate, and a senior loan may lose significant value before a default occurs. Moreover, any specific collateral used to secure a senior loan may decline in value or become illiquid, which would adversely affect the senior loans value.
No active trading market may exist for certain senior loans, which may
impair the ability of the underlying fund and/or ETF to realize full value in the event of the need to sell a senior loan and which may make it difficult to value senior
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loans. Adverse market conditions may impair the liquidity of some actively traded senior loans. To the extent that a secondary market does exist for certain senior loans, the market may be
subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. See Liquidity Risk.
Although senior loans in which the underlying fund and/or ETF will invest generally will be secured by specific collateral, there can be no assurance that
liquidation of such collateral would satisfy the borrowers obligation in the event of non-payment of scheduled interest or principal or that such collateral could be readily liquidated. In the event of the bankruptcy of a borrower, an
underlying fund and/or ETF could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing a senior loan. If the terms of a senior loan do not require the borrower to pledge additional collateral
in the event of a decline in the value of the already pledged collateral, an underlying fund and/or ETF will be exposed to the risk that the value of the collateral will not at all times equal or exceed the amount of the borrowers obligations
under the senior loans. To the extent that a senior loan is collateralized by stock in the borrower or its subsidiaries, such stock may lose all of its value in the event of the bankruptcy of the borrower. Uncollateralized senior loans involve a
greater risk of loss. Some senior loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate the senior loans to presently existing or future indebtedness of the borrower or take other
action detrimental to lenders, including an underlying fund and/or ETF. Such court action could under certain circumstances include invalidation of senior loans.
If a senior loan is acquired through an assignment, an underlying fund and/or ETF may
not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. If a senior loan is acquired through a participation, an underlying fund and/or ETF generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement against the borrower, and the underlying fund and/or ETF may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a
result, the underlying fund and/or ETF will be exposed to the credit risk of both the borrower and the institution selling the participation.
Small Cap Securities Risk
Small cap companies may have limited product lines or markets. They may be less financially secure than larger, more
established companies. They may depend on a small number of key personnel. If a product fails or there are other adverse developments, or if management changes, the underlying funds and/or ETFs investment in a small cap company may lose
substantial value. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few
securities analysts.
The securities of small cap companies generally trade
in lower volumes and are subject to greater and more unpredictable price changes than larger cap securities or the market as a whole. In addition, small cap securities may be particularly sensitive to changes in interest rates, borrowing costs and
earnings. Investing in small cap securities requires a longer term view.
Sovereign Debt Risk
Sovereign debt instruments are subject to the risk that a governmental entity may delay or refuse to pay interest or repay
principal on its sovereign debt, due, for example, to cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of the governmental entitys debt position in relation to the economy or the failure
to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a governmental entity defaults, it may ask for more time in which to pay or for further loans. There is no legal process for collecting
sovereign debt that a government does not pay nor are there bankruptcy proceedings through which all or part of the sovereign debt that a governmental entity has not repaid may be collected.
Structured Products Risk
Holders of structured products bear risks of the underlying investments, index or reference
obligation and are subject to counterparty risk. An underlying fund and/or ETF may have the right to receive payments only from the structured product, and generally does not have direct rights against the issuer or the entity that sold the assets
to be securitized. Certain structured products may be thinly traded or have a limited trading market. In addition to the general risks associated with debt securities discussed herein, structured products carry additional risks, including, but not
limited to: the possibility that distributions from collateral securities will not be adequate to make interest or other payments; the quality of the collateral may decline in value or default; and the possibility that the structured products are
subordinate to other classes. Structured notes are based upon the movement of one or more factors, including currency exchange rates, interest rates, referenced bonds and stock indices, and changes in interest rates and impact of these factors may
cause significant price fluctuations. Additionally, changes in the reference instrument or security may cause the interest rate on the structured note to be reduced to zero.
Supranational Entities Risk
The underlying fund and/or ETF may
invest in obligations issued or guaranteed by the International Bank for Reconstruction and Development (the World Bank). The government members, or stockholders, usually make initial capital contributions to the World Bank and in many
cases are committed to make additional capital contributions if the World Bank is unable to repay its borrowings. There is no guarantee that one or more stockholders of the World Bank will continue to make any necessary additional capital
contributions. If such contributions are not made, the entity may be unable to pay interest or repay principal on its debt securities, and an underlying fund and/or ETF may lose money on such investments.
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Tender Option Bonds and Related Securities Risk
The Funds use of tender option bonds may
reduce the Funds return and/or increase volatility. Investments in tender option bonds expose an underlying fund and/or ETF to counterparty risk and leverage risk. An investment in tender option bonds typically will involve greater risk than
an investment in a municipal fixed rate security, including the risk of loss of principal. Distributions on residual interest tender option bonds (TOB Residuals) and inverse floaters will bear an inverse relationship to short-term
municipal security interest rates. Distributions on TOB Residuals and inverse floaters paid to an underlying fund and/or ETF will be reduced or, in the extreme, eliminated as short-term municipal interest rates rise and will increase when short-term
municipal interest rates fall. TOB Residuals and inverse floaters generally will underperform the market for fixed rate municipal securities in a rising interest rate environment.
U.S. Companies that Generate Revenue Abroad Risk
Many U.S.
companies in which an underlying fund and/or ETF may invest generate significant revenues and earnings from abroad. As a result, these companies and the prices of their securities may be affected by weaknesses in global and regional economies and
the relative value of foreign currencies to the U.S. dollar. These factors, taken as a whole, could adversely affect the price of underlying fund and/or ETF shares.
U.S. Government Issuer Risk
Treasury obligations may differ in
their interest rates, maturities, times of issuance and other characteristics. Obligations of U.S. Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S.
Government. No assurance can be given that the U.S. Government will provide financial support to its agencies and authorities if it is not obligated by law to do so.
U.S. Government Mortgage-Related Securities Risk
There are a
number of important differences among the agencies and instrumentalities of the U.S. Government that issue mortgage-related securities and among the securities that they issue. Mortgage-related securities guaranteed by the Government National
Mortgage Association (GNMA or Ginnie Mae) 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 securities also are
supported by the right of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. Mortgage-related securities issued by Fannie Mae or Freddie Mac are solely the obligations of Fannie Mae or Freddie Mac, as the case may be,
and are not backed by or entitled to the full faith and credit of the United States but are supported by the right of the issuer to borrow from the U.S. Treasury.
Variable and Floating Rate Instrument Risk
The absence of an
active market for these instruments could make it difficult for the Fund to dispose of them if the issuer defaults.
Warrants Risk
If the price of the underlying stock does not rise above the exercise price before the warrant expires, the warrant generally
expires without any value and the underlying fund and/or ETF loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as
their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock.
When-Issued and Delayed Delivery Securities and Forward Commitments Risks
When-issued and delayed delivery securities and forward commitments
involve the risk that the security an underlying fund and/or ETF buys will lose value prior to its delivery. There also is the risk that the security will not be issued or that the other party to the transaction will not meet its obligation. If this
occurs, the underlying fund and/or ETF loses both the investment opportunity for the assets it set aside to pay for the security and any gain in the securitys price.
Zero Coupon Securities Risk
While interest payments are not made
on such securities, holders of such securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest
payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being
unable to invest distributions at a rate as high as the implicit yield on the zero coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be
subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero coupon bonds are more exposed to interest rate risk than shorter term
zero coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
STATEMENT OF ADDITIONAL INFORMATION
B
LACK
R
OCK
F
UNDS
II
100 Bellevue Parkway, Wilmington, Delaware 19809 Phone No. (800) 441-7762
This Statement of Additional Information of BlackRock Multi-Asset Income Portfolio (the Portfolio or the Multi-Asset Income
Portfolio), a series of BlackRock Funds II (the Trust), is not a prospectus and should be read in conjunction with the Prospectus of the Portfolio, dated November 27, 2013, as amended March 21, 2014, as may be further
amended or supplemented from time to time (the Prospectus), which has been filed with the Securities and Exchange Commission (the Commission or the SEC) and can be obtained, without charge, by calling
(800) 441-7762 or by writing to the Portfolio at the above address. The Portfolios Prospectus is incorporated by reference into this Statement of Additional Information, and Part I of this Statement of Additional Information and the
portions of Part II of this Statement of Additional Information that relate to the Portfolio have been incorporated by reference into the Portfolios Prospectus. The portions of Part II of this Statement of Additional Information that do not
relate to the Portfolio do not form a part of the Portfolios Statement of Additional Information, have not been incorporated by reference into the Portfolios Prospectus and should not be relied upon by investors in the Portfolio. The
audited financial statements of the Portfolio are incorporated into this Statement of Additional Information by reference to the Portfolios Annual Report to Shareholders for the fiscal year ended July 31, 2013 (the Annual
Report). You may request a copy of the Annual Report at no charge by calling (800) 441-7762 between 8:00 a.m. and 6:00 p.m. Eastern time on any business day.
References to the Investment Company Act of 1940, as amended (the
Investment Company Act or the 1940 Act), or other applicable law, will include any rules promulgated thereunder and any guidance, interpretations or modifications by the Commission, Commission staff or other authority with
appropriate jurisdiction, including court interpretations, and exemptive, no-action or other relief or permission from the Commission, Commission staff or other authority.
Multi-Asset Income Portfolio
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Class
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Ticker Symbol
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Investor A Shares
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BAICX
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Investor C Shares
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BCICX
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Institutional Shares
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BIICX
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B
LACK
R
OCK
A
DVISORS
, LLC M
ANAGER
B
LACK
R
OCK
I
NVESTMENTS
, LLC D
ISTRIBUTOR
The date of this Statement of Additional Information is November 27, 2013, as amended March 21, 2014.
TABLE OF CONTENTS
P
ART
I: I
NFORMATION
A
BOUT
T
HE
P
ORTFOLIO
Part I of this Statement of Additional Information (SAI) sets forth information about BlackRock Multi-Asset Income Portfolio (Multi-Asset Income Portfolio or the
Portfolio), a series of BlackRock Funds II (the Trust). It includes information about the Trusts Board of Trustees (the Board or the Board of Trustees), the management services provided to and
the management fees paid by the Portfolio, performance data for the Portfolio, and information about other fees paid by and services provided to the Portfolio. This Part I should be read in conjunction with the Portfolios Prospectus and those
portions of Part II of this SAI that pertain to the Portfolio.
I.
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Investment Objectives and Policies
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Set forth below is listing of some of the types of investments and investment strategies that the Portfolio and its underlying funds may use, and the
risks and considerations associated with those investments and investment strategies. Please see the Part II of this Statement of Additional Information for further information on these investments and investment strategies.
Only information that is clearly identified as applicable to the Portfolio
is considered to form a part of the Portfolios Statement of Additional Information.
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Multi-Asset
Income
Portfolio
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144A Securities
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X
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Asset-Backed Securities
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X
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Asset-Based Securities
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X
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Precious Metal-Related Securities
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X
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Bank Loans
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X
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Borrowing and Leverage
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X
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Cash Flows; Expenses
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X
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Cash Management
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X
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Collateralized Debt Obligations
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X
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Collateralized Bond Obligations
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X
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Collateralized Loan Obligations
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X
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Commercial Paper
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X
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Commodity-Linked Derivative Instruments and Hybrid Instruments
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Qualifying Hybrid Instruments
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Hybrid Instruments Without Principal Protection
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Limitations on Leverage
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Counterparty Risk
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Convertible Securities
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X
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Debt Securities
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X
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Depositary Receipts (ADRs, EDRs and GDRs)
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X
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Derivatives
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X
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Hedging
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X
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Indexed and Inverse Floating Rate
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X
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Swap Agreements
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X
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Interest Rate Swaps, Caps and Floors
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X
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Credit Default Swap Agreements
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X
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Credit Linked Securities
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X
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I-1
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Multi-Asset
Income
Portfolio
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Interest Rate Transactions and Swaptions
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See note 1 below
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Total Return Swap Agreements
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X
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Hybrid Instruments
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X
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Types of Options
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See note 1 below
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Options on Securities and Securities Indices
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X
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Call Options
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X
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Put Options
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See note 1 below
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Options on Government National Mortgage Association (GNMA) Certificates
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X
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Futures
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X
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Risks Associated with Futures
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X
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Foreign Exchange Transactions
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X
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Forward Foreign Exchange Transactions
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X
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Currency Futures
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X
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Currency Options
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X
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Limitations on Currency Transactions
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X
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Risk Factors in Hedging Foreign Currency Risks
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X
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Risk Factors in Derivatives
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X
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Credit Risk
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X
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Currency Risk
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X
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Leverage Risk
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X
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Liquidity Risk
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X
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Correlation Risk
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X
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Index Risk
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X
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Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives
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X
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Distressed Securities
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X
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Dollar Rolls
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X
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Equity Securities
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X
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Exchange Traded Notes
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X
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Funding Agreements
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X
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Foreign Investment Risks
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X
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Foreign Market Risk
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X
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Foreign Economy Risk
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X
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Currency Risk and Exchange Risk
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X
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Governmental Supervision and Regulation/Accounting Standards
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X
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Certain Risks of Holding Fund Assets Outside the United States
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X
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Settlement Risk
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X
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Publicly Available Information
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X
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Guarantees
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X
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Illiquid or Restricted Securities
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X
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Inflation-Indexed Bonds
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X
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Information Concerning the Indices
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X
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I-2
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Multi-Asset
Income
Portfolio
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Standard & Poors 500 Index
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Russell Indexes
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MSCI Index
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Inflation Risk
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X
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Initial Public Offering (IPO) Risk
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X
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Investment Grade Debt Obligations
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X
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Investment in Emerging Markets
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X
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Brady Bonds
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X
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Investment in Other Investment Companies
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X
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Junk Bonds
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X
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Lease Obligations
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X
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Life Settlement Investments
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Liquidity Management
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X
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Master Limited Partnerships
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X
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Merger Transaction Risk
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Mezzanine Investments
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X
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Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks
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X
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Money Market Securities
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X
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Mortgage-Related Securities
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X
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Mortgage-Backed Securities
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X
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Collateralized Mortgage Obligations (CMOs)
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X
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Adjustable Rate Mortgage Securities
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X
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CMO Residuals
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X
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Stripped Mortgage Backed Securities
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X
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Tiered Index Bonds
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X
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Municipal Investments
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X
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Risk Factors and Special Considerations Relating to Municipal Bonds
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X
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Description of Municipal Bonds
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X
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General Obligation Bonds
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X
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Revenue Bonds
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X
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Private Activity Bonds (PABs)
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X
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Moral Obligation Bonds
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X
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Municipal Notes
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X
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Municipal Commercial Paper
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X
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Municipal Lease Obligations
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X
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Tender Option Bonds
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X
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Yields
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X
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Variable Rate Demand Obligations (VRDOs) and Participating VRDOs
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X
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Transactions in Financial Futures Contracts
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X
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Call Rights
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X
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Municipal Interest Rate Swap Transactions
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X
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Insured Municipal Bonds
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X
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I-3
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Multi-Asset
Income
Portfolio
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Build America Bonds
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X
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Participation Notes
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X
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Pay-in-Kind Bonds
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X
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Portfolio Turnover Rates
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X
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Preferred Stock
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X
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Real Estate Related Securities
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X
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Real Estate Investment Trusts (REITS)
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X
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Repurchase Agreements and Purchase and Sale Contracts
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X
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Reverse Repurchase Agreements
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X
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Rights Offerings and Warrants to Purchase
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X
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Securities Lending
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X
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Securities of Smaller or Emerging Growth Companies
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X
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Short Sales
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Sovereign Debt
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X
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Standby Commitment Agreements
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X
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Stripped Securities
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X
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Structured Notes
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X
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Supranational Entities
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X
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Tax-Exempt Derivatives
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X
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Tax-Exempt Preferred Shares
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Taxability Risk
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X
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Trust Preferred Securities
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X
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U.S. Government Obligations
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X
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Utility Industries
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X
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When Issued Securities, Delayed Delivery Securities and Forward Commitments
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X
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Yields and Ratings
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X
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Zero Coupon Securities
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X
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1
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The Portfolio may purchase (but not write) interest rate options.
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Regulation Regarding Derivatives
Effective December 31, 2012, the Commodity Futures Trading Commission
(CFTC) adopted certain regulatory changes that subject registered investment companies and advisers to registered investment companies to regulation by the CFTC if a fund invests more than a prescribed level of its liquidation value in
CFTC-regulated futures, options and swaps (CFTC Derivatives), or if the fund markets itself as providing investment exposure to such instruments. To the extent the Portfolio uses CFTC Derivatives, it intends to do so below such
prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments.
However, the Portfolio may have investments in underlying funds not advised by BlackRock (which for purposes of the no-action letter
referenced below may include certain securitized vehicles and/or mortgage REITS that may invest in CFTC Derivatives). The Portfolios investment adviser, BlackRock Advisors, LLC, has no transparency into the holdings of these underlying funds
because they are not advised by BlackRock. To address this issue of lack of transparency, the CFTC staff issued a no-action letter on November 29, 2012 permitting the adviser of a fund that invests in such underlying funds and that would
otherwise have filed a
I-4
claim of exclusion pursuant to Rule 4.5, to delay registration as a commodity pool operator six months from the date on which the CFTC issues additional guidance on the treatment of
CFTC Derivatives held by underlying funds. The investment adviser to the Portfolio has filed a claim with the CFTC to rely on this no-action relief with respect to the Portfolio.
II.
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Investment Restrictions
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The Portfolio is subject to the investment limitations enumerated in this subsection which may be changed only by a vote of the holders of a majority of
the Portfolios outstanding shares.
The Portfolio may not:
1. Purchase any securities which would cause 25% or more of the
value of the Portfolios total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that (a) the Portfolio may cause 25% or
more of its total assets at the time of purchase to be invested in the securities of one or more investment companies; (b) there is no limitation with respect to (i) instruments issued or guaranteed by the United States and tax exempt
instruments issued by any state, territory or possession of the United States, the District of Columbia or any of their authorities, agencies, instrumentalities or political subdivisions, and (ii) repurchase agreements secured by the
instruments described in clause (i); (c) wholly-owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of the parents; and (d) utilities
will be divided according to their services; for example, gas, gas transmission, electric and gas, electric and telephone will each be considered a separate industry. For purposes of the concentration policy, the Portfolio will look through to the
portfolio holdings of the underlying funds in which it invests and will aggregate the holdings of the underlying funds (on a pro rata basis based on the Portfolios investment in each underlying fund) to determine concentration in a particular
industry in accordance with the concentration policy provided above. For the purposes of this policy, only those underlying funds that are part of the BlackRock family of funds will be aggregated; the Portfolio will not aggregate underlying fund
holdings, if any, in underlying funds outside of the BlackRock family of funds.
2. Issue senior securities, borrow money or pledge its assets, except that the Portfolio may borrow from banks or enter into reverse repurchase agreements or dollar rolls in amounts aggregating not more
than 33
1
/
3
% of the value of its total assets (calculated when the loan is made) to take advantage of investment opportunities and may pledge up to 33
1
/
3
% of the value of its total assets to secure such borrowings. The Portfolio is also authorized to borrow an additional 5% of its total assets without regard to the foregoing limitations for temporary
purposes such as clearance of portfolio transactions and share redemptions. For purposes of these restrictions, the purchase or sale of securities on a when-issued, delayed delivery or forward commitment basis, the purchase and sale of
options and futures contracts and collateral arrangements with respect thereto are not deemed to be the issuance of a senior security, a borrowing or a pledge of assets.
3. Purchase or sell real estate, except that the Portfolio may purchase securities of issuers which deal in real estate and may
purchase securities which are secured by interests in real estate.
4. Acquire any other investment company or investment company security except in connection with a merger, consolidation, reorganization or acquisition of
assets or where otherwise permitted by the 1940 Act.
5. Act as
an underwriter of securities within the meaning of the Securities Act of 1933 except to the extent that the purchase of obligations directly from the issuer thereof, or the disposition of securities, in accordance with the Portfolios
investment objective, policies and limitations may be deemed to be underwriting.
6. Write or sell put options, call options, straddles, spreads, or any combination thereof, except for transactions in options on securities and securities indices, futures contracts and options on
futures contracts and currencies, to the extent permitted by applicable law.
7. Purchase securities of companies for the purpose of exercising control.
8. Purchase securities on margin, make short sales of securities or maintain a short position, except that (a) this investment limitation shall not
apply to the Portfolios transactions in futures contracts and related
I-5
options or the Portfolios sale of securities short against the box, and (b) the Portfolio may obtain short-term credit as may be necessary for the clearance of purchases and sales of
portfolio securities.
9. Purchase or sell commodity contracts,
or invest in oil, gas or mineral exploration or development programs, except that the Portfolio may, to the extent appropriate to its investment policies, purchase securities of companies engaging in whole or in part in such activities and may enter
into futures contracts and related options.
10. Make loans,
except that the Portfolio may purchase and hold debt instruments and enter into repurchase agreements in accordance with its investment objective and policies and may lend portfolio securities. See Investment Policies-Additional Information on
Investment Strategies-Securities Lending above.
11.
Purchase or sell commodities except that the Portfolio may, to the extent appropriate to its investment policies, purchase securities of companies engaging in whole or in part in such activities, may engage in currency transactions and may enter
into futures contracts and related options, to the extent permitted by applicable law.
Unless otherwise indicated, all limitations apply only at the time that a transaction is undertaken. Any change in the percentage of the Portfolios assets invested in certain securities or other
instruments resulting from market fluctuations or other changes in the Portfolios total assets will not require the Portfolio to dispose of an investment until the adviser or sub-adviser determines that it is practicable to sell or close out
the investment without undue market or tax consequences.
III.
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|
Information on Trustees and Officers
|
The Board of Trustees consists of thirteen individuals (each a Trustee), ten of whom are not interested persons of the Trust as
defined in the Investment Company Act (the Independent Trustees). The registered investment companies advised by the Manager or its affiliates (the BlackRock-advised Funds) are organized into one complex of closed-end funds,
two complexes of open-end funds (the Equity-Liquidity Complex and the Equity-Bond Complex) and one complex of exchange-traded funds (each a BlackRock Fund Complex). The Portfolio is included in the BlackRock Fund Complex referred to as
the Equity-Bond Complex. The Trustees also oversee as Board members the operations of the other open-end registered investment companies included in the Equity-Bond Complex.
The Board of Trustees has overall responsibility for the oversight of the
Trust and the Portfolio. The Chairman of the Board is an Independent Trustee, and the Chairman of each Board committee (each, a Committee) is an Independent Trustee. The Board has five standing Committees: an Audit Committee, a
Governance and Nominating Committee, a Compliance Committee, a Performance Oversight Committee and an Executive Committee. The Chairman of the Boards role is to preside at all meetings of the Board, and to act as a liaison with service
providers, officers, attorneys, and other Trustees generally between meetings. The Chairman of each Committee performs a similar role with respect to the Committee. The Chairman of the Board or a Committee may also perform such other functions as
may be delegated by the Board or the Committee from time to time. The Independent Trustees meet regularly outside the presence of Portfolio management, in executive session or with other service providers to the Portfolio. The Board has regular
meetings five times a year, and may hold special meetings if required before its next regular meeting. Each Committee meets regularly to conduct the oversight functions delegated to that Committee by the Board and reports its findings to the Board.
The Board and each standing Committee conduct annual assessments of their oversight function and structure. The Board has determined that the Boards leadership structure is appropriate because it allows the Board to exercise independent
judgment over management and to allocate areas of responsibility among Committees and the full Board to enhance effective oversight.
The Board has engaged the Manager to manage the Portfolio on a day-to-day basis. The Board is responsible for overseeing the Manager, other service
providers, the operations of the Portfolio and associated risk in accordance with the provisions of the Investment Company Act, state law, other applicable laws, the Trusts charter, and the Portfolios investment objectives and
strategies. The Board reviews, on an ongoing basis, the
I-6
Portfolios performance, operations, and investment strategies and techniques. The Board also conducts reviews of the Manager and its role in running the operations of the Portfolio.
Day-to-day risk management with respect to the Portfolio is the
responsibility of the Manager or of sub-advisers or other service providers (depending on the nature of the risk), subject to the supervision of the Manager. The Portfolio is subject to a number of risks, including investment, compliance,
operational and valuation risks, among others. While there are a number of risk management functions performed by the Manager and the sub-advisers or other service providers, as applicable, it is not possible to eliminate all of the risks applicable
to the Portfolio. Risk oversight forms part of the Boards general oversight of the Portfolio and is addressed as part of various Board and Committee activities. The Board, directly or through a Committee, also reviews reports from, among
others, management, the independent registered public accounting firm for the Portfolio, sub-advisers, and internal auditors for the investment adviser or its affiliates, as appropriate, regarding risks faced by the Portfolio and managements
or the service providers risk functions. The Committee system facilitates the timely and efficient consideration of matters by the Trustees, and facilitates effective oversight of compliance with legal and regulatory requirements and of the
Portfolios activities and associated risks. The Board has appointed a Chief Compliance Officer, who oversees the implementation and testing of the Portfolios compliance program and reports to the Board regarding compliance matters for
the Portfolio and its service providers. The Independent Trustees have engaged independent legal counsel to assist them in performing their oversight responsibilities.
The members of the Audit Committee are Fred G. Weiss (Chair), Robert M.
Hernandez and the Honorable Stuart E. Eizenstat, all of whom are Independent Trustees. The principal responsibilities of the Audit Committee are to approve, and recommend to the full Board for approval, the selection, retention, termination and
compensation of the Portfolios independent registered public accounting firm (the Independent Registered Public Accounting Firm) and to oversee the Independent Registered Public Accounting Firms work. The Audit
Committees responsibilities include, without limitation, to (1) evaluate the qualifications, independence and performance of the Independent Registered Public Accounting Firm; (2) approve all audit engagement terms and fees for the
Portfolio; (3) review the conduct and results of each audit and discuss the Portfolios audited financial statements; (4) review any issues raised by the Independent Registered Public Accounting Firm or Portfolio management regarding
the accounting or financial reporting policies and practices of the Portfolio and the internal controls of the Portfolio and certain service providers; (5) oversee the performance of (a) the Portfolios internal audit function
provided by its investment adviser and (b) the Independent Registered Public Accounting Firm; (6) oversee policies, procedures and controls regarding valuation of the Portfolios investments and their classification as liquid or
illiquid; (7) discuss with Portfolio management its policies regarding risk assessment and risk management as such matters relate to the Portfolios financial reporting and controls; (8) resolve any disagreements between Portfolio
management and the Independent Registered Public Accounting Firm regarding financial reporting; and (9) undertake such other duties and responsibilities as may from time to time be delegated by the Board to the Audit Committee. The Board has
adopted a written charter for the Audit Committee. During the fiscal year ended July 31, 2013, the Audit Committee met four times.
The members of the Governance and Nominating Committee (the Governance Committee) are the Honorable Stuart E. Eizenstat (Chair), Robert M.
Hernandez and Fred G. Weiss, all of whom are Independent Trustees. The principal responsibilities of the Governance Committee are to (1) identify individuals qualified to serve as Independent Trustees of the Trust and recommend Independent
Trustee nominees for election by shareholders or appointment by the Board; (2) advise the Board with respect to Board composition, procedures and committees (other than the Audit Committee); (3) oversee periodic self-assessments of the
Board and committees of the Board (other than the Audit Committee); (4) review and make recommendations regarding Independent Trustee compensation; (5) monitor corporate governance matters and develop appropriate recommendations to the
Board; (6) act as the administrative committee with respect to Board policies and procedures, committee policies and procedures (other than the Audit Committee) and codes of ethics as they relate to Independent Trustees; and (7) undertake
such other duties and responsibilities as may from time to time be delegated by the Board to the Governance Committee. The
I-7
Governance Committee may consider nominations for the office of Trustee made by Portfolio shareholders as it deems appropriate. Portfolio shareholders who wish to recommend a nominee should send
nominations to the Secretary of the Portfolio that include biographical information and set forth the qualifications of the proposed nominee. The Board has adopted a written charter for the Governance Committee. During the fiscal year ended
July 31, 2013, the Governance Committee met three times.
The members of the Compliance Committee are James H. Bodurtha (Chair), Bruce R. Bond and Roberta Cooper Ramo, all of whom are Independent Trustees. The
Compliance Committees purpose is to assist the Board in fulfilling its responsibility to oversee regulatory and fiduciary compliance matters involving the Portfolio, the fund-related activities of BlackRock and the Portfolios third-party
service providers. The Compliance Committees responsibilities include, without limitation, to (1) oversee the compliance policies and procedures of the Portfolio and its service providers and recommend changes or additions to such
policies and procedures; (2) review information on and, where appropriate, recommend policies concerning the Portfolios compliance with applicable law; (3) review reports from, oversee the annual performance review of, and make
certain recommendations and determinations regarding the Portfolios Chief Compliance Officer (the CCO), including determining the amount and structure of the CCOs compensation and recommending such amount and structure to the
full Board for approval and ratification; and (4) undertake such other duties and responsibilities as may from time to time be delegated by the Board to the Compliance Committee. The Board has adopted a written charter for the Compliance
Committee. During the fiscal year ended July 31, 2013, the Compliance Committee met four times.
The members of the Performance Oversight Committee (the Performance Committee) are David H. Walsh (Chair), Donald W. Burton, Kenneth A. Froot and John F. OBrien, all of whom are
Independent Trustees, and Paul L. Audet, who is an interested Trustee. The Performance Committees purpose is to assist the Board in fulfilling its responsibility to oversee the Portfolios investment performance relative to its
agreed-upon performance objectives. The Performance Committees responsibilities include, without limitation, to (1) review the Portfolios investment objectives, policies and practices; (2) recommend to the Board specific
investment tools and techniques employed by BlackRock; (3) recommend to the Board appropriate investment performance objectives based on its review of appropriate benchmarks and competitive universes; (4) review the Portfolios
investment performance relative to agreed-upon performance objectives; (5) review information on unusual or exceptional investment matters; and (6) undertake such other duties and responsibilities as may from time to time be delegated by
the Board to the Performance Committee. The Board has adopted a written charter for the Performance Committee. During the fiscal year ended July 31, 2013, the Performance Committee met four times.
The members of the Executive Committee are James H. Bodurtha, the Honorable
Stuart E. Eizenstat, Robert M. Hernandez, David H. Walsh and Fred G. Weiss, all of whom are Independent Trustees, and Paul L. Audet, who serves as an interested Trustee. The principal responsibilities of the Executive Committee are to (1) act
on routine matters between meetings of the Board; (2) act on such matters as may require urgent action between meetings of the Board; and (3) exercise such other authority as may from time to time be delegated to the Executive Committee by
the Board. The Board has adopted a written charter for the Executive Committee. During the fiscal year ended July 31, 2013, the Executive Committee did not meet.
The Independent Trustees have adopted a statement of policy that describes
the experience, qualifications, skills and attributes that are necessary and desirable for potential Independent Trustee candidates (the Statement of Policy). The Board believes that each Independent Trustee satisfied, at the time he or
she was initially elected or appointed a Trustee, and continues to satisfy, the standards contemplated by the Statement of Policy. Furthermore, in determining that a particular Independent Trustee was and continues to be qualified to serve as a
Trustee, the Board has considered a variety of criteria, none of which, in isolation, was controlling. The Board believes that, collectively, the Independent Trustees have balanced and diverse experience, skills, attributes and qualifications, which
allow the Board to operate effectively in governing the Portfolio and protecting the interests of shareholders. Among the attributes common to all Independent Trustees are their ability to review critically, evaluate, question and discuss
information provided to them, to interact effectively with the Portfolios investment adviser, sub-advisers, other service providers, counsel and
I-8
Independent Registered Public Accounting Firm, and to exercise effective business judgment in the performance of their duties as Trustees.
Each Trustees ability to perform his or her duties effectively is
evidenced by his or her educational background or professional training; business, consulting, public service or academic positions; experience from service as a board member of the Portfolio and the other funds in the BlackRock Fund Complex (and
any predecessor funds), other investment funds, public companies, non-profit entities or other organizations; ongoing commitment to and participation in Board and Committee meetings, as well as his or her leadership of standing and
ad hoc
committees throughout the years; or other relevant life experiences.
The table below discusses some of the experiences, qualifications and skills of each of the Trustees that support the conclusion that each Trustee should serve (or continue to serve) on the Boards.
|
|
|
Trustees
|
|
Experience, Qualifications and Skills
|
|
|
Independent Trustees
|
|
|
|
|
James H. Bodurtha
|
|
James H. Bodurtha has served for more than 20 years on the boards of registered investment companies, most recently as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including as Chairman of the Board of certain of the legacy-Merrill Lynch Investment Managers, L.P. (MLIM) funds. Prior thereto, Mr. Bodurtha was counsel to and a member of the Board of a smaller bank-sponsored mutual
funds group. In addition, Mr. Bodurtha is a member of, and previously served as Chairman of, the Independent Directors Council and currently serves as an independent director on the Board of Governors of the Investment Company Institute. He also has
more than 30 years of executive management and business experience through his work as a consultant and as the chairman of the board of a privately-held company. In addition, Mr. Bodurtha has more than 20 years of legal experience as a corporate
attorney and partner in a law firm, where his practice included counseling registered investment companies and their boards.
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|
|
Bruce R. Bond
|
|
Bruce R. Bond has served for approximately 15 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-BlackRock funds and the State Street Research Mutual Funds. He also has executive management and business experience, having served as president and chief executive officer of several communications networking
companies. Mr. Bond also has corporate governance experience from his service as a director of a computer equipment company.
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|
|
Donald W. Burton
|
|
Donald W. Burton has served for approximately 27 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM and Raymond James funds. He also has more than 30 years of investment management business experience, having served as the managing general partner of an investment partnership, and a member of the
Investment Advisory Council of the Florida State Board of Administration. In addition, Mr. Burton has corporate governance experience, having served as a board member of publicly-held financial, health-care, and telecommunications
companies.
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|
|
The Honorable
Stuart E. Eizenstat
|
|
The Honorable Stuart E. Eizenstat has served for approximately 11 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond
Complex and its predecessor funds, including the legacy-BlackRock funds. He served as U.S. Ambassador to the European Union Under Secretary of Commerce for International Trade, Under Secretary of State for Economic, Business & Agricultural
Affairs, and Deputy Secretary of the U.S. Treasury during the Clinton Administration. He was Director of the White House Domestic Policy Staff and Chief Domestic Policy Adviser to President Carter. In addition, Mr. Eizenstat is a practicing attorney
and Head of the International Practice at a major international law firm. Mr. Eizenstat has business and executive management experience and corporate governance experience through his service on the advisory boards and corporate boards of
publicly-held consumer, energy, environmental delivery, metallurgical and telecommunications companies. Mr. Eizenstat has been determined by the Audit Committee to be an audit committee financial expert, as such term is defined in the applicable SEC
rules.
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|
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Kenneth A. Froot
|
|
Kenneth A. Froot has served for approximately 17 years on the boards of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. The Equity-Bond Board benefits from Mr. Froots years of academic experience, having served as a professor of finance at Harvard University since 1992 and teaching courses on capital markets,
international finance, and risk management. Mr. Froot has published numerous articles and books on a range of topics, including, among others, the financing of risk, risk management, the global financial system, currency analysis, foreign investing,
and investment style strategies. He has served as a director of research for Harvard Business School for approximately 6 years, and as a managing partner of an investment partnership. In addition, Mr. Froot has served as a consultant to the
International Monetary Fund, the World Bank, and the Board of Governors of the Federal Reserve, and served on the staff of the US Presidents Council of Economic Advisers and the Economic Advisory Board of the Export-Import Bank of the United
States.
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I-9
|
|
|
Trustees
|
|
Experience, Qualifications and Skills
|
|
|
Robert M. Hernandez
|
|
Robert M. Hernandez has served for approximately 18 years on the board of registered investment companies, having served as Chairman of the Board of the Equity-Bond Complex and as
Vice Chairman and Chairman of the Audit and Nominating/Governance Committees of its predecessor funds, including certain legacy-BlackRock funds. Mr. Hernandez has business and executive experience through his service as group president, chief
financial officer, Chairman and vice chairman, among other positions, of publicly-held energy, steel, and metal companies. He has served as a director of other public companies in various industries throughout his career. He also has broad corporate
governance experience, having served as a board member of publicly-held energy, insurance, chemicals, metals and electronics companies. Mr. Hernandez has been determined by the Audit Committee to be an audit committee financial expert, as such term
is defined in the applicable SEC rules.
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|
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John F. OBrien
|
|
John F. OBrien has served for approximately 7 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. He also has investment management experience, having served as the president, director, and chairman of the board of an investment management firm and a life insurance company.
Mr. OBrien also has broad corporate governance and audit committee experience, having served as a board member and audit committee member of publicly-held financial, medical, energy, chemical, retail, life insurance, and auto parts
manufacturing companies, and as a director of a not-for-profit organization.
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|
|
Roberta Cooper Ramo
|
|
Roberta Cooper Ramo has served for approximately 12 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. She is a practicing attorney and shareholder in a law firm for more than 30 years. Ms. Ramo has oversight experience through her service as chairman of the board of a retail company and as
president of the American Bar Association and the American Law Institute and as President, for 2 years, and Member of the Board of Regents, for 6 years, of the University of New Mexico. She also has corporate governance experience, having served on
the boards of United New Mexico Bank and the First National Bank of New Mexico and on the boards of non-profit organizations.
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|
|
David H. Walsh
|
|
David H. Walsh has served for approximately 9 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. Mr. Walsh has investment management experience, having served as a consultant with Putnam Investments (Putnam) from 1993 to 2003, and employed in various capacities at Putnam from 1971
to 1992. He has oversight experience, serving as the director of an academic institute, and a board member of various not-for-profit organizations.
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|
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Fred G. Weiss
|
|
Fred G. Weiss has served for approximately 14 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including as Chairman of the board of certain of the legacy-MLIM funds. He also has more than 30 years of business and executive management experience, having served in senior executive positions of two public companies where he
was involved in both strategic planning and corporate development, as Chairman of the Committee on Investing Employee Assets (CIBA) and as a managing director of an investment consulting firm. Mr. Weiss also has corporate governance experience,
having served as a board member of a publicly-held global technology company and a pharmaceutical company, and as a director of a not-for-profit foundation. Mr. Weiss has been determined by the Audit Committee to be an audit committee financial
expert, as such term is defined in the applicable SEC rules.
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|
|
Interested Trustees
|
|
|
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|
Paul L. Audet
|
|
Paul L. Audet has a wealth of experience in the investment management industry, including more than 14 years with BlackRock and over 30 years in finance and asset management.
His expertise in finance is demonstrated by his positions as Chief Financial Officer of BlackRock and head of BlackRocks Global Cash Management business. Mr. Audet currently is a member of BlackRocks Global Operating and Corporate Risk
Management Committees, the BlackRock Alternative Investors Executive Committee and the Investment Committee for the Private Equity Fund of Funds. Prior to joining BlackRock, Mr. Audet was the Senior Vice President of Finance at PNC Bank Corp. and
Chief Financial Officer of the investment management and mutual fund processing businesses and head of PNCs Mergers & Acquisitions unit.
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|
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Laurence D. Fink
|
|
Laurence D. Fink has served for approximately 12 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds. He serves as Chairman of the Board and Chief Executive Officer of BlackRock, Inc. since its formation in 1998 and of BlackRock, Inc.s predecessor entities since 1988 and Chairman of the Executive and Management Committees.
Mr. Fink served as a managing director of The First Boston Corporation, Member of its Management Committee, Co-head of its Taxable Fixed Income Division and Head of its Mortgage and Real Estate Products Group. He also is Chairman of the Board of
several of BlackRocks alternative investment vehicles, Director of several of BlackRocks offshore funds, a Member of the Board of Trustees of New York University, Chair of the Financial Affairs Committee and a member of the Executive
Committee, the
Ad Hoc
Committee on Board Governance, and the Committee on Trustees. Mr. Fink serves as Co-Chairman of the NYU Hospitals Center Board of Trustees, Chairman of the Development/Trustee Stewardship Committee and Chairman of the
Finance Committee, and a Trustee of The Boys Club of New York.
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I-10
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Trustees
|
|
Experience, Qualifications and Skills
|
|
|
Henry Gabbay
|
|
Henry Gabbays many years of experience in finance provide the Board with a wealth of practical business knowledge and leadership. In particular, Mr. Gabbays experience
as a Consultant for and Managing Director of BlackRock, Inc., Chief Administrative Officer of BlackRock and President of BlackRock Funds provides the Fund with greater insight into the analysis and evaluation of both its existing investment
portfolios and potential future investments as well as enhanced oversight of its investment decisions and investment valuation processes. In addition, Mr. Gabbays former positions as Chief Administrative Officer of BlackRock and as Treasurer
of certain closed-end funds in the BlackRock Fund Complexes provide the Boards with direct knowledge of the operations of the BlackRock-advised Funds and its investment adviser. Mr. Gabbays previous service on and long-standing relationship
with the Boards also provide him with a specific understanding of the BlackRock-advised Funds, its operations, and the business and regulatory issues facing the BlackRock-advised Funds.
|
Biographical Information
Certain biographical and other information relating to the
Trustees is set forth below, including their year of birth, principal occupations for at least the last five years, the term of office and length of time served, the total number of registered investment companies overseen in the complex of funds
advised by BlackRock Advisors, LLC (the Manager) or its affiliates (BlackRock-advised Funds) and any public company and investment company directorships.
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|
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|
|
|
|
|
|
|
|
Name, Address
and Year of Birth
|
|
Position(s)
Held with
Trust
|
|
Length of
Time
Served as a
Trustee
1,2
|
|
Principal Occupation(s)
During Past Five
Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting of
Investment
Portfolios
(Portfolios)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
|
|
|
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James H. Bodurtha
3
55 East 52
nd
Street
New York, NY 10055 1944
|
|
Trustee
|
|
2007 to present
|
|
Director, The China Business Group, Inc. (consulting and investing firm) since 1996 and Executive Vice President thereof from 1996 to 2003; Chairman of the Board, Berkshire Holding
Corporation since 1980.
|
|
29 RICs consisting of 89 Portfolios
|
|
None
|
|
|
|
|
|
|
Bruce R. Bond
55 East 52
nd
Street New York, NY 10055 1946
|
|
Trustee
|
|
2007 to present
|
|
Trustee and Member of the Governance Committee, State Street Research Mutual Funds from 1997 to 2005; Board Member of Governance, Audit and Finance Committee, Avaya Inc. (computer
equipment) from 2003 to 2007.
|
|
29 RICs consisting of 89 Portfolios
|
|
None
|
|
|
|
|
|
|
Donald W. Burton
55 East 52
nd
Street
New York, NY 10055
1944
|
|
Trustee
|
|
2007 to present
|
|
Managing General Partner, The Burton Partnership, LP (an investment partnership) since 1979; Managing General Partner, The South Atlantic Venture Funds from 1983 to 2012; Director,
IDology, Inc. (technology solutions) since 2006; Director, Knology, Inc. (telecommunications) from 1996 to 2012; Director, Capital Southwest (financial) from 2006 to 2012.
|
|
29 RICs consisting of 89 Portfolios
|
|
None
|
|
|
|
|
|
|
Honorable Stuart
E.
Eizenstat
4
55 East 52
nd
Street
New York, NY 10055 1943
|
|
Trustee
|
|
2007 to present
|
|
Partner and Head of International Practice, Covington and Burling LLP (law firm) since 2001; International Advisory Board Member, The Coca Cola Company from 2002 to 2011; Advisory
Board Member, Veracity Worldwide, LLC (risk management) since 2007; Member of the International Advisory Board GML Ltd. (energy) since 2003; Advisory Board Member, BT Americas (telecommunications) from 2004 to 2010.
|
|
29 RICs consisting of 89 Portfolios
|
|
Alcatel-Lucent (telecommunications); Global Specialty Metallurgical; UPS Corporation (delivery service)
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I-11
|
|
|
|
|
|
|
|
|
|
|
Name, Address
and Year of Birth
|
|
Position(s)
Held with
Trust
|
|
Length of
Time
Served as a
Trustee
1,2
|
|
Principal Occupation(s)
During Past Five
Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting of
Investment
Portfolios
(Portfolios)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
|
|
|
|
|
Kenneth A. Froot
55 East 52
nd
Street
New York, NY 10055 1957
|
|
Trustee
|
|
2007 to present
|
|
Professor, Harvard University since 1992.
|
|
29 RICs consisting of 89 Portfolios
|
|
None
|
|
|
|
|
|
|
Robert M. Hernandez
5
55 East 52
nd
Street
New York, NY 10055 1944
|
|
Trustee
|
|
2007 to present
|
|
Director, Vice Chairman and Chief Financial Officer of USX Corporation (energy and steel business) from 1991 to 2001; Director, TE Connectivity (electronics) from 2006 to
2012.
|
|
29 RICs consisting of 89 Portfolios
|
|
ACE Limited (insurance company); Eastman Chemical Company; RTI International Metals, Inc.
|
|
|
|
|
|
|
John F. OBrien
55 East
52
nd
Street
New York, NY 10055
1943
|
|
Trustee
|
|
2007 to present
|
|
Chairman, Woods Hole Oceanographic Institute since 2009 and Trustee thereof from 2003 to 2009; Director, Ameresco, Inc. (energy solutions company) from 2006 to 2007.
|
|
29 RICs consisting of 89 Portfolios
|
|
Cabot Corporation (chemicals); LKQ Corporation (auto parts manufacturing); TJX Companies, Inc. (retailer)
|
|
|
|
|
|
|
Roberta Cooper Ramo
55 East 52
nd
Street
New York, NY 10055
1942
|
|
Trustee
|
|
2007 to present
|
|
Shareholder and Attorney, Modrall, Sperling, Roehl, Harris & Sisk, P.A. (law firm) since 1993; Chairman of the Board, Coopers Inc. (retail) since 1999; Director, ECMC
Group (service provider to students, schools and lenders) since 2001; President, The American Law Institute (non-profit) since 2008.
|
|
29 RICs consisting of 89 Portfolios
|
|
None
|
|
|
|
|
|
|
David H. Walsh
6
55 East 52
nd
Street
New York, NY 10055
1941
|
|
Trustee
|
|
2007 to present
|
|
Director, National Museum of Wildlife Art since 2007; Trustee, University of Wyoming Foundation since 2008; Director, Ruckelshaus Institute and Haub School of Natural Resources at
the University of Wyoming from 2006 to 2008; Director, The American Museum of Fly Fishing since 1997.
|
|
29 RICs consisting of 89 Portfolios
|
|
None
|
|
|
|
|
|
|
Fred G. Weiss
7
55 East 52
nd
Street
New York, NY 10055
1941
|
|
Trustee
|
|
2007 to present
|
|
Managing Director, FGW Associates (consulting and investment company) since 1997; Director, Michael J. Fox Foundation for Parkinsons Research since 2000; Director, BTG
International PLC (medical technology commercialization company) from 2001 to 2007.
|
|
29 RICs consisting of 89 Portfolios
|
|
Actavis, Inc. (pharmaceuticals)
|
I-12
|
|
|
|
|
|
|
|
|
|
|
Name, Address
and Year of Birth
|
|
Position(s)
Held with
Trust
|
|
Length of
Time
Served as a
Trustee
1,2
|
|
Principal Occupation(s)
During Past Five
Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting of
Investment
Portfolios
(Portfolios)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
|
|
|
|
|
Interested Trustees
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
55 East 52
nd
Street
New York, NY 10055
1953
|
|
Trustee
|
|
2011 to present
|
|
Senior Managing Director of BlackRock, Inc. and Head of U.S. Mutual Funds since 2011; Chair of the U.S. Mutual Funds Committee reporting to the Global Executive Committee since
2011; Head of BlackRocks Real Estate business from 2008 to 2011; Member of BlackRocks Global Operating and Corporate Risk Management Committees and of the BlackRock Alternative Investors Executive Committee and Investment Committee for
the Private Equity Fund of Funds business since 2008; Head of BlackRocks Global Cash Management business from 2005 to 2010; Acting Chief Financial Officer of BlackRock from 2007 to 2008; Chief Financial Officer of BlackRock from 1998 to
2005.
|
|
155 RICs consisting of 283 Portfolios
|
|
None
|
|
|
|
|
|
|
Laurence D. Fink
55 East 52
nd
Street
New York, NY 10055
1952
|
|
Trustee
|
|
2007 to present
|
|
Chairman and Chief Executive Officer of BlackRock, Inc. since its formation in 1998 and of BlackRock, Inc.s predecessor entities since 1988 and Chairman of the Executive and
Management Committees; Formerly Managing Director, The First Boston Corporation, Member of its Management Committee, Co-head of its Taxable Fixed Income Division and Head of its Mortgage and Real Estate Products Group; Chairman of the Board of
several of BlackRocks alternative investment vehicles; Director of several of BlackRocks offshore funds; Member of the Board of Trustees of New York University, Chair of the Financial Affairs Committee and a member of the Executive
Committee, the Ad Hoc Committee on Board Governance, and the Committee on Trustees; Co-Chairman of the NYU Hospitals Center Board of Trustees, Chairman of the Development/Trustee Stewardship Committee and Chairman of the Finance Committee; Trustee,
The Boys Club of New York.
|
|
29 RICs consisting of 89 Portfolios
|
|
BlackRock, Inc.
|
|
|
|
|
|
|
Henry Gabbay
55 East 52
nd
Street
New York, NY 10055
1947
|
|
Trustee
|
|
2007 to present
|
|
Consultant, BlackRock, Inc. from 2007 to 2008; Managing Director, BlackRock, Inc. from 1989 to 2007; Chief Administrative Officer, BlackRock from 1998 to 2007; President of
BlackRock Funds and BlackRock Allocation Target Shares (formerly, BlackRock Bond Allocation Target Shares) from 2005 to 2007 and Treasurer of certain closed-end funds in the BlackRock Fund Complex from 1989 to 2006.
|
|
155 RICs consisting of 283 Portfolios
|
|
None
|
1
|
|
Each Trustee holds office until his or her successor is duly elected and qualifies or until his or her earlier death, resignation, retirement or
removal as provided by the Trusts by-laws or charter or statute. In no event may an Independent Trustee hold office beyond December 31 of the year in which he or she turns 74. In no event may an Interested Trustee hold office beyond
December 31 of the year in which he or she turns 72.
|
2
|
|
Following the combination of MLIM and BlackRock, Inc. in September 2006, the various legacy MLIM and legacy BlackRock Fund boards were realigned and
consolidated into three new Fund boards in 2007. As a result, although the chart shows certain Trustees as joining the Trusts board in 2007, each Trustee first became a member of the Board of Directors/Trustees of other legacy MLIM or legacy
BlackRock Funds as follows: James H. Bodurtha, 1995; Bruce R. Bond, 2005; Donald W. Burton, 2002; Honorable Stuart E. Eizenstat, 2001; Kenneth A. Froot, 2005; Robert M. Hernandez, 1996; John F. OBrien, 2005; Roberta Cooper Ramo, 1999; David H.
Walsh, 2003; and Fred G. Weiss, 1998.
|
I-13
3
|
|
Chairman of the Compliance Committee.
|
4
|
|
Chairman of the Governance and Nominating Committee.
|
5
|
|
Chairman of the Board of Trustees.
|
6
|
|
Chairman of the Performance Oversight Committee.
|
7
|
|
Vice-Chairman of the Board of Trustees and Chairman of the Audit Committee.
|
8
|
|
Messrs. Audet and Fink are both interested persons, as defined in the Investment Company Act, of the Trust based on their positions at
BlackRock, Inc. and its affiliates. Mr. Gabbay is an interested person of the Trust due to his former position at BlackRock, Inc. and to his ownership of BlackRock, Inc. and PNC Financial Services Group, Inc. (PNC) securities.
|
Certain biographical and other information
relating to the officers of the Trust is set forth below, including their year of birth, their principal occupations for at least the last five years, length of time served, total number of registered investment companies and investment portfolios
overseen in the BlackRock-advised Funds and any currently held public company and investment company directorships:
|
|
|
|
|
|
|
|
|
|
|
Name, Address
and Year of Birth
|
|
Position(s)
Held with
Trust
|
|
Length of
Time Served
1
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
|
|
|
|
|
Trust Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Perlowski
55 East 52
nd
Street
New York, NY 10055
1964
|
|
President and Chief Executive Officer
|
|
2010 to present
|
|
Managing Director of BlackRock, Inc. since 2009; Global Head of BlackRock Fund Administration since 2009; Managing Director and Chief Operating Officer of the Global Product Group
at Goldman Sachs Asset Management, L.P. from 2003 to 2009; Treasurer of Goldman Sachs Mutual Funds from 2003 to 2009 and Senior Vice President thereof from 2007 to 2009; Director of Goldman Sachs Offshore Funds from 2002 to 2009; Director of Family
Resource Network (charitable foundation) since 2009.
|
|
155 RICs consisting of 283 Portfolios
|
|
None
|
|
|
|
|
|
|
Brendan Kyne
55 East 52
nd
Street New York, NY 10055 1977
|
|
Vice President
|
|
2009 to present
|
|
Managing Director of BlackRock, Inc. since 2010; Director of BlackRock, Inc. from 2008 to 2009; Head of Product Development and Management for BlackRocks U.S. Retail Group
since 2009 and Co-head thereof from 2007 to 2009; Vice President of BlackRock, Inc. from 2005 to 2008.
|
|
155 RICs consisting of 283 Portfolios
|
|
None
|
|
|
|
|
|
|
Neal J. Andrews
55 East 52
nd
Street New York, NY 10055 1966
|
|
Chief Financial Officer
|
|
2007 to present
|
|
Managing Director of BlackRock, Inc. since 2006; Senior Vice President and Line of Business Head of Fund Accounting and Administration at PNC Global Investment Servicing (U.S.) Inc.
from 1992 to 2006.
|
|
155 RICs consisting of 283 Portfolios
|
|
None
|
|
|
|
|
|
|
Jay M. Fife
55 East 52
nd
Street New York, NY 10055 1970
|
|
Treasurer
|
|
2007 to present
|
|
Managing Director of BlackRock, Inc. since 2007; Director of BlackRock, Inc. in 2006; Assistant Treasurer of MLIM and Fund Asset Management, L.P. advised funds from 2005 to 2006;
Director of MLIM Fund Services Group from 2001 to 2006.
|
|
155 RICs consisting of 283 Portfolios
|
|
None
|
|
|
|
|
|
|
Brian P. Kindelan
55 East 52
nd
Street New York, NY 10055 1959
|
|
Chief Compliance Officer and Anti-Money Laundering Officer
|
|
2007 to present
|
|
Chief Compliance Officer of the BlackRock-advised Funds since 2007; Managing Director and Senior Counsel of BlackRock, Inc. since 2005.
|
|
155 RICs consisting of 283 Portfolios
|
|
None
|
|
|
|
|
|
|
Benjamin Archibald 55 East 52
nd
Street New York, NY 10055 1975
|
|
Secretary
|
|
2012 to present
|
|
Director of BlackRock, Inc. since 2010; Assistant Secretary of the BlackRock-advised Funds from 2010 to 2012; General Counsel and Chief Operating Officer of Uhuru Capital Management
from 2009 to 2010; Executive Director and Counsel of Goldman Sachs Asset Management from 2005 to 2009.
|
|
61 RICs consisting of 193 Portfolios
|
|
None
|
1
|
|
Officers of the Trust serve at the pleasure of the Board of Trustees.
|
I-14
Share Ownership
Information relating to each Trustees share ownership in the Portfolio
and in all BlackRock-advised Funds that are overseen by the respective Trustee (Supervised Funds) as of December 31, 2012 is set forth in the chart below:
|
|
|
|
|
Name of Trustee
1
|
|
Aggregate Dollar
Range of Equity
Securities in the
Multi-Asset Income Portfolio
|
|
Aggregate Dollar
Range of Equity
Securities in
the
Supervised Funds
|
|
|
|
Interested Trustees
|
|
|
|
|
|
|
|
Paul L. Audet
|
|
None
|
|
Over $100,000
|
|
|
|
Laurence D. Fink
|
|
None
|
|
None*
|
|
|
|
Henry Gabbay
|
|
None
|
|
Over $100,000
|
|
|
|
Independent Trustees
|
|
|
|
|
|
|
|
James H. Bodurtha
|
|
None
|
|
Over $100,000
|
|
|
|
Bruce R. Bond
|
|
None
|
|
Over $100,000
|
|
|
|
Donald W. Burton
|
|
None
|
|
Over $100,000
|
|
|
|
Honorable Stuart E. Eizenstat
|
|
None
|
|
Over $100,000
|
|
|
|
Kenneth A. Froot
|
|
None
|
|
Over $100,000
|
|
|
|
Robert M. Hernandez
|
|
None
|
|
Over $100,000
|
|
|
|
John F. OBrien
|
|
None
|
|
Over $100,000
|
|
|
|
Roberta Cooper Ramo
|
|
None
|
|
Over $100,000
|
|
|
|
David H. Walsh
|
|
None
|
|
Over $100,000
|
|
|
|
Fred G. Weiss
|
|
None
|
|
Over $100,000
|
1
|
|
Trustees of the Trust are eligible to purchase Institutional shares of the Portfolio.
|
*
|
|
As of December 31, 2012, Mr. Fink had invested, in the aggregate, over $100,000 in BlackRock-advised Funds, including funds not overseen by him as a director
or trustee.
|
As of November 1, 2013, the
Trustees and officers of the Trust as a group owned an aggregate of less than 1% of the outstanding shares of the Portfolio. As of December 31, 2012, none of the Independent Trustees of the Trust or their immediate family members owned
beneficially or of record any securities in affiliates of the Manager, the Distributor, or any person directly or indirectly controlling, controlled by, or under common control with the Manager or the Distributor.
Compensation of Trustees
Each Trustee who is an Independent Trustee is paid as compensation an annual
retainer of $175,000 per year for his or her services as a Board member of the BlackRock-advised Funds, including the Portfolio, and a $25,000 Board meeting fee to be paid for each Board meeting up to five Board meetings held in a calendar year
(compensation for meetings in excess of this number to be determined on a case-by-case basis), together with out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings. In
addition, the Chairman and Vice-Chairman of the Board are paid as compensation an additional annual retainer of $115,000 and $35,000, respectively, per year. The Chairmen of the Audit Committee, Compliance Committee, Governance Committee and
Performance Committee are paid as compensation an additional annual retainer of $35,000, respectively.
Mr. Gabbay is an interested Trustee of the Trust and serves as an interested Board member of the other BlackRock-advised Funds which comprise the Equity-Liquidity, the Equity-Bond and the Closed-End
BlackRock Fund Complexes. Mr. Gabbay receives as compensation for his services as a Board member of each of the three BlackRock Fund Complexes, (i) an annual retainer of $550,000, paid quarterly in arrears allocated to the
BlackRock-advised Funds in these three BlackRock Fund Complexes, including the Trust and (ii) with respect to each of the two open-end BlackRock Fund Complexes, a Board meeting fee of $3,750 (with respect to meetings of the Equity-Liquidity
Complex) and $18,750 (with respect to meetings of the
I-15
Equity-Bond Complex) to be paid for attendance at each Board meeting up to five Board meetings held in a calendar year by each such Complex (compensation for meetings in excess of this number to
be determined on a case-by-case basis). Mr. Gabbay will also be reimbursed for out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings. Mr. Gabbays
compensation for serving on the boards of funds in these three BlackRock Fund Complexes (including the Trust) is equal to 75% of each board member retainer and, as applicable, of each board meeting fee (without regard to additional fees paid to
board and committee chairs) received by the independent board members serving on such boards. The Board of the Trust, or of any other BlackRock-advised Fund may modify the board members compensation from time to time depending on market
conditions and Mr. Gabbays compensation would be impacted by those modifications.
The following table sets forth the compensation earned by each of the Trustees from the Portfolio for the fiscal year ended July 31, 2013 and the aggregate compensation paid to them by all
BlackRock-advised Funds for the calendar year ended December 31, 2012.
|
|
|
|
|
|
|
Name
1
|
|
Aggregate
Compensation from
the Multi-Asset
Income
Portfolio
|
|
Estimated Annual
Benefits Upon
Retirement
|
|
Aggregate
Compensation from
the Portfolio and
Other
BlackRock-
Advised Funds
|
|
|
|
|
Interested Trustees:
2
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
|
|
None
|
|
None
|
|
None
|
|
|
|
|
Laurence D. Fink
|
|
None
|
|
None
|
|
None
|
|
|
|
|
Henry Gabbay
|
|
$3,338
|
|
None
|
|
$641,250
|
|
|
|
|
Independent Trustees:
|
|
|
|
|
|
|
|
|
|
|
James H. Bodurtha
3
|
|
$3,862
|
|
None
|
|
$340,000
|
|
|
|
|
Bruce R. Bond
|
|
$3,501
|
|
None
|
|
$305,000
|
|
|
|
|
Donald W. Burton
|
|
$3,501
|
|
None
|
|
$305,000
|
|
|
|
|
Honorable Stuart E. Eizenstat
4
|
|
$3,862
|
|
None
|
|
$340,000
|
|
|
|
|
Kenneth A. Froot
|
|
$3,501
|
|
None
|
|
$305,000
|
|
|
|
|
Robert M. Hernandez
5
|
|
$4,687
|
|
None
|
|
$420,000
|
|
|
|
|
John F. OBrien
|
|
$3,501
|
|
None
|
|
$305,000
|
|
|
|
|
Roberta Cooper Ramo
|
|
$3,501
|
|
None
|
|
$305,000
|
|
|
|
|
David H. Walsh
6
|
|
$3,862
|
|
None
|
|
$340,000
|
|
|
|
|
Fred G. Weiss
7
|
|
$4,223
|
|
None
|
|
$375,000
|
1
|
|
For the number of BlackRock-advised Funds from which each Trustee/Director receives compensation see the Biographical Information Chart beginning on
page I-11.
|
2
|
|
Mr. Gabbay began receiving compensation from the BlackRock-advised Funds for his service as a Trustee/Director effective January 1, 2009.
Messrs. Audet and Fink receive no compensation from the BlackRock-advised Funds for their service as a Trustee/Director.
|
3
|
|
Chairman of the Compliance Committee.
|
4
|
|
Chairman of the Governance Committee.
|
5
|
|
Chairman of the Board of Trustees.
|
6
|
|
Chairman of the Performance Committee.
|
7
|
|
Vice Chairman of the Board of Trustees and Chairman of the Audit Committee.
|
IV.
|
|
Management and Advisory Arrangements
|
The management and sub-advisory services provided by BlackRock, BlackRock International Limited (BIL), BlackRock Financial Management, Inc.
(BFM), BlackRock Investment Management, LLC (BIM), BlackRock Asset Management North Asia Limited (BNA) and BlackRock (Singapore) Limited (BRS), and the fees received for such services, are described in
the Prospectus.
For its management services, BlackRock is
entitled to fees, computed daily on a portfolio-by-portfolio basis and payable monthly, at the maximum annual rates set forth below. The management fees are based on assets attributable to the Portfolios direct investments and exclude
investments in underlying funds. BlackRock has
I-16
also entered into sub-advisory agreements with BIL, BFM, BIM, BNA and BRS (together, the Sub-Advisers) pursuant to which BlackRock pays each Sub-Adviser for services it provides a
monthly fee at an annual rate equal to a percentage of the advisory fee paid to BlackRock under the Investment Management Agreement. BIM acts as sub-adviser with respect to the equity investments of the Portfolio. As of March 21, 2014, BNA
replaced BlackRock (Hong Kong) Limited (BHK) as sub-adviser.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MULTI-ASSET INCOME PORTFOLIO (BEFORE WAIVERS)
|
|
|
|
|
Average Daily Net Assets
|
|
Management Fee (as a percentage
of average daily net
assets
attributable to direct investments
in securities other than shares of
underlying funds (as defined in
the Portfolios prospectus))
|
|
|
|
First $1 billion
|
|
|
.600%
|
|
|
|
$1 billion $2 billion
|
|
|
.550%
|
|
|
|
$2 billion $3 billion
|
|
|
.525%
|
|
|
|
Greater than $3 billion
|
|
|
.500%
|
|
BlackRock renders management services to the
Portfolio pursuant to an Investment Management Agreement. BFM, BIM, BIL, BNA and BRS each render sub-advisory services to the Portfolio pursuant to sub-advisory agreements. The Investment Advisory Agreement with BlackRock and the sub-advisory
agreements between BlackRock and BFM, BlackRock and BIM, BlackRock and BIL, BlackRock and BNA, and BlackRock and BRS are collectively referred to as the Advisory Contracts.
A discussion regarding the basis for the Boards approval of the Advisory Contracts (other than the sub-advisory agreement
with BNA) is available in the Portfolios Annual Report to Shareholders for the fiscal year ended July 31, 2013. A discussion regarding the basis for the Boards approval of the sub-advisory agreement with BNA will be available in the
Portfolios Annual Report for the fiscal year ended July 31, 2014.
Under the Advisory Contracts, BlackRock, BIM, BFM, BIL, BNA and BRS are not liable for any error of judgment or mistake of law or for any loss suffered by the Trust or the Portfolio in connection with the
performance of the Advisory Contracts. Under the Advisory Contracts, BlackRock, BFM, BIM, BIL, BNA and BRS are liable for a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence in the performance of their respective duties or from reckless disregard of their respective duties and obligations thereunder. Each Advisory Contract is terminable as to the Portfolio by vote
of the Trusts Board of Trustees or by the holders of a majority of the outstanding voting securities of the Portfolio, at any time without penalty, on 60 days written notice to BlackRock, BFM, BIM, BIL, BNA or BRS, as the case may be.
BlackRock, BFM, BIM, BIL, BNA and BRS may also terminate their advisory relationship with respect to the Portfolio on 60 days written notice to the Trust. Each of the Advisory Contracts terminates automatically in the event of its assignment.
Set forth below are the total management fees paid by the Trust
to BlackRock (after waivers) for service provided for the Portfolio for the periods indicated, and BlackRock waived management fees and reimbursed expenses, as follows:
|
|
|
|
|
|
|
Multi-Asset Income Portfolio
|
|
Fees Paid to
BlackRock
|
|
Waivers
|
|
Reimbursements
|
|
|
|
|
August 1, 2012 July 31, 2013
|
|
$11,551,837
|
|
$2,692,225
|
|
$1,380,830
|
|
|
|
|
August 1, 2011 July 31, 2012
|
|
$678,448
|
|
$297,258
|
|
$127,282
|
|
|
|
|
August 1, 2010 July 31, 2011
|
|
$19,627
|
|
$19,627
|
|
$103,835
|
I-17
Set forth below are the total sub-advisory fees paid by BlackRock to BIM, BFM, BIL, BHK and BRS (after
waivers) for services provided for the Portfolio for the periods indicated, and BIM, BFM, BIL, BHK and BRS waived sub-advisory fees as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Asset Income
Portfolio**
|
|
Fees Paid
to BIM
(After
Waivers)
|
|
Waivers
by
BIM
|
|
Fees Paid
to BFM
(After
Waivers)
|
|
Waivers
by
BFM
|
|
Fees Paid
to BIL
(After
Waivers)
|
|
Waivers
by
BIL
|
|
Fees Paid
to BHK
(After
Waivers)
|
|
Waivers
by
BHK
|
|
Fees Paid
to BRS*
(After
Waivers)
|
|
Waivers
by
BRS
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2012 July 31, 2013
|
|
$1,093,427
|
|
$0
|
|
$926,368
|
|
$0
|
|
$0
|
|
$0
|
|
$0*
|
|
$0*
|
|
$0*
|
|
$0*
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2011 July 31, 2012
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2010 July 31, 2011
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
*
|
Information shown is for the period from September 24, 2012 July 31, 2013.
|
**
|
Information with respect to BNA is not shown because BNA became a sub-adviser to the Portfolio effective March 21, 2014. As of the date of this SAI, BNA has not
received any sub-advisory fees for its services to the Portfolio.
|
Pursuant to the Management Agreement, BlackRock may from time to time, in its sole discretion to the extent permitted by applicable law, appoint one or more sub-advisers, including, without limitation,
affiliates of the Manager, to perform investment advisory services with respect to the Portfolio. In addition, the Manager may delegate certain of its investment advisory functions under the Management Agreement to one or more of its affiliates to
the extent permitted by applicable law. BlackRock may terminate any or all sub-advisers or such delegation arrangements in its sole discretion at any time to the extent permitted by applicable law.
Administration Agreement.
BlackRock and BNY Mellon Investment
Servicing (U.S.) Inc. (BNY Mellon) (the Administrators) serve as the Trusts co-administrators pursuant to an administration agreement (the Administration Agreement). BNY Mellon has agreed to maintain office
facilities for the Trust; furnish the Trust with statistical and research data, clerical, accounting, and bookkeeping services; provide and supervise the operation of an automated data processing system to process purchase and redemption orders;
prepare and file certain reports required by regulatory authorities; prepare and file federal and state tax returns; prepare and file material requested by state securities regulators; calculate various contractual expenses; compute the
Portfolios net asset value, net income and net capital gain or loss; and serve as a liaison with the Trusts independent public accountants. The Administrators may from time to time voluntarily waive administration fees with respect to
the Portfolio and may voluntarily reimburse the Portfolio for expenses.
Under the Administration Agreement, the Trust pays to BlackRock and BNY Mellon on behalf of the Portfolio a fee, computed daily and payable monthly, at an aggregate annual rate of (i) .075% of the
first $500 million of the Portfolios average daily net assets, .065% of the next $500 million of the Portfolios average daily net assets and .055% of the average daily net assets of the Portfolio in excess of $1 billion and
(ii) .025% of the first $500 million of average daily net assets allocated to each class of shares of the Portfolio, .015% of the next $500 million of such average daily net assets and .005% of the average daily net assets allocated to each
class of shares of the Portfolio in excess of $1 billion.
Under
the Administration Agreement, BlackRock is responsible for: (i) the supervision and coordination of the performance of the Trusts service providers; (ii) the negotiation of service contracts and arrangements between the Trust and its
service providers; (iii) acting as liaison between the Trustees of the Trust and the Trusts service providers; and (iv) providing ongoing business management and support services in connection with the Trusts operations.
The Administration Agreement provides that BlackRock and BNY
Mellon will not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or the Portfolio in connection with the performance of the Administration Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from reckless disregard of their respective duties and obligations thereunder. In addition, the Trust will indemnify each of BlackRock and BNY Mellon and their affiliates
against any loss arising in connection with their provision of services under the Administration Agreement, except that neither BlackRock nor BNY Mellon nor their affiliates shall be
I-18
indemnified against any loss arising out of willful misfeasance, bad faith, gross negligence or reckless disregard of their respective duties under the Administration Agreement.
For the periods indicated, the Portfolio paid the Administrators combined
administration fees, and the Administrators waived combined administration fees and reimbursed expenses, as follows:
|
|
|
|
|
|
|
Multi-Asset Income Portfolio
|
|
Fees Paid to
BlackRock
|
|
Waivers
|
|
Reimbursements
|
|
|
|
|
August 1, 2012 July 31, 2013
|
|
$1,694,133
|
|
$416,930
|
|
$0
|
|
|
|
|
August 1, 2011 July 31, 2012
|
|
$150,225
|
|
$37,421
|
|
$0
|
|
|
|
|
August 1, 2010 July 31, 2011
|
|
$4,646
|
|
$4,646
|
|
$0
|
The Trust and its service providers may
engage third party plan administrators who provide trustee, administrative and recordkeeping services for certain employee benefit, profit-sharing and retirement plans as agent for the Trust with respect to such plans, for the purpose of accepting
orders for the purchase and redemption of shares of the Portfolio.
In addition, pursuant to a Shareholders Administrative Services Agreement, BlackRock provides certain shareholder liaison services in connection
with the Trusts investor service center. The Portfolio reimburses BlackRock for its costs in maintaining the service center, which costs include, among other things, employee salaries, leasehold expenses, and other out-of-pocket expenses. Set
forth below are the amounts the Portfolio reimbursed BlackRock pursuant to the Shareholders Administrative Services Agreement.
|
|
|
Fiscal Year Ended July 31,
|
|
Multi-Asset
Income
Portfolio,
|
|
|
2013
|
|
$15,557
|
|
|
2012
|
|
$18
|
|
|
2011
|
|
$1
|
Information Regarding the
Portfolio Managers
Michael Fredericks, Lutz-Peter Wilke,
CFA, and Justin Christofel, CFA are the portfolio managers and are jointly and primarily responsible for the day-to-day management of the Portfolio.
Other Funds and Accounts Managed
The following table sets forth information about funds and accounts other than the Portfolio for which the Portfolios portfolio managers are
primarily responsible for the day-to-day portfolio management as of the Portfolios fiscal year ended July 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed
and Assets by Account Type
|
|
Number of Other Accounts and
Assets for Which Advisory Fee is
Performance-Based
|
Name of Portfolio Manager
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
|
|
|
|
|
|
Justin Christofel
|
|
18
|
|
18
|
|
2
|
|
0
|
|
0
|
|
0
|
|
|
$11.58 Billion
|
|
$3.39 Billion
|
|
$56.94 Million
|
|
$0
|
|
$0
|
|
$0
|
|
|
|
|
|
|
|
Michael Fredericks
|
|
1
|
|
0
|
|
1
|
|
0
|
|
0
|
|
0
|
|
|
$12.65 Million
|
|
$0
|
|
$54.76 Million
|
|
$0
|
|
$0
|
|
$0
|
|
|
|
|
|
|
|
Lutz-Peter Wilke
|
|
2
|
|
0
|
|
3
|
|
0
|
|
0
|
|
2
|
|
|
$7.48 Billion
|
|
$0
|
|
$2.65 Billion
|
|
$0
|
|
$0
|
|
$2.59 Billion
|
Portfolio Manager
Compensation Overview
The discussion below describes the
portfolio managers compensation as of July 31, 2013.
I-19
BlackRocks financial arrangements with its portfolio managers, its competitive compensation and its
career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation
include a base salary, a performance-based discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by BlackRock.
Base compensation.
Generally, portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation.
Discretionary
incentive compensation is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio managers group within BlackRock, the investment performance, including risk-adjusted returns, of the firms
assets under management or supervision by that portfolio manager, and the individuals performance and contribution to the overall performance of these portfolios and BlackRock. Among other things, BlackRocks Chief Investment Officers
make a subjective determination with respect to each portfolio managers compensation based on the performance of the Portfolio and other accounts managed by each portfolio manager. Performance of multi-asset class funds is generally measured
on a pre-tax basis over various time periods including 1-,3- and 5- year periods, as applicable. Messrs. Christofel, Fredericks and Wilkes performance is not measured against a specific benchmark.
Distribution of Discretionary Incentive Compensation.
Discretionary
incentive compensation is distributed to portfolio managers in a combination of cash and BlackRock, Inc. restricted stock units which vest ratably over a number of years. For some portfolio managers, discretionary incentive compensation is also
distributed in deferred cash awards that notionally track the returns of select BlackRock investment products they manage and that vest ratably over a number of years. The BlackRock, Inc. restricted stock units, upon vesting, will be settled in
BlackRock, Inc. common stock. Typically, the cash portion of the discretionary incentive compensation, when combined with base salary, represents more than 60% of total compensation for the portfolio managers. Paying a portion of discretionary
incentive compensation in BlackRock, Inc. stock puts compensation earned by a portfolio manager for a given year at risk based on BlackRocks ability to sustain and improve its performance over future periods. Providing a portion of
discretionary incentive compensation in deferred cash awards that notionally track the BlackRock investment products they manage provides direct alignment with investment product results.
Long-Term Incentive Plan Awards
From time to time long-term incentive equity awards are granted to certain key
employees to aid in retention, align their interests with long-term shareholder interests and motivate performance. Equity awards are generally granted in the form of BlackRock, Inc. restricted stock units that, once vested, settle in BlackRock,
Inc. common stock. Mr. Fredericks has unvested long-term incentive awards.
Deferred Compensation Program
A portion of the compensation paid to eligible United States-based BlackRock employees may be voluntarily deferred at their election for defined periods of time
into an account that tracks the performance of certain of the firms investment products. Any portfolio manager who is either a managing director or director at BlackRock is eligible to participate in the deferred compensation program.
Other compensation benefits.
In addition to base
compensation and discretionary incentive compensation, portfolio managers may be eligible to receive or participate in one or more of the following:
Incentive Savings Plans
BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to
participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 8% of
eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal to 3-5% of eligible compensation up to the Internal Revenue Service limit ($255,000 for 2013). The RSP offers a range of investment options,
including registered investment companies and collective investment funds managed by
I-20
the firm. BlackRock contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested into a target date fund
that corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in BlackRock common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in
the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the purchase date. All of the eligible portfolio managers are eligible to participate in these plans.
Portfolio Manager Beneficial Holdings
As of July 31, 2013, the end of the Portfolios most recently
completed fiscal year, the dollar range of securities beneficially owned by each portfolio manager in the Portfolio is shown below:
|
|
|
Portfolio Manager
|
|
Dollar Range of Equity Securities
Beneficially Owned
1
|
|
|
Michael Fredericks
|
|
$100,001-$500,000
|
|
|
Lutz-Peter Wilke, CFA
|
|
$1-$10,000
|
|
|
Justin Christofel, CFA
|
|
$1-$10,000
|
1
|
|
Includes securities attributable to the portfolio managers participation in certain deferred compensation and retirement programs.
|
Portfolio Manager
Potential Material Conflicts of Interest
BlackRock has
built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. BlackRock has adopted policies and procedures that
address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time.
Nevertheless, BlackRock furnishes investment management and advisory services to numerous clients in addition to the Portfolio, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts
(including accounts which are hedge funds or have performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the
Portfolio. In addition, BlackRock, its affiliates and significant shareholders and any officer, director, shareholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Portfolio.
BlackRock, or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee or any member of their families may take different actions than those recommended to the Portfolio by BlackRock with respect to the same
securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies of which any of BlackRocks (or its affiliates or significant shareholders) officers, directors or employees are
directors or officers, or companies as to which BlackRock or any of its affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public
information. Certain portfolio managers also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for the Portfolio. It should also be noted that a portfolio manager may be managing hedge fund and/or long
only accounts, or may be part of a team managing hedge fund and/or long only accounts, subject to incentive fees. Such portfolio managers may therefore be entitled to receive a portion of any incentive fees earned on such accounts.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and must
treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable
manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to
allocate investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
I-21
Custodian and Transfer Agency Agreements
Pursuant to the terms of a custodian agreement (the Custodian
Agreement) between the Trust and The Bank of New York Mellon (the Custodian), the Custodian or a sub-custodian (i) maintains a separate account or accounts in the name of the Portfolio, (ii) holds and transfers portfolio
securities on account of the Portfolio, (iii) accepts receipts and makes disbursements of money on behalf of the Portfolio, (iv) collects and receives all income and other payments and distributions on account of the Portfolios
securities and (v) makes periodic reports to the Board of Trustees concerning the Portfolios operations. The Custodian is authorized to select one or more banks or trust companies to serve as sub-custodian on behalf of the Portfolio,
provided that, with respect to sub-custodians other than sub-custodians for non-U.S. securities, the Custodian remains responsible for the performance of all its duties under the Custodian Agreement and holds the Trust harmless from the acts and
omissions of any sub-custodian. Citibank, N.A. serves as the international sub-custodian for various series of the Trust and has been appointed by the Board of Trustees as the Trusts foreign custody manager under Rule 17f-5 of the
1940 Act. As foreign custody manager, Citibank, N.A. selects and monitors foreign sub-custodian banks and furnishes information relevant to the selection of foreign depositories.
BNY Mellon Investment Servicing (US) Inc., which has its principal offices
at 301 Bellevue Parkway, Wilmington, Delaware 19809, serves as the transfer and dividend disbursement agent for the Portfolio.
V.
|
|
Information on Sales Charges and Distribution Related Expenses
|
Distribution Agreement and Distribution and Service Plan
. The Trust
has entered into a distribution agreement with BlackRock Investments, LLC (BRIL, or the Distributor) under which BRIL, as agent, offers shares of the Portfolio on a continuous basis. BRIL has agreed to use appropriate efforts
to effect sales of the shares, but it is not obligated to sell any particular amount of shares. BRILs principal business address is 40 East 52nd Street New York, NY 10022. BRIL is an affiliate of BlackRock.
The Trust may pay to brokers, dealers, financial institutions and industry
professionals (including BlackRock, BRIL, PNC and their affiliates) (collectively, Service Organizations) fees for the provision of personal services to shareholders. In the past, BlackRock or BRIL has retained a portion of the
shareholder servicing fees paid by the Trust. To the extent a shareholder is not associated with a Service Organization, the shareholder servicing fees will be paid to BlackRock, and BlackRock will provide services.
Set forth below is information on sales charges (including any contingent
deferred sales charges (CDSCs)) received by the Portfolio, including the amounts paid to affiliates of BlackRock, for the Portfolios last fiscal year. Effective October 1, 2008, BRIL, an affiliate of BlackRock, acts as the
Trusts sole Distributor.
Investor A Shares Sales Charge
Information
|
|
|
|
|
|
|
|
|
|
|
Investor A Shares
|
Fiscal Year Ended
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained
by BRIL
|
|
Sales Charges
Paid to
Affiliates
|
|
CDSCs Received
on Redemption of
Load Waived
Shares
|
|
|
|
|
|
July 31, 2013
|
|
$13,941,922
|
|
$1,007,603
|
|
$1,008,303
|
|
$52,708
|
|
|
|
|
|
July 31, 2012
|
|
$2,693,045
|
|
$189,468
|
|
$189,468
|
|
$12,477
|
|
|
|
|
|
July 31, 2011
|
|
$45,824
|
|
$3,256
|
|
$3,256
|
|
$0
|
I-22
Investor C Shares Sales Charge Information
|
|
|
|
|
|
|
Investor C Shares
|
Fiscal Year Ended
|
|
CDSCs
Received
BRIL
|
|
CDSCs
Paid to
Affiliates
|
|
|
|
July 31, 2013
|
|
$220,850
|
|
$220,850
|
|
|
|
July 31, 2012
|
|
$15,356
|
|
$15,356
|
|
|
|
July 31, 2011
|
|
$40
|
|
$40
|
The table below provides information for the
fiscal year ended July 31, 2013 about the 12b-1 fees the Portfolio paid to BRIL under the Trusts 12b-1 plans. A significant amount of the fees collected by BRIL were paid to affiliates for providing shareholder servicing activities for
Investor A Shares and for providing shareholder servicing and distribution-related activities and services for Investor C Shares.
|
|
|
|
|
Fiscal Year Ended
July 31, 2013
|
Class Name
|
|
Paid to BRIL
|
|
|
Investor A Shares
|
|
$1,690,125
|
|
|
Investor C Shares
|
|
$6,057,010
|
Credit Agreement
The Portfolio, along with certain other funds managed by the Manager and its
affiliates (Participating Funds), is a party to a 364-day, $800 million credit agreement with a group of lenders, which is renewed annually (the Credit Agreement). Excluding commitments designated for a certain individual
fund, other Participating Funds, including the Portfolio, can borrow up to an aggregate commitment amount of $500 million, subject to asset coverage and other limitations as specified in the Credit Agreement. The Portfolio may borrow under the
Credit Agreement to meet shareholder redemptions and for other lawful purposes. The Portfolio may not borrow under the Credit Agreement for leverage. The Portfolio may borrow up to the maximum amount allowable under the Portfolios current
Prospectus and SAI, subject to various other legal, regulatory or contractual limits. Borrowing results in interest expense and other fees and expenses for the Portfolio which may impact the Portfolios net expenses. The costs of borrowing may
reduce the Portfolios return. The Portfolio is charged its pro rata share of upfront fees and commitment fees on the aggregate commitment amount based on its net assets. If the Portfolio borrows pursuant to the Credit Agreement, the Portfolio
is charged interest at a variable rate.
VI.
|
|
Computation of Offering Price Per Share
|
An illustration of the computation of the offering price for the Investor A Shares of the Portfolio based on the value of the Portfolios Investor A
Shares net assets and number of Investor A Shares outstanding on July 31, 2013 is set forth below.
|
|
|
|
|
|
|
Multi-Asset
Income Portfolio
Investor A Shares
|
|
|
|
Net Assets
|
|
|
$1,375,764,776
|
|
|
|
Number of Shares Outstanding
|
|
|
124,922,627
|
|
|
|
Net Asset Value Per Share (net assets divided by number of shares outstanding)
|
|
|
$11.01
|
|
|
|
Sales Charge (5.25% of offering price; 5.53% of net asset value per share)
1
|
|
|
0.61
|
|
|
|
|
|
|
|
|
Offering Price
|
|
|
$11.62
|
|
|
|
|
|
|
1
|
|
Assumes maximum sales charge applicable.
|
The offering price for the Portfolios other share classes is equal to the share class net asset value computed as set forth above for Investor
A Shares. Though not subject to a sales charge, certain share classes may be
I-23
subject to a CDSC on redemption. For more information on the purchasing and valuation of shares, please see Purchase of Shares and Pricing of Shares in Part II of this
Statement of Additional Information.
VII.
|
|
Portfolio Transactions and Brokerage
|
See Part II Portfolio Transactions and Brokerage of this Statement of Additional Information for more information.
Information about the brokerage commissions paid by the Portfolio, including
commissions paid to Affiliates, for the last three fiscal years is set forth in the following table:
During the 12 months ended July 31, 2013, the Portfolio paid brokerage commissions as follows:
|
|
|
Portfolio
|
|
Commissions Brokerage
|
|
|
Multi-Asset Income Portfolio
|
|
$1,421,900
|
For the fiscal year ended July 31,
2013, the brokerage commissions paid to affiliates by the Portfolio represented 0% of the aggregate brokerage commissions paid and involved 0% of the dollar amount of transactions involving payment of commissions during the year.
The following table shows the dollar amount of brokerage commissions paid to
brokers for providing third party research services and the approximate dollar amount of the transactions involved for the fiscal year ended July 31, 2013. The provision of third party research services was not necessarily a factor in the
placement of all brokerage business with such brokers.
|
|
|
|
|
Portfolio
|
|
Brokerage
Commissions
|
|
Amount of
Transactions
Involved
|
|
|
|
Multi-Asset Income Portfolio
|
|
$478,771
|
|
$524,375,764
|
During the 12 months ended July 31,
2012, the Portfolio paid brokerage commissions as follows:
|
|
|
Portfolio
|
|
Brokerage Commissions
|
|
|
Multi-Asset Income Portfolio
|
|
$118,910
|
For the fiscal year ended July 31,
2012, the brokerage commissions paid to affiliates by the Portfolio represented 0% of the aggregate brokerage commissions paid and involved 0% of the dollar amount of transactions involving payment of commissions during the year.
The following table shows the dollar amount of brokerage commissions paid to
brokers for providing third party research services and the approximate dollar amount of the transactions involved for the fiscal year ended July 31, 2012. The provision of third party research services was not necessarily a factor in the
placement of all brokerage business with such brokers.
|
|
|
|
|
Portfolio
|
|
Brokerage
Commisions
|
|
Amount of
Transactions
Involved
|
|
|
|
Multi-Asset Income Portfolio
|
|
$12,953
|
|
$32,162,622
|
During the 12 months ended July 31,
2011, the Portfolio paid brokerage commissions as follows:
|
|
|
Portfolio
|
|
Brokerage Commissions
|
|
|
Multi-Asset Income Portfolio
|
|
$780
|
For the fiscal year ended July 31,
2011, the brokerage commissions paid to affiliates by the Portfolio represented 0% of the aggregate brokerage commissions paid and involved 0% of the dollar amount of transactions involving payment of commissions during the year.
I-24
The following table shows the dollar amount of brokerage commissions paid to brokers for providing third
party research services and the approximate dollar amount of the transactions involved for the fiscal year ended July 31, 2011. The provision of third party research services was not necessarily a factor in the placement of all brokerage
business with such brokers.
|
|
|
|
|
Portfolio
|
|
Brokerage
Commisions
|
|
Amount
of
Transactions
Involved
|
|
|
|
Multi-Asset Income Portfolio
|
|
$503
|
|
$366,743
|
The Portfolio conducts its securities
lending pursuant to an exemptive order from the Commission permitting it to lend portfolio securities to borrowers affiliated with the Portfolio and to retain an affiliate of the Portfolio as lending agent. To the extent that the Portfolio engages
in securities lending, BlackRock Investment Management, LLC (BIM), an affiliate of the Manager, acts as securities lending agent for the Portfolio, subject to the overall supervision of the Manager. BIM administers the lending program in
accordance with guidelines approved by the Portfolios Board.
The Portfolio retains a portion of securities lending income and remits a remaining portion to BIM as compensation for its services as securities lending
agent. Securities lending income is equal to the total of income earned from the reinvestment of cash collateral (and excludes collateral investment expenses as defined below), and any fees or other payments to and from borrowers of securities. As
securities lending agent, BIM bears all operational costs directly related to securities lending. The Portfolio is responsible for expenses in connection with the investment of cash collateral received for securities on loan in a private investment
company managed by an affiliate of the Manager, however, BIM has agreed to cap the collateral investment expenses the Portfolio bears to an annual rate of 0.04% of the daily net assets of such private investment company (the collateral
investment expenses). In addition, in accordance with the exemptive order, the investment adviser to the private investment company will not charge any advisory fees with respect to shares purchased by the Portfolio. Such shares also will not
be subject to a sales load, redemption fee, distribution fee or service fee.
Pursuant to the current securities lending agreement (i) the Portfolio retains 75% of securities lending income (which excludes collateral investment expenses); however, commencing January 1, 2015, the
Portfolio will retain 70% of securities lending income (which excludes collateral investment expenses), and (ii) these amounts can never be less than 65% of the sum of securities lending income plus collateral investment expenses.
Under the securities lending program, the Portfolio is categorized into a
specific asset class. The determination of the Portfolios asset class category (fixed income, domestic equity, international equity, or fund of funds), each of which may be subject to a different fee arrangement, is based on a methodology
agreed to between the Trust and BIM.
In addition, commencing the
business day following the date that the aggregate securities lending income earned across the Equity-Bond Complex in a calendar year exceeds the aggregate securities lending income earned across the Equity-Bond Complex in the calendar year 2013
(the Hurdle Date), the Portfolio, pursuant to the current securities lending agreement, will receive for the remainder of that calendar year securities lending income as follows:
(i) 80% of securities lending income (which excludes collateral investment expenses); however, for the remainder of the
calendar year following any Hurdle Date after January 1, 2015, the Portfolio will retain 75% of securities lending income (which excludes collateral investment expenses); and (ii) these amounts can never be less than 65% of the sum of securities
lending income plus collateral investment expenses.
I-25
The following table below shows the dollar amount of security lending agent fees that were paid by the
Portfolio to BIM for the periods indicated:
|
|
|
Fiscal Year Ended July 31,
|
|
Paid to BIM
|
|
|
2013
|
|
$0
|
|
|
2012
|
|
$0
|
|
|
2011
|
|
$0
|
The value of the Portfolios aggregate
holdings of the securities of its regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) if any portion of such holdings were purchased during the fiscal year ended July 31, 2013 are as follows:
|
|
|
|
|
Regular Broker/Dealer
|
|
Debt (D)/Equity (E)
|
|
Aggregate Holdings (000s)
|
|
|
|
Bank of America Securities LLC
|
|
D
|
|
$24,683
|
|
|
|
JPMorgan Securities, Inc
|
|
D
|
|
$35,284
|
|
|
|
CIT Group Holdings, Inc
|
|
D
|
|
$5,817
|
|
|
|
Deutsche Bank Securities, Inc
|
|
D
|
|
$91,269
|
|
|
|
Credit Suisse Securities (USA), LLC
|
|
D
|
|
$18,497
|
|
|
|
Barclays Bank PLC
|
|
D
|
|
$9,950
|
|
|
|
UBS Securities LLC
|
|
D
|
|
$12,259
|
|
|
|
Goldman, Sachs & Co.
|
|
D
|
|
$173,042
|
|
|
|
CitiGroup Global Markets, Inc.
|
|
D
|
|
$11,153
|
|
|
|
Deutsche Bank Securities, Inc.
|
|
E
|
|
$1,996
|
|
|
|
Morgan Stanley & Co., Inc.
|
|
D
|
|
$5,029
|
|
|
|
RBC Capital Markets LLC
|
|
D
|
|
$85,364
|
|
|
|
Wells Fargo Securities LLC
|
|
D
|
|
$34,957
|
|
|
|
Goldman, Sachs & Co.
|
|
E
|
|
$6,165
|
|
|
|
CitiGroup Global Markets, Inc.
|
|
E
|
|
$15,063
|
|
|
|
BNY Convergex Execution Solutions LLC
|
|
D
|
|
$10,428
|
VIII.
|
|
Additional Information
|
The Trust was organized as a Massachusetts business trust on April 26, 2007 and is registered under the 1940 Act as an open end, management
investment company. Shares of each class of the Portfolio of the Trust bear their pro rata portion of all operating expenses paid by the Portfolio, except transfer agency fees, certain administrative/servicing fees and amounts payable under the
Trusts Amended and Restated Distribution and Service Plan. Each share of the Portfolio has a par value of $.001, represents an interest in the Portfolio and is entitled to the dividends and distributions earned on the Portfolios assets
that are declared in the discretion of the Board of Trustees. The Trusts shareholders are entitled to one vote for each full share held and proportionate fractional votes for fractional shares held, and will vote in the aggregate and not by
class, except where otherwise required by law or as determined by the Board of Trustees. Effective November 28, 2011, the BlackRock Income Portfolio changed its name to the BlackRock Income Builder Portfolio and effective December 15,
2011, the BlackRock Income Builder Portfolio changed its name to the BlackRock Multi-Asset Income Portfolio.
Shares of the Trust have non-cumulative voting rights and, accordingly, the holders of more than 50% of the Trusts outstanding shares (irrespective of class) may elect all of the Trustees. Shares
have no preemptive rights and only such conversion and exchange rights as the Board may grant in its discretion. When issued for payment, shares will be fully paid and non-assessable by the Trust.
There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as required by law. At that time, the Trustees then in office will call a shareholders meeting to elect Trustees. Except as set forth above, the Trustees shall continue to hold office and may appoint
successor
I-26
Trustees. The Trusts Declaration of Trust provides that meetings of the shareholders of the Trust shall be called by the Trustees upon the written request of shareholders owning at least
10% of the outstanding shares entitled to vote.
Rule 18f-2 under
the 1940 Act provides that any matter required by the provisions of the 1940 Act or applicable state law, or otherwise, to be submitted to the holders of the outstanding voting securities of an investment company such as the Trust shall not be
deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each investment portfolio affected by such matter. Rule 18f-2 further provides that an investment portfolio shall be deemed to be
affected by a matter unless the interests of each investment portfolio in the matter are substantially identical or the matter does not affect any interest of the investment portfolio. Under Rule 18f-2, the approval of a management agreement, a
distribution plan subject to Rule 12b-1 under the 1940 Act or any change in a fundamental investment policy would be effectively acted upon with respect to an investment portfolio only if approved by a majority of the outstanding shares of such
investment portfolio. However, Rule 18f-2 also provides that the ratification of the appointment of independent accountants, the approval of principal underwriting contracts and the election of Trustees may be effectively acted upon by shareholders
of the Trust voting together in the aggregate without regard to a particular investment portfolio.
The proceeds received by the Portfolio for each issue or sale of its shares, and all net investment income, realized and unrealized gain and proceeds thereof, subject only to the rights of creditors, will
be specifically allocated to and constitute the underlying assets of that Portfolio. The underlying assets of the Portfolio will be segregated on the books of account, and will be charged with the liabilities in respect to that Portfolio and with a
share of the general liabilities of the Trust. As stated herein, certain expenses of the Portfolio may be charged to a specific class of shares representing interests in that Portfolio.
The Trusts Declaration of Trust authorizes the Board of Trustees, without shareholder approval (unless otherwise required
by applicable law), to: (i) sell and convey the assets belonging to a class of shares to another management investment company for consideration which may include securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of such class to be redeemed at a price which is equal to their net asset value and which may be paid in cash or by distribution of the securities or other consideration received from the sale and conveyance; (ii) sell and
convert the assets belonging to one or more classes of shares into money and, in connection therewith, to cause all outstanding shares of such class to be redeemed at their net asset value; or (iii) combine the assets belonging to a class of
shares with the assets belonging to one or more other classes of shares if the Board of Trustees reasonably determines that such combination will not have a material adverse effect on the shareholders of any class participating in such combination
and, in connection therewith, to cause all outstanding shares of any such class to be redeemed or converted into shares of another class of shares at their net asset value. The Board of Trustees may authorize the liquidation and termination of the
Portfolio or class of shares. Upon any liquidation of the Portfolio, shareholders of each class of the Portfolio are entitled to share pro rata in the net assets belonging to that class available for distribution.
Shareholder and Trustee Liability of the Trust
Under Massachusetts law, shareholders of a business trust
may, under certain circumstances, be held personally liable as partners for the obligations of the trust. However, the Trusts Declaration of Trust provides that shareholders shall not be subject to any personal liability in connection with the
assets of the Trust for the acts or obligations of the Trust, and that every note, bond, contract, order or other undertaking made by the Trust shall contain a provision to the effect that the shareholders are not personally liable thereunder. The
Declaration of Trust provides for indemnification out of the Trust property of any shareholder held personally liable solely by reason of his being or having been a shareholder and not because of his acts or omissions or some other reason. The
Declaration of Trust also provides that the Trust shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust, and shall satisfy any judgment thereon.
I-27
The Declaration of Trust further provides that all persons having any claim against the Trustees or Trust
shall look solely to the Trust property for payment; that no Trustee of the Trust shall be personally liable for or on account of any contract, debt, tort, claim, damage, judgment or decree arising out of or connected with the administration or
preservation of the Trust property or the conduct of any business of the Trust; and that no Trustee shall be personally liable to any person for any action or failure to act except by reason of such Trustees own bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties as a Trustee. With the exception stated, the Declaration of Trust provides that a Trustee is entitled to be indemnified against all liabilities and expenses reasonably incurred by such Trustee in
connection with the defense or disposition of any proceeding in which he may be involved or with which he may be threatened by reason of his being or having been a Trustee, and that the Trust will indemnify officers, representatives and employees of
the Trust to the same extent that trustees are entitled to indemnification.
Counsel.
Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019 serves as the Trusts counsel.
Independent Registered Public Accounting Firm.
Deloitte & Touche LLP, with offices at 1700 Market Street,
Philadelphia, Pennsylvania 19103 serves as the Portfolios independent registered public accountant.
Principal Shareholders.
To the knowledge of the Trust, the following entities owned beneficially or of record 5% or more of the Portfolios shares as of October 31, 2013:
|
|
|
|
|
|
|
Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
*American Enterprise Investment Svc
|
|
707 2nd Ave S
Minneapolis, MN
55402
|
|
21.49%
|
|
Investor A Shares
|
|
|
|
|
*Merrill Lynch Pierce Fenner & Smith Incorporated
|
|
4800 Deer Lake Drive East Jacksonville, FL 32246-6484
|
|
16.11%
|
|
Investor A Shares
|
|
|
|
|
*UBS WM USA
|
|
499 Washington Blvd 9th Floor Jersey City,
NJ 07310-2055
|
|
13.04%
|
|
Investor A Shares
|
|
|
|
|
*Edward D. Jones and Co.
|
|
12555 Manchester Road
St.
Louis, MO 63131-3710
|
|
11.84%
|
|
Investor A Shares
|
|
|
|
|
*Pershing LLC
|
|
1 Pershing Plaza
Jersey City,
NJ 07399-0001
|
|
8.02%
|
|
Investor A Shares
|
|
|
|
|
*NFS LLC FEBO
|
|
499 Washington Boulevard Jersey City, NJ 07310
|
|
7.34%
|
|
Investor A Shares
|
|
|
|
|
*Merrill Lynch Pierce Fenner & Smith Incorporated
|
|
4800 Deer Lake Drive East Jacksonville, FL 32246-6484
|
|
35.95%
|
|
Investor C Shares
|
|
|
|
|
*Morgan Stanley & Co.
|
|
Harborside Financial Center Plaza II 3rd Floor Jersey City, NJ 07311
|
|
12.80%
|
|
Investor C Shares
|
|
|
|
|
*First Clearing, LLC
|
|
2801 Market Street
St. Louis,
MO 63103
|
|
8.89%
|
|
Investor C Shares
|
|
|
|
|
*Raymond James Omnibus for Mutual Funds
|
|
880 Carillon Parkway
St.
Petersburg, FL 33716
|
|
6.61%
|
|
Investor C Shares
|
|
|
|
|
*American Enterprise Investment Svc
|
|
707 2nd Ave S Minneapolis, MN 55402
|
|
5.97%
|
|
Investor C Shares
|
|
|
|
|
*UBS WM USA
|
|
499 Washington Blvd 9th Floor Jersey City,
NJ 07310-2055
|
|
5.54%
|
|
Investor C Shares
|
|
|
|
|
*Merrill Lynch Pierce Fenner & Smith Incorporated
|
|
4800 Deer Lake Drive East Jacksonville, FL 32246-6484
|
|
36.74%
|
|
Institutional Shares
|
|
|
|
|
*First Clearing, LLC
|
|
2801 Market Street
St. Louis,
MO 63103
|
|
12.80%
|
|
Institutional Shares
|
|
|
|
|
*Morgan Stanley & Co.
|
|
Harborside Financial Center Plaza II 3rd Floor
Jersey City, NJ 07311
|
|
12.18%
|
|
Institutional Shares
|
|
|
|
|
*Pershing LLC
|
|
1 Pershing Plaza
Jersey City,
NJ 07399-0001
|
|
7.76%
|
|
Institutional Shares
|
|
|
|
|
*LPL Financial FBO Customer Accounts
|
|
9785 Towne Centre Drive San Diego, CA 92121-1968
|
|
7.47%
|
|
Institutional Shares
|
I-28
|
|
|
|
|
|
|
Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
*NFS LLC FEBO
|
|
499 Washington Blvd
Jersey
City, NJ 07310
|
|
7.23%
|
|
Institutional Shares
|
|
|
|
|
*Charles Schwab & Co Inc
|
|
101 Montgomery Street
San Francisco, CA 94104-4122
|
|
6.59%
|
|
Institutional Shares
|
*
|
|
Record holder that does not beneficially hold the shares.
|
Shareholder Approvals.
As used in this Statement of Additional Information and in the Prospectus, a majority of the outstanding shares
of a class, series or Portfolio means, with respect to the approval of an investment advisory agreement, a distribution plan or a change in a fundamental investment policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the outstanding shares of such class, series or Portfolio are present in person or by proxy, or (2) more than 50% of the outstanding shares of such class, series or
Portfolio.
The audited financial statements and notes thereto in the Portfolios Annual Report to Shareholders for the fiscal year ended July 31, 2013 (the
2013 Annual Report) are incorporated in this Statement of Additional Information by reference. No other parts of the 2013 Annual Report are incorporated by reference herein. The financial statements included in the 2013 Annual Report
have been audited by Deloitte & Touche LLP. The report of Deloitte & Touche LLP is incorporated herein by reference. Such financial statements have been incorporated herein in reliance upon such report given upon
Deloitte & Touche LLPs authority as experts in accounting and auditing.
Additional copies of the 2013 Annual Report may be obtained at no charge by telephoning the Distributor at the telephone number appearing on the front page of this Statement of Additional Information.
I-29
P
ART
II
Throughout this Statement of Additional Information (SAI), each
BlackRock-advised fund may be referred to as a Fund or collectively with others as the Funds.
Each Fund is organized either as a Maryland corporation, a Massachusetts business trust or a Delaware statutory trust. In each jurisdiction, nomenclature
varies. For ease and clarity of presentation, shares of common stock and shares of beneficial interest are referred to herein as shares or Common Stock, holders of shares of Common Stock are referred to as
shareholders, the trustees or directors of each Fund are referred to as Directors, BlackRock Advisors, LLC or its affiliates is the investment adviser or manager of each Fund and is referred to herein as the
Manager or BlackRock, and the investment advisory agreement or management agreement applicable to each Fund is referred to as the Management Agreement. Each Funds Articles of Incorporation or Declaration of
Trust, together with all amendments thereto, is referred to as its charter. The Investment Company Act of 1940, as amended, is referred to herein as the Investment Company Act. The Securities Act of 1933, as amended, is
referred to herein as the Securities Act. The Securities and Exchange Commission is referred to herein as the Commission or the SEC.
Certain Funds are feeder funds (each, a Feeder Fund)
that invest all or a portion of their assets in a corresponding master portfolio (each, a Master Portfolio) of a master limited liability company (each, a Master LLC), a mutual fund that has the same objective and
strategies as the Feeder Fund. All investments are generally made at the level of the Master Portfolio. This structure is sometimes called a master/feeder structure. A Feeder Funds investment results will correspond directly to the
investment results of the underlying Master Portfolio in which it invests. For simplicity, this SAI uses the term Fund to include both a Feeder Fund and its Master Portfolio.
In addition to containing information about the Fund, Part II of this SAI contains general information about all funds in the
BlackRock-advised fund complex. Certain information contained herein may not be relevant to a particular Fund.
I
NVESTMENT
R
ISKS
AND
C
ONSIDERATIONS
Set forth below are descriptions of some of the types of
investments and investment strategies that one or more of the Funds may use, and the risks and considerations associated with those investments and investment strategies. Please see each Funds Prospectus and the Investment Objectives and
Policies section of Part I of this SAI for further information on each Funds investment policies and risks. Information contained in this section about the risks and considerations associated with a Funds investments and/or
investment strategies applies only to those Funds specifically identified in Part I of this Statement of Additional Information as making each type of investment or using each investment strategy (each, a Covered Fund). Information that
does not apply to a Covered Fund does not form a part of that Covered Funds Statement of Additional Information and should not be relied on by investors in that Covered Fund.
Only information that is clearly identified as applicable to a Covered Fund is considered to form a part of that Covered
Funds Statement of Additional Information.
144A
Securities.
A Fund may purchase securities that can be offered and sold only to qualified institutional buyers under Rule 144A under the Securities Act. The Directors have determined to treat as liquid Rule 144A securities that
are either freely tradable in their primary markets offshore or have been determined to be liquid in accordance with the policies and procedures adopted by the Funds Directors. The Directors have adopted guidelines and delegated to the Manager
the daily function of determining and monitoring liquidity of 144A securities. The Directors, however, will retain sufficient oversight and will ultimately be responsible for the determinations. Since it is not possible to predict with assurance
exactly how the market for securities sold and offered under Rule 144A will continue to develop, the Directors will carefully monitor a Funds investments in these securities. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these securities.
Asset-Backed Securities.
Asset-backed securities are securities backed by home equity loans, installment sale contracts, credit card
receivables or other assets. Asset-backed securities are pass-through securities, meaning that principal and interest payments net of expenses made by the borrower on the underlying assets (such as credit card receivables)
are passed through to a Fund. The value of asset-backed securities, like that of traditional fixed income securities, typically increases when interest rates fall and decreases when interest rates rise. However, asset-backed securities differ from
traditional fixed income securities because of their potential for prepayment. The price paid by a Fund for its asset-backed securities, the yield the Fund expects to receive from such securities and the average life of the securities are based on a
number of factors, including the anticipated rate of prepayment of
II-1
the underlying assets. In a period of declining interest rates, borrowers may prepay the underlying assets more quickly than anticipated, thereby reducing the yield to maturity and the average
life of the asset-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in these circumstances, it will likely receive a rate of interest that is lower than the rate on the security that was prepaid. To the extent that a
Fund purchases asset-backed securities at a premium, prepayments may result in a loss to the extent of the premium paid. If a Fund buys such securities at a discount, both scheduled payments and unscheduled prepayments will increase current and
total returns and unscheduled prepayments will also accelerate the recognition of income which, when distributed to shareholders, will be taxable as ordinary income. In a period of rising interest rates, prepayments of the underlying assets may
occur at a slower than expected rate, creating maturity extension risk. This particular risk may effectively change a security that was considered short- or intermediate-term at the time of purchase into a longer term security. Since the value of
longer-term securities generally fluctuates more widely in response to changes in interest rates than does the value of shorter term securities, maturity extension risk could increase the volatility of the Fund. When interest rates decline, the
value of an asset-backed security with prepayment features may not increase as much as that of other fixed-income securities, and, as noted above, changes in market rates of interest may accelerate or retard prepayments and thus affect maturities.
Asset-Based Securities.
Certain Funds may invest
in debt, preferred or convertible securities, the principal amount, redemption terms or conversion terms of which are related to the market price of some natural resource asset such as gold bullion. These securities are referred to as
asset-based securities. A Fund will purchase only asset-based securities that are rated, or are issued by issuers that have outstanding debt obligations rated, investment grade (for example, AAA, AA, A or BBB by Standard &
Poors (S&P) or Fitch Ratings (Fitch), or Baa by Moodys Investors Service, Inc. (Moodys) or commercial paper rated A-1 by S&P or Prime-1 by Moodys) or by issuers that the Manager has
determined to be of similar creditworthiness. Obligations ranked in the fourth highest rating category, while considered investment grade, may have certain speculative characteristics and may be more likely to be downgraded than
securities rated in the three highest rating categories. If an asset-based security is backed by a bank letter of credit or other similar facility, the Manager may take such backing into account in determining the creditworthiness of the issuer.
While the market prices for an asset-based security and the related natural resource asset generally are expected to move in the same direction, there may not be perfect correlation in the two price movements. Asset-based securities may not be
secured by a security interest in or claim on the underlying natural resource asset. The asset-based securities in which a Fund may invest may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Certain
asset-based securities may be payable at maturity in cash at the stated principal amount or, at the option of the holder, directly in a stated amount of the asset to which it is related. In such instance, because no Fund presently intends to invest
directly in natural resource assets, a Fund would sell the asset-based security in the secondary market, to the extent one exists, prior to maturity if the value of the stated amount of the asset exceeds the stated principal amount and thereby
realize the appreciation in the underlying asset.
Precious
Metal-Related Securities.
A Fund may invest in the equity securities of companies that explore for, extract, process or deal in precious metals (
e.g.
, gold, silver and platinum), and in asset-based securities indexed to the value of such
metals. Such securities may be purchased when they are believed to be attractively priced in relation to the value of a companys precious metal-related assets or when the values of precious metals are expected to benefit from inflationary
pressure or other economic, political or financial uncertainty or instability. Based on historical experience, during periods of economic or financial instability the securities of companies involved in precious metals may be subject to extreme
price fluctuations, reflecting the high volatility of precious metal prices during such periods. In addition, the instability of precious metal prices may result in volatile earnings of precious metal-related companies, which may, in turn, adversely
affect the financial condition of such companies.
The major
producers of gold include the Republic of South Africa, Russia, Canada, the United States, Brazil and Australia. Sales of gold by Russia are largely unpredictable and often relate to political and economic considerations rather than to market
forces. Economic, financial, social and political factors within South Africa may significantly affect South African gold production.
Bank Loans.
Certain Funds may invest in bank loans. Bank loans are generally non-investment grade floating rate instruments. Usually, they
are freely callable at the issuers option. Certain Funds may invest in fixed and floating rate loans (Loans) arranged through private negotiations between a corporate borrower or a foreign sovereign entity and one or more financial
institutions (Lenders). A Fund may invest in such Loans in the form of participations in Loans (Participations) and assignments of all or a portion of Loans from third parties (Assignments). A Fund considers these
investments to be investments in debt securities for purposes of its investment policies. Participations typically will result in the Fund having a contractual relationship only with the Lender, not with the borrower. The Fund will have the right to
receive payments of principal, interest and any fees to
II-2
which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Fund
generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loans, nor any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the
Loan in which it has purchased the Participation. As a result, the Fund will assume the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling the Participation, the
Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. The Fund will acquire Participations only if the Lender interpositioned between the Fund and the borrower is determined
by the Funds manager to be creditworthy. When the Fund purchases Assignments from Lenders, the Fund will acquire direct rights against the borrower on the Loan, and will not have exposure to a counterpartys credit risk. The Funds may
enter into Participations and Assignments on a forward commitment or when-issued basis, whereby a Fund would agree to purchase a Participation or Assignment at set terms in the future. For more information on forward commitments and
when-issued securities, see When-Issued Securities, Delayed Delivery Securities and Forward Commitments below.
A Fund may have difficulty disposing of Assignments and Participations. In certain cases, the market for such instruments is not highly liquid, and
therefore the Fund anticipates that in such cases such instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary market may have an adverse impact on the value of such instruments and on the
Funds ability to dispose of particular Assignments or Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower. Assignments and Participations will not be considered illiquid so
long as it is determined by the Funds manager that an adequate trading market exists for these securities. To the extent that liquid Assignments and Participations that a Fund holds become illiquid, due to the lack of sufficient buyers or
market or other conditions, the percentage of the Funds assets invested in illiquid assets would increase.
Leading financial institutions often act as agent for a broader group of lenders, generally referred to as a syndicate. The syndicates agent arranges the loans, holds collateral and accepts payments
of principal and interest. If the agent develops financial problems, a Fund may not recover its investment or recovery may be delayed.
The Loans in which the Fund may invest are subject to the risk of loss of principal and income. Although borrowers frequently provide collateral to secure
repayment of these obligations they do not always do so. If they do provide collateral, the value of the collateral may not completely cover the borrowers obligations at the time of a default. If a borrower files for protection from its
creditors under the U.S. bankruptcy laws, these laws may limit a Funds rights to its collateral. In addition, the value of collateral may erode during a bankruptcy case. In the event of a bankruptcy, the holder of a Loan may not recover its
principal, may experience a long delay in recovering its investment and may not receive interest during the delay.
Borrowing and Leverage.
Each Fund may borrow as a temporary measure for extraordinary or emergency purposes, including to meet redemptions or to settle securities transactions. Certain Funds
will not purchase securities at any time when borrowings exceed 5% of their total assets, except (a) to honor prior commitments or (b) to exercise subscription rights when outstanding borrowings have been obtained exclusively for
settlements of other securities transactions. Certain Funds may also borrow in order to make investments. The purchase of securities while borrowings are outstanding will have the effect of leveraging the Fund. Such leveraging increases the
Funds exposure to capital risk, and borrowed funds are subject to interest costs that will reduce net income. The use of leverage by a Fund creates an opportunity for greater total return, but, at the same time, creates special risks. For
example, leveraging may exaggerate changes in the net asset value of Fund shares and in the yield on the Funds portfolio. Although the principal of such borrowings will be fixed, the Funds assets may change in value during the time the
borrowings are outstanding. Borrowings will create interest expenses for the Fund that can exceed the income from the assets purchased with the borrowings. To the extent the income or capital appreciation derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay on the borrowings, the Funds return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such
borrowed funds is not sufficient to cover the cost of borrowing, the return to the Fund will be less than if leverage had not been used and, therefore, the amount available for distribution to shareholders as dividends will be reduced. In the latter
case, the Manager in its best judgment nevertheless may determine to maintain the Funds leveraged position if it expects that the benefits to the Funds shareholders of maintaining the leveraged position will outweigh the current reduced
return.
Certain types of borrowings by a Fund may result in the
Fund being subject to covenants in credit agreements relating to asset coverage, portfolio composition requirements and other matters. It is not anticipated that observance of such covenants would impede the Manager from managing a Funds
portfolio in accordance with the
II-3
Funds investment objectives and policies. However, a breach of any such covenants not cured within the specified cure period may result in acceleration of outstanding indebtedness and
require the Fund to dispose of portfolio investments at a time when it may be disadvantageous to do so.
Each Fund may at times borrow from affiliates of the Manager, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace.
Cash Flows; Expenses.
The ability of each Fund to
satisfy its investment objective depends to some extent on the Managers ability to manage cash flow (primarily from purchases and redemptions and distributions from the Funds investments). The Manager will make investment changes to a
Funds portfolio to accommodate cash flow while continuing to seek to replicate the total return of the Funds target index. Investors should also be aware that the investment performance of each index is a hypothetical number which does
not take into account brokerage commissions and other transaction costs, custody and other costs of investing, and any incremental operating costs (
e.g.
, transfer agency and accounting costs) that will be borne by the Funds. Finally, since
each Fund seeks to replicate the total return of its target index, the Manager generally will not attempt to judge the merits of any particular security as an investment.
Cash Management.
Generally, the Manager will employ futures
and options on futures to provide liquidity necessary to meet anticipated redemptions or for day-to-day operating purposes. However, if considered appropriate in the opinion of the Manager, a portion of a Funds assets may be invested in
certain types of instruments with remaining maturities of 397 days or less for liquidity purposes. Such instruments would consist of: (i) obligations of the U.S. Government, its agencies, instrumentalities, authorities or political subdivisions
(U.S. Government Securities); (ii) other fixed-income securities rated Aa or higher by Moodys or AA or higher by S&P or, if unrated, of comparable quality in the opinion of the Manager; (iii) commercial paper;
(iv) bank obligations, including negotiable certificates of deposit, time deposits and bankers acceptances; and (v) repurchase agreements. At the time the Fund invests in commercial paper, bank obligations or repurchase agreements,
the issuer or the issuers parent must have outstanding debt rated Aa or higher by Moodys or AA or higher by S&P or outstanding commercial paper, bank obligations or other short-term obligations rated Prime-1 by Moodys or A-1 by
S&P; or, if no such ratings are available, the instrument must be of comparable quality in the opinion of the Manager.
Collateralized Debt Obligations.
Certain Funds may invest in collateralized debt obligations (CDOs), which include
collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other similarly structured securities. CDOs are types of asset-backed securities. A CBO is ordinarily issued by a trust or other special
purpose entity (SPE) and is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities) held by such issuer. A CLO is ordinarily issued by a trust or other SPE and is
typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent
unrated loans, held by such issuer. Although certain CDOs may benefit from credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such enhancement may not always be present, and may fail to
protect a Fund against the risk of loss on default of the collateral. Certain CDO issuers may use derivatives contracts to create synthetic exposure to assets rather than holding such assets directly, which entails the risks of
derivative instruments described elsewhere in this SAI. CDOs may charge management fees and administrative expenses, which are in addition to those of a Fund.
For both CBOs and CLOs, the cash flows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion
is the equity tranche, which bears the first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from default (though such protection is not complete). Since it is partially
protected from defaults, a senior tranche from a CBO or CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can
experience substantial losses due to actual defaults, downgrades of the underlying collateral by rating agencies, forced liquidation of the collateral pool due to a failure of coverage tests, increased sensitivity to defaults due to collateral
default and disappearance of protecting tranches, market anticipation of defaults as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be paid in kind or deferred and capitalized (paid in the
form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.
The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which a Fund invests. Normally,
CBOs, CLOs and other CDOs are privately offered and sold, and thus are not registered under the securities laws. As a result, investments in CDOs may be characterized by a Fund as illiquid securities. However, an active dealer market may exist for
CDOs, allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed income securities and asset-backed securities
II-4
generally discussed elsewhere in this SAI, CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate
to make interest or other payments; (ii) the risk that the collateral may default or decline in value or be downgraded, if rated by a nationally recognized statistical rating organization (NRSRO); (iii) a Fund may invest in
tranches of CDOs that are subordinate to other tranches; (iv) the structure and complexity of the transaction and the legal documents could lead to disputes among investors regarding the characterization of proceeds; (v) the investment
return achieved by the Fund could be significantly different than those predicted by financial models; (vi) the lack of a readily available secondary market for CDOs; (vii) risk of forced fire sale liquidation due to technical
defaults such as coverage test failures; and (viii) the CDOs manager may perform poorly.
Commercial Paper.
Certain Funds may purchase commercial paper. Commercial paper purchasable by each Fund includes Section 4(2) paper, a term that includes debt obligations issued
in reliance on the private placement exemption from registration afforded by Section 4(a)(2) of the Securities Act. Section 4(2) paper is restricted as to disposition under the Federal securities laws, and is frequently sold
(and resold) to institutional investors such as the Fund through or with the assistance of investment dealers who make a market in the Section 4(2) paper, thereby providing liquidity. Certain transactions in Section 4(2) paper may qualify
for the registration exemption provided in Rule 144A under the Securities Act. Most Funds can purchase commercial paper rated (at the time of purchase) A-1 by S&P or Prime-1 by Moodys or when deemed advisable by a
Funds Manager or sub-adviser, high quality issues rated A-2, Prime-2 or F-2 by S&P, Moodys or Fitch, respectively.
Commodity-Linked Derivative Instruments and Hybrid
Instruments.
Certain Funds seek to gain exposure to the commodities markets primarily through investments in hybrid instruments. Hybrid instruments are either equity or debt derivative securities with one or more commodity-dependent
components that have payment features similar to a commodity futures contract, a commodity option contract, or a combination of both. Therefore, these instruments are commodity-linked. They are considered hybrid instruments
because they have both commodity-like and security-like characteristics. Hybrid instruments are derivative instruments because at least part of their value is derived from the value of an underlying commodity, futures contract, index or other
readily measurable economic variable.
The prices of
commodity-linked derivative instruments may move in different directions than investments in traditional equity and debt securities when the value of those traditional securities is declining due to adverse economic conditions. As an example, during
periods of rising inflation, debt securities have historically tended to decline in value due to the general increase in prevailing interest rates. Conversely, during those same periods of rising inflation, the prices of certain commodities, such as
oil and metals, have historically tended to increase. Of course, there cannot be any guarantee that these investments will perform in that manner in the future, and at certain times the price movements of commodity-linked instruments have been
parallel to those of debt and equity securities. Commodities have historically tended to increase and decrease in value during different parts of the business cycle than financial assets. Nevertheless, at various times, commodities prices may move
in tandem with the prices of financial assets and thus may not provide overall portfolio diversification benefits. Under favorable economic conditions, the Funds investments may be expected to under-perform an investment in traditional
securities. Over the long term, the returns on the Funds investments are expected to exhibit low or negative correlation with stocks and bonds.
Qualifying Hybrid Instruments.
Certain Funds may invest in hybrid instruments that qualify for exclusion from regulation under the Commodity
Exchange Act and the regulations adopted thereunder. A hybrid instrument that qualifies for this exclusion from regulation must be predominantly a security. A hybrid instrument is considered to be predominantly a security if (a) the
issuer of the hybrid instrument receives payment in full of the purchase price of the hybrid instrument, substantially contemporaneously with delivery of the hybrid instrument; (b) the purchaser or holder of the hybrid instrument is not
required to make any payment to the issuer in addition to the purchase price paid under subparagraph (a), whether as margin, settlement payment, or otherwise, during the life of the hybrid instrument or at maturity; (c) the issuer of the hybrid
instrument is not subject by the terms of the instrument to mark-to-market margining requirements; and (d) the hybrid instrument is not marketed as a contract of sale of a commodity for future delivery (or option on such a contract) subject to
applicable provisions of the Commodity Exchange Act. Hybrid instruments may be principal protected, partially protected, or offer no principal protection. A principal protected hybrid instrument means that the issuer will pay, at a minimum, the par
value of the note at maturity. Therefore, if the commodity value to which the hybrid instrument is linked declines over the life of the note, the Fund will receive at maturity the face or stated value of the note. With a principal protected hybrid
instrument, the Fund will receive at maturity the greater of the par value of the note or the increase in its value based on the underlying commodity or index. This protection is, in effect, an option whose value is subject to the volatility and
price level of the underlying commodity. The Managers decision whether to use principal protection depends in part on the
II-5
cost of the protection. In addition, the protection feature depends upon the ability of the issuer to meet its obligation to buy back the security, and, therefore, depends on the creditworthiness
of the issuer. With full principal protection, the Fund will receive at maturity of the hybrid instrument either the stated par value of the hybrid instrument, or potentially, an amount greater than the stated par value if the underlying commodity,
index, futures contract or economic variable to which the hybrid instrument is linked has increased in value. Partially protected hybrid instruments may suffer some loss of principal if the underlying commodity, index, futures contract or economic
variable to which the hybrid instrument is linked declines in value during the term of the hybrid instrument. However, partially protected hybrid instruments have a specified limit as to the amount of principal that they may lose.
Hybrid Instruments Without Principal Protection.
Certain Funds may
invest in hybrid instruments that offer no principal protection. At maturity, there is a risk that the underlying commodity price, futures contract, index or other economic variable may have declined sufficiently in value such that some or all of
the face value of the hybrid instrument might not be returned. The Manager, at its discretion, may invest in a partially protected principal structured note or a note without principal protection. In deciding to purchase a note without principal
protection, the Manager may consider, among other things, the expected performance of the underlying commodity futures contract, index or other economic variable over the term of the note, the cost of the note, and any other economic factors that
the Manager believes are relevant.
Limitations on Leverage.
Some of the hybrid instruments in which a Fund may invest may involve leverage. To avoid being subject to undue leverage risk, a Fund will seek to limit the amount of economic leverage it has under any one hybrid instrument that it buys and the
leverage of the Funds overall portfolio. A Fund will not invest in a hybrid instrument if, at the time of purchase: (i) that instruments leverage ratio exceeds 300% of the price increase in the underlying commodity,
futures contract, index or other economic variable or (ii) the Funds portfolio leverage ratio exceeds 150%, measured at the time of purchase. Leverage ratio is the expected increase in the value of a hybrid
instrument, assuming a one percent price increase in the underlying commodity, futures contract, index or other economic factor. In other words, for a hybrid instrument with a leverage factor of 150%, a 1% gain in the underlying economic variable
would be expected to result in a 1.5% gain in value for the hybrid instrument. Conversely, a hybrid instrument with a leverage factor of 150% would suffer a 1.5% loss if the underlying economic variable lost 1% of its value. Portfolio leverage
ratio is defined as the average (mean) leverage ratio of all instruments in a Funds portfolio, weighted by the market values of such instruments or, in the case of futures contracts, their notional values. To the extent that the policy
on a Funds use of leverage stated above conflicts with the Investment Company Act or the rules and regulations thereunder, the Fund will comply with the applicable provisions of the Investment Company Act. A Fund may at times or from time to
time decide not to use leverage in its investments or use less leverage than may otherwise be allowable.
Counterparty Risk.
A significant risk of hybrid instruments is counterparty risk. Unlike exchange-traded futures and options, which are standard contracts, hybrid instruments are customized
securities, tailor-made by a specific issuer. With a listed futures or options contract, an investors counterparty is the exchange clearinghouse. Exchange clearinghouses are capitalized by the exchange members and typically have high
investment grade ratings (
e.g.
, ratings of AAA or AA by S&P). Therefore, the risk is small that an exchange clearinghouse might be unable to meet its obligations at maturity. However, with a hybrid instrument, a Fund will take on the
counterparty credit risk of the issuer. That is, at maturity of the hybrid instrument, there is a risk that the issuer may be unable to perform its obligations under the structured note.
Convertible Securities.
A convertible security is a bond, debenture, note, preferred stock or other security that
may be converted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible
income securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible securities. The value of a
convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the
convertible securitys investment value. Convertible securities rank senior to common stock in a corporations capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to
redemption at the option of the issuer at a price established in the convertible securitys governing instrument.
The characteristics of convertible securities make them potentially attractive investments for an investment company seeking a high total return from
capital appreciation and investment income. These characteristics include
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the potential for capital appreciation as the value of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to common stock
dividends and decreased risks of decline in value relative to the underlying common stock due to their fixed income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is
generally less than would be the case if the securities were issued in nonconvertible form.
In analyzing convertible securities, the Manager will consider both the yield on the convertible security relative to its credit quality and the potential capital appreciation that is offered by the
underlying common stock, among other things.
Convertible
securities are issued and traded in a number of securities markets. Even in cases where a substantial portion of the convertible securities held by a Fund are denominated in U.S. dollars, the underlying equity securities may be quoted in the
currency of the country where the issuer is domiciled. As a result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which the share price is quoted will affect the value of the
convertible security. With respect to convertible securities denominated in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate established at the time the security is
issued, which may increase the effects of currency risk. As described below, a Fund is authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of exchange rate fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield on nonconvertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (
i.e.
, strictly on the basis
of its yield) is sometimes referred to as its investment value. To the extent interest rates change, the investment value of the convertible security typically will fluctuate. At the same time, however, the value of the convertible
security will be influenced by its conversion value, which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the
underlying common stock. If the conversion value of a convertible security is substantially below its investment value, the price of the convertible security is governed principally by its investment value. To the extent the conversion value of a
convertible security increases to a point that approximates or exceeds its investment value, the price of the convertible security will be influenced principally by its conversion value. A convertible security will sell at a premium over the
conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed income security. The yield and conversion premium of convertible securities issued in Japan and the Euromarket are
frequently determined at levels that cause the conversion value to affect their market value more than the securities investment value.
Holders of convertible securities generally have a claim on the assets of the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to redemption at the option of the issuer at a price established in a charter provision, indenture or other governing instrument pursuant to which the convertible security was
issued. If a convertible security held by a Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock or sell it to a third party. Certain convertible debt securities may provide a
put option to the holder, which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain circumstances.
A Fund may also invest in synthetic convertible securities. Synthetic
convertible securities may include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled Convertibles are instruments that are created by the issuer and have the economic characteristics of traditional convertible securities
but may not actually permit conversion into the underlying equity securities in all circumstances. As an example, a private company may issue a Cash-Settled Convertible that is convertible into common stock only if the company successfully completes
a public offering of its common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation. Manufactured Convertibles are created by the Manager or another party by combining separate securities that possess one of
the two principal characteristics of a convertible security,
i.e.
, fixed income (fixed income component) or a right to acquire equity securities (convertibility component). The fixed income component is achieved by
investing in nonconvertible fixed income securities, such as nonconvertible bonds, preferred stocks and money market instruments. The convertibility component is achieved by investing in call options, warrants, or other securities with equity
conversion features (equity features) granting the holder the right to purchase a specified quantity of the underlying stocks within a specified period of time at a specified price or, in the case of a stock index option, the right to
receive a cash payment based on the value of the underlying stock index.
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A Manufactured Convertible differs from traditional convertible securities in several respects. Unlike a
traditional convertible security, which is a single security that has a unitary market value, a Manufactured Convertible is comprised of two or more separate securities, each with its own market value. Therefore, the total market value
of such a Manufactured Convertible is the sum of the values of its fixed income component and its convertibility component.
More flexibility is possible in the creation of a Manufactured Convertible than in the purchase of a traditional convertible security. Because many
corporations have not issued convertible securities, the Manager may combine a fixed income instrument and an equity feature with respect to the stock of the issuer of the fixed income instrument to create a synthetic convertible security otherwise
unavailable in the market. The Manager may also combine a fixed income instrument of an issuer with an equity feature with respect to the stock of a different issuer when the Manager believes such a Manufactured Convertible would better promote a
Funds objective than alternative investments. For example, the Manager may combine an equity feature with respect to an issuers stock with a fixed income security of a different issuer in the same industry to diversify the Funds
credit exposure, or with a U.S. Treasury instrument to create a Manufactured Convertible with a higher credit profile than a traditional convertible security issued by that issuer. A Manufactured Convertible also is a more flexible investment in
that its two components may be purchased separately and, upon purchasing the separate securities, combined to create a Manufactured Convertible. For example, the Fund may purchase a warrant for eventual inclusion in a Manufactured
Convertible while postponing the purchase of a suitable bond to pair with the warrant pending development of more favorable market conditions.
The value of a Manufactured Convertible may respond to certain market fluctuations differently from a traditional convertible security with similar
characteristics. For example, in the event a Fund created a Manufactured Convertible by combining a short-term U.S. Treasury instrument and a call option on a stock, the Manufactured Convertible would be expected to outperform a traditional
convertible of similar maturity that is convertible into that stock during periods when Treasury instruments outperform corporate fixed income securities and underperform during periods when corporate fixed income securities outperform Treasury
instruments.
Debt Securities.
Debt securities,
such as bonds, involve credit risk. This is the risk that the issuer will not make timely payments of principal and interest. The degree of credit risk depends on the issuers financial condition and on the terms of the debt securities. Changes
in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of a Funds investment in that issuer. Credit risk is reduced to the extent a Fund limits its debt investments to
U.S. Government securities. All debt securities, however, are subject to interest rate risk. This is the risk that the value of the security may fall when interest rates rise. If interest rates move sharply in a manner not anticipated by Fund
management, a Funds investments in debt securities could be adversely affected and the Fund could lose money. In general, the market price of debt securities with longer maturities will go up or down more in response to changes in interest
rates than will the market price of shorter-term debt securities.
During periods of rising interest rates, the average life of certain fixed income securities is extended because of slower than expected principal
payments. This may lock in a below-market interest rate and extend the duration of these fixed-income securities, especially mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising
interest rates, these securities may exhibit additional volatility and lose value. This is known as extension risk.
The value of fixed income securities in the Funds can be expected to vary inversely with changes in prevailing interest rates. Fixed income securities
with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The Funds are not restricted to any maximum or minimum time to maturity in
purchasing individual portfolio securities, and the average maturity of a Funds assets will vary.
Depositary Receipts (ADRs, EDRs and GDRs).
Certain Funds may invest in the securities of foreign issuers in the form of Depositary Receipts or other securities convertible into securities of
foreign issuers. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. The Fund may invest in both sponsored and unsponsored American Depositary Receipts
(ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence ownership of either foreign
or domestic underlying securities. GDRs are depositary receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information concerning the issuer may
II-8
not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Depositary
Receipts are generally subject to the same risks as the foreign securities that they evidence or into which they may be converted. Investments in ADRs, EDRs and GDRs present additional investment considerations as described under Foreign
Investment Risks.
Derivatives.
Each Fund may use instruments referred to as derivative securities.
Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold or oil), a currency or an index (a measure of value or rates, such as the S&P 500 Index or the prime lending rate). Derivatives
allow a Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Each Fund may use derivatives for hedging purposes. Certain Funds may also use
derivatives for speculative purposes to seek to enhance returns. The use of a derivative is speculative if the Fund is primarily seeking to achieve gains, rather than offset the risk of other positions. When a Fund invests in a derivative for
speculative purposes, the Fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivatives cost. Unless otherwise permitted, no Fund may use any derivative to gain exposure to an asset or
class of assets that it would be prohibited by its investment restrictions from purchasing directly.
Hedging.
Hedging is a strategy in which a derivative is used to offset the risks associated with other Fund holdings. Losses on the other investment may be substantially reduced by gains on a
derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a manner different from that anticipated by the Fund or if the cost of
the derivative outweighs the benefit of the hedge. Hedging also involves correlation risk,
i.e.
the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by a Fund, in which case any
losses on the holdings being hedged may not be reduced or may be increased. The inability to close options and futures positions also could have an adverse impact on a Funds ability to hedge effectively its portfolio. There is also a risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom the Fund has an open position in an option, a futures contract or a related option. There can be no assurance that a Funds hedging strategies
will be effective. No Fund is required to engage in hedging transactions and each Fund may choose not to do so.
A Fund may use derivative instruments and trading strategies, including the following:
Indexed and Inverse Floating Rate Securities.
A Fund may invest in securities that provide a potential return based on a particular index of value
or interest rates. For example, a Fund may invest in securities that pay interest based on an index of interest rates. The principal amount payable upon maturity of certain securities also may be based on the value of the index. To the extent a Fund
invests in these types of securities, the Funds return on such securities will be subject to risk with respect to the value of the particular index: that is, if the value of the index falls, the value of the indexed securities owned by the
Fund will fall. Interest and principal payable on certain securities may also be based on relative changes among particular indices. A Fund may also invest in so-called inverse floating obligations or residual interest bonds
on which the interest rates vary inversely with a floating rate (which may be reset periodically by a dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). A Fund may purchase synthetically-created
inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when interest rates increase, and will increase when interest rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate that is a multiple of the rate at which fixed-rate securities increase or decrease
in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed-rate securities. To seek to limit the volatility of these securities, a Fund may purchase inverse floating
obligations that have shorter-term maturities or that contain limitations on the extent to which the interest rate may vary. Certain investments in such obligations may be illiquid. The Manager believes that indexed and inverse floating obligations
represent flexible portfolio management instruments for a Fund that allow the Fund to seek potential investment rewards, hedge other portfolio positions or vary the degree of investment leverage relatively efficiently under different market
conditions. A Fund may invest in indexed and inverse securities for hedging purposes or to seek to increase returns. When used for hedging purposes, indexed and inverse securities involve correlation risk. Furthermore, where such a security includes
a contingent liability, in the event of an adverse movement in the underlying index or interest rate, a Fund may be required to pay substantial additional margin to maintain the position.
The Funds may invest up to 10% of their total assets in leveraged inverse floating rate debt instruments (inverse
floaters). Municipal tender option bonds, both taxable and tax-exempt, which may include inverse floating rate debt instruments, (including residual interests thereon) are excluded from this 10% limitation.
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Swap Agreements.
A Fund may enter into swap agreements, including interest rate and index swap
agreements, for hedging purposes or to seek to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in an instrument 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 one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be exchanged or swapped between the parties are calculated with respect to a notional amount,
i.e.
, the dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a basket of securities representing a particular index. The notional amount of the swap agreement is only a fictive basis on which to calculate the obligations that the
parties to a swap agreement have agreed to exchange. A Funds obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions
held by each party to the agreement (the net amount). A Funds obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by marking as segregated liquid, unencumbered assets, marked to market daily, to avoid any potential leveraging of the Funds portfolio.
Whether a Funds use of swap agreements will be successful in
furthering its investment objective will depend on the Managers ability to correctly predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because
they may have terms of greater than seven days, some swap agreements may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of
a swap agreement counterparty. A Fund will seek to lessen this risk to some extent by entering into a transaction only if the counterparty meets the current credit requirement for OTC option counterparties. Swap agreements also bear the risk that a
Fund will not be able to meet its payment obligations to the counterparty. As noted, however, a Fund will segregate liquid assets permitted to be so segregated by the Commission in an amount equal to or greater than the market value of the
Funds liabilities under the swap agreement or the amount it would cost the Fund initially to make an equivalent direct investment plus or minus any amount the Fund is obligated to pay or is to receive under the swap agreement. Restrictions
imposed by the tax rules applicable to regulated investment companies, may limit the Funds ability to use swap agreements. The swap market is largely unregulated. It is possible that developments in the swap market, including potential
government regulation, could adversely affect each Funds ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
See Credit Default Swap Agreements, Interest Rate Swaps,
Caps and Floors and Municipal Interest Rate Swap Agreements below for further information on particular types of swap agreements that may be used by certain Funds.
Interest Rate Swaps, Caps and Floors
.
In order to hedge the value of a Funds portfolio against interest
rate fluctuations or to enhance a Funds income, a Fund may enter into various transactions, such as interest rate swaps and the purchase or sale of interest rate caps and floors. Interest rate swaps are OTC contracts in which each party agrees
to make a periodic interest payment based on an index or the value of an asset in return for a periodic payment from the other party based on a different index or asset. The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index rises above a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap.
A Fund expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion
of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. A Fund generally will use these transactions primarily as a hedge and not as a speculative investment. However, a Fund
may also invest in interest rate swaps to enhance income or to increase the Funds yield during periods of steep interest rate yield curves (
i.e.
, wide differences between short term and long term interest rates). In an interest rate
swap, a Fund may exchange with another party their respective commitments to pay or receive interest,
e.g.
, an exchange of fixed rate payments for floating rate payments. For example, if a Fund holds a mortgage- backed security with an
interest rate that is reset only once each year, it may swap the right to receive interest at this fixed rate for the right to receive interest at a rate that is reset every week. This would enable a Fund to offset a decline in the value of the
mortgage backed security due to rising interest rates but would also limit its ability to benefit from falling interest rates. Conversely, if a Fund holds a mortgage-backed security with an interest rate that is reset every week and it would like to
lock in what it believes to be a high interest rate for one year, it may swap the right to receive interest at this variable weekly rate for the right to receive interest at a rate that is fixed for one year. Such a swap would protect the Fund from
a reduction in yield due to falling interest rates and
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may permit the Fund to enhance its income through the positive differential between one week and one year interest rates, but would preclude it from taking full advantage of rising interest
rates.
A Fund usually will enter into interest rate swap
transactions on a net basis (
i.e.
, the two payment streams are netted against one another with the Fund receiving or paying, as the case may be, only the net amount of the two payment streams). Inasmuch as these transactions are entered into
for good faith hedging purposes, the Manager believes that such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. The net amount of the excess, if any, of a
Funds obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and an amount of liquid assets that have an aggregate net asset value at least equal to the accrued excess will be maintained in
a segregated account by the Fund.
If the interest rate swap
transaction is entered into on other than a net basis, the full amount of a Funds obligations will be accrued on a daily basis, and the full amount of the Funds obligations will be maintained in a segregated account.
Typically the parties with which a Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. A Fund will enter into interest rate swap, cap or floor transactions only with counterparties that are rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Manager to be equivalent to such rating. If there is a default by the counterparty to such a transaction, a Fund will have
contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents using standardized
swap documentation. As a result, the swap market has become relatively liquid in comparison with other similar instruments traded in the interbank market. Caps and floors, however, are less liquid than swaps. Certain Federal income tax requirements
may limit a Funds ability to engage in certain interest rate transactions. Gains from transactions in interest rate swaps distributed to shareholders will be taxable as ordinary income or, in certain circumstances, as long term capital gains
to shareholders.
Credit Default Swap Agreements and Similar
Instruments.
Certain Funds may enter into credit default swap agreements and similar agreements, and may also buy credit-linked securities. The credit default swap agreement or similar instrument may have as reference obligations one or more
securities that are not currently held by a Fund. The protection buyer in a credit default contract may be obligated to pay the protection seller an up-front payment or a periodic stream of payments over the term of the
contract, provided generally that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face
amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may be either the buyer or seller in the transaction. If a
Fund is a buyer and no credit event occurs, the Fund recovers nothing if the swap is held through its termination date. However, if a credit event occurs, the Fund may elect to receive the full notional value of the swap in exchange for an equal
face amount of deliverable obligations of the reference entity that may have little or no value. As a seller, a Fund generally receives an up-front payment or a fixed rate of income throughout the term of the swap, which typically is between six
months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference
entity that may have little or no value.
Credit default swaps
and similar instruments involve greater risks than if a Fund had invested in the reference obligation directly, since, in addition to general market risks, they are subject to illiquidity risk, counterparty risk and credit risk. A Fund will enter
into credit default swap agreements and similar instruments only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose
creditworthiness is believed by the Manager to be equivalent to such rating. A buyer also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the
value of any deliverable obligation received by the seller, coupled with the up-front or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the Fund. When a Fund acts
as a seller of a credit default swap or a similar instrument, it is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts
owed by the buyer related to its delivery of deliverable obligations.
Credit Linked Securities.
Among the income producing securities in which a Fund may invest are credit linked securities, which are issued by a limited purpose trust or other vehicle that, in turn,
invests in a derivative instrument
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or basket of derivative instruments, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to certain fixed income markets. For instance, a Fund may
invest in credit linked securities as a cash management tool in order to gain exposure to a certain market and/or to remain fully invested when more traditional income producing securities are not available.
Like an investment in a bond, investments in these credit linked securities
represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. However, these payments are conditioned on the issuers receipt of payments from, and the
issuers potential obligations to, the counterparties to the derivative instruments and other securities in which the issuer invests. For instance, the issuer may sell one or more credit default swaps, under which the issuer would receive a
stream of payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the issuer
would be obligated to pay the counterparty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of income and principal that a Fund would receive. A Funds investments in these
instruments are indirectly subject to the risks associated with derivative instruments, including, among others, credit risk, default or similar event risk, counterparty risk, interest rate risk, leverage risk and management risk. It is also
expected that the securities will be exempt from registration under the Securities Act. Accordingly, there may be no established trading market for the securities and they may constitute illiquid investments.
Interest Rate Transactions and Swaptions.
A Fund, to the extent
permitted under applicable law, may enter into interest rate swaps, may purchase or sell interest rate caps and floors and may enter into options on swap agreements (swaptions) on either an asset-based or liability-based basis, depending
on whether a Fund is hedging its assets or its liabilities. A Fund may enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration management technique or to protect
against an increase in the price of securities a Fund anticipates purchasing at a later date. They may also be used for speculation to increase returns.
Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a
standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross
returns to be exchanged or swapped between the parties are generally calculated with respect to a notional amount,
i.e.
, the return on or increase in value of a particular dollar amount invested at a particular
interest rate 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 that
interest rates exceed a specified rate, or cap; and interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or
floor. Caps and floors are less liquid than swaps.
A
Fund will usually enter into interest rate swaps on a net basis,
i.e.
, the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments.
A swaption is a contract that gives a counterparty the right (but not the
obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. A Fund may write (sell) and purchase put and call swaptions.
Depending on the terms of the particular option agreement, a Fund will
generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option
expire unexercised. However, when a Fund writes a swaption, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement.
A Fund will accrue the net amount of the excess, if any, of its obligations
over its entitlements with respect to each interest rate or currency swap or swaption on a daily basis and its Manager or sub-adviser will designate liquid assets on its books and records in an amount having an aggregate net asset value at least
equal to the accrued excess to the extent required by Commission guidelines. If the other party to an interest rate swap defaults, a Funds risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to
receive.
Total Return Swap Agreements.
Total return swap
agreements are contracts in which one party agrees to make periodic payments to another party based on the change in market value of the assets underlying the contract, which may include a specified security, basket of securities or securities
indices during the specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets. Total
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return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Total return swap
agreements may effectively add leverage to the Funds portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap.
Total return swap agreements are subject to the risk that a counterparty
will default on its payment obligations to the Fund thereunder. Swap agreements also bear the risk that the Fund will not be able to meet its obligation to the counterparty. Generally, the Fund will enter into total return swaps on a net basis
(
i.e.
, the two payment streams are netted against one another with the Fund receiving or paying, as the case may be, only the net amount of the two payments). The net amount of the excess, if any, of the Funds obligations over its
entitlements with respect to each total return swap will be accrued on a daily basis, and an amount of liquid assets having an aggregate net asset value at least equal to the accrued excess will be segregated by the Fund. If the total return swap
transaction is entered into on other than a net basis, the full amount of the Funds obligations will be accrued on a daily basis, and the full amount of the Funds obligations will be segregated by the Fund in an amount equal to or
greater than the market value of the liabilities under the total return swap agreement or the amount it would have cost the Fund initially to make an equivalent direct investment, plus or minus any amount the Fund is obligated to pay or is to
receive under the total return swap agreement.
Types of
Options
Options on Securities and Securities Indices.
A Fund may engage in transactions in options on individual securities, baskets of securities or securities indices, or particular measurements of value or rates (an index), such as an index of the price of treasury securities or an index
representative of short-term interest rates. Such investments may be made on exchanges and in the over-the-counter (OTC) markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the
parties to post margin against their obligations, and the performance of the parties obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated
between the buyer and the seller, but generally do not require the parties to post margin and are subject to greater credit risk. OTC options also involve greater liquidity risk. See Additional Risk Factors of OTC Transactions; Limitations on
the Use of OTC Derivatives below.
Call Options.
A
Fund may purchase call options on any of the types of securities or instruments in which it may invest. A purchased call option gives a Fund the right to buy, and obligates the seller to sell, the underlying security at the exercise price at any
time during the option period. A Fund also may purchase and sell call options on indices. Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price
upon exercise, an index option gives the holder the right to receive cash upon exercise of the option if the level of the index upon which the option is based is greater than the exercise price of the option.
A call option is also covered if a Fund holds a call on the same security or
index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written provided the difference is maintained by
the Fund in liquid assets designated on the advisers or sub-advisers books and records to the extent required by Commission guidelines.
A Fund also is authorized to write (
i.e.
, sell) covered call options on the securities or instruments in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered call option is an option in which a Fund, in return for a premium, gives another party a right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. The principal reason for writing call options is the attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing covered call options, a
Fund gives up the opportunity, while the option is in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, a Funds ability to sell the underlying security will be limited while the
option is in effect unless the Fund enters into a closing purchase transaction. A closing purchase transaction cancels out a Funds position as the writer of an option by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options also serve as a partial hedge to the extent of the premium received against the price of the underlying security declining.
A Fund also is authorized to write (
i.e.
, sell) uncovered call options on securities or instruments in which it may
invest but that are not currently held by the Fund. The principal reason for writing uncovered call options is to realize income without committing capital to the ownership of the underlying securities or instruments. When writing uncovered call
options, a Fund must deposit and maintain sufficient margin with the broker dealer through which it made the uncovered call option as collateral to ensure that the securities can be purchased for delivery if and when
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the option is exercised. In addition, in connection with each such transaction a Fund will segregate unencumbered liquid securities or cash with a value at least equal to the Funds exposure
(the difference between the unpaid amounts owed by the Fund on such transaction minus any collateral deposited with the broker dealer), on a marked-to-market basis (as calculated pursuant to requirements of the Commission). Such segregation will
ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Funds portfolio. Such segregation will not limit the Funds exposure to loss. During
periods of declining securities prices or when prices are stable, writing uncovered calls can be a profitable strategy to increase a Funds income with minimal capital risk. Uncovered calls are riskier than covered calls because there is no
underlying security held by a Fund that can act as a partial hedge. Uncovered calls have speculative characteristics and the potential for loss is unlimited. When an uncovered call is exercised, a Fund must purchase the underlying security to meet
its call obligation. There is also a risk, especially with less liquid preferred and debt securities, that the securities may not be available for purchase. If the purchase price exceeds the exercise price, a Fund will lose the difference.
Put Options.
A Fund is authorized to purchase put options
to seek to hedge against a decline in the value of its securities or to enhance its return. By buying a put option, a Fund acquires a right to sell the underlying securities or instruments at the exercise price, thus limiting the Funds risk of
loss through a decline in the market value of the securities or instruments until the put option expires. The amount of any appreciation in the value of the underlying securities or instruments will be partially offset by the amount of the premium
paid for the put option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale transaction and profit or loss from the sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale transaction cancels out a Funds position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it
has purchased. A Fund also may purchase uncovered put options.
Each Fund also has authority to write (
i.e.
, sell) put options on the types of securities or instruments that may be held by the Fund, provided
that such put options are covered, meaning that such options are secured by segregated, liquid assets. A Fund will receive a premium for writing a put option, which increases the Funds return. With respect to BlackRock Basic Value V.I. Fund,
BlackRock Capital Appreciation V.I. Fund, BlackRock Equity Dividend V.I. Fund, BlackRock Global Allocation V.I. Fund, BlackRock Global Opportunities V.I. Fund, BlackRock International V.I. Fund, BlackRock Large Cap Core V.I. Fund, BlackRock Large
Cap Growth V.I. Fund, BlackRock Large Cap Value V.I. Fund, BlackRock S&P 500 V.I. Fund, BlackRock Value Opportunities V.I. Fund, each a series of BlackRock Variable Series Funds, Inc., and BlackRock Capital Appreciation Portfolio, BlackRock
Global Allocation Portfolio and BlackRock Large Cap Core Portfolio, each a series of BlackRock Series Fund, Inc., a Fund will not sell puts if, as a result, more than 50% of the Funds assets would be required to cover its potential obligations
under its hedging and other investment transactions.
Each Fund
is also authorized to write (
i.e.
, sell) uncovered put options on securities or instruments in which it may invest but with respect to which the Fund does not currently have a corresponding short position or has not deposited as collateral
cash equal to the exercise value of the put option with the broker dealer through which it made the uncovered put option. The principal reason for writing uncovered put options is to receive premium income and to acquire such securities or
instruments at a net cost below the current market value. A Fund has the obligation to buy the securities or instruments at an agreed upon price if the price of the securities or instruments decreases below the exercise price. If the price of the
securities or instruments increases during the option period, the option will expire worthless and a Fund will retain the premium and will not have to purchase the securities or instruments at the exercise price. In connection with such a
transaction, a Fund will segregate unencumbered liquid assets with a value at least equal to the Funds exposure, on a marked-to-market basis (as calculated pursuant to requirements of the Commission). Such segregation will ensure that a Fund
has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Funds portfolio. Such segregation will not limit the Funds exposure to loss.
Options on Government National Mortgage Association (GNMA)
Certificates.
The following information relates to the unique characteristics of options on GNMA Certificates. Since the remaining principal balance of GNMA Certificates declines each month as a result of mortgage payments, a Fund, as a writer
of a GNMA call holding GNMA Certificates as cover to satisfy its delivery obligation in the event of exercise, may find that the GNMA Certificates it holds no longer have a sufficient remaining principal balance for this purpose. Should
this occur, a Fund will purchase additional GNMA Certificates from the same pool (if obtainable) or other GNMA Certificates in the cash market in order to maintain its cover.
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A GNMA Certificate held by a Fund to cover an option position in any but the nearest expiration month may
cease to represent cover for the option in the event of a decline in the GNMA coupon rate at which new pools are originated under the FHA/VA loan ceiling in effect at any given time. If this should occur, a Fund will no longer be covered, and the
Fund will either enter into a closing purchase transaction or replace such Certificate with a certificate that represents cover. When a Fund closes its position or replaces such Certificate, it may realize an unanticipated loss and incur transaction
costs.
Risks Associated with Options.
There are several
risks associated with transactions in options on securities and indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary market for particular options, whether traded over-the-counter or on a national securities exchange (Exchange) may be absent for reasons which include the
following: there may be insufficient trading interest in certain options; restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the Options Clearing Corporation may not at all times
be adequate to handle current trading volume; or one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which
event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the Options Clearing Corporation as a result of trades on that Exchange would continue to
be exercisable in accordance with their terms.
Futures
A Fund may engage in transactions in futures and options on
futures. Futures are standardized, exchange-traded contracts that obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of an asset at a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract a Fund is required to deposit collateral (margin) equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures
position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior
day. Futures involve substantial leverage risk.
The sale of a
futures contract limits a Funds risk of loss from a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contracts expiration date. In the event the market value of the portfolio
holdings correlated with the futures contract increases rather than decreases, however, a Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures
contract.
The purchase of a futures contract may protect a Fund
from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be
attractive. In the event that such securities decline in value or a Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position.
A Fund is also authorized to purchase or sell call and put options on
futures contracts including financial futures and stock indices. Generally, these strategies would be used under the same market and market sector conditions (
i.e.
, conditions relating to specific types of investments) in which the Fund
entered into futures transactions. A Fund may purchase put options or write call options on futures contracts and stock indices in lieu of selling the underlying futures contract in anticipation of a decrease in the market value of its securities.
Similarly, a Fund can purchase call options, or write put options on futures contracts and stock indices, as a substitute for the purchase of such futures to hedge against the increased cost resulting from an increase in the market value of
securities which the Fund intends to purchase.
To maintain
greater flexibility, a Fund may invest in instruments which have characteristics similar to futures contracts. These instruments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the
value of a security, an index of securities or a commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures and securities, including volatility and illiquidity.
Risks Associated with Futures.
The primary risks associated with the
use of futures contracts and options are (a) the imperfect correlation between the change in market value of the instruments held by a Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for
a futures contract and the resulting
II-15
inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Managers or sub-advisers
inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Foreign Exchange Transactions.
A Fund may engage in spot and forward
foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, Currency Instruments) for purposes of hedging against the decline
in the value of currencies in which its portfolio holdings are denominated against the U.S. dollar or, with respect to certain Funds, to seek to enhance returns. Such transactions could be effected with respect to hedges on foreign dollar
denominated securities owned by a Fund, sold by a Fund but not yet delivered, or committed or anticipated to be purchased by a Fund. As an illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a
yen-denominated security. In such circumstances, for example, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful,
a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call option which, if
exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a straddle). By selling such a call option in this illustration, the Fund gives up the opportunity to profit
without limit from increases in the relative value of the yen to the dollar. Straddles of the type that may be used by a Fund are considered to constitute hedging transactions. No Fund will attempt to hedge all of its foreign portfolio
positions.
Forward Foreign Exchange Transactions.
Forward
foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar
but require current, rather than future, settlement. A Fund will enter into foreign exchange transactions for purposes of hedging either a specific transaction or a portfolio position, or, with respect to certain Funds, to seek to enhance returns. A
Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates
receiving a dividend or distribution. A Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a
currency in which the Fund anticipates acquiring a portfolio position in the near future. Forward foreign exchange transactions involve substantial currency risk, and also involve credit and liquidity risk. A Fund may also hedge a currency by
entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a cross-hedge). A Fund will only enter into a cross-hedge if the Manager believes that (i) there is a demonstrably
high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective
or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged.
A Fund may also engage in proxy hedging transactions to reduce the effect of currency fluctuations on the value of existing or anticipated holdings of
portfolio securities. Proxy hedging is often used when the currency to which the Fund is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in value
are generally considered to be linked to a currency or currencies in which some or all of the Funds securities are, or are expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. In addition, there is the risk that the
perceived linkage between various currencies may not be present or may not be present during the particular time that a Fund is engaging in proxy hedging. A Fund may also cross-hedge currencies by entering into forward contracts to sell one or more
currencies that are expected to decline in value relative to other currencies to which the Fund has or in which the Fund expects to have portfolio exposure. For example, a Fund may hold both Canadian government bonds and Japanese government bonds,
and the adviser or sub-adviser may believe that Canadian dollars will deteriorate against Japanese yen. The Fund would sell Canadian dollars to reduce its exposure to that currency and buy Japanese yen. This strategy would be a hedge against a
decline in the value of Canadian dollars, although it would expose the Fund to declines in the value of the Japanese yen relative to the U.S. dollar.
Some of the forward non-U.S. currency contracts entered into by the Funds are classified as non-deliverable forwards (NDF). NDFs are cash-settled,
short-term forward contracts that may be thinly traded or are denominated in non-convertible foreign currency, where the profit or loss at the time at the settlement date is calculated by taking the
II-16
difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. All NDFs have a fixing date and a settlement date. The
fixing date is the date at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement date is the date by which the payment of the difference is due to the party receiving
payment. NDFs are commonly quoted for time periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure to and/or hedge exposure to foreign currencies that are not internationally
traded.
Currency Futures.
A Fund may also seek to enhance
returns or hedge against the decline in the value of a currency through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts
while forward foreign exchange transactions are traded in the OTC market. Currency futures involve substantial currency risk, and also involve leverage risk.
Currency Options.
A Fund may also seek to enhance returns or hedge against the decline in the value of a currency through the use of currency
options. Currency options are similar to options on securities. For example, in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a
specified amount of a specified currency on or before the expiration date for a specified amount of another currency. A Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See Types of Options
above and Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives below. Currency options involve substantial currency risk, and may also involve credit, leverage or liquidity risk.
Currency Swaps.
In order to protect against currency fluctuations, a
Fund may enter into currency swaps. A Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a
forward basis. Currency swaps involve the exchange of the rights of a Fund and another party to make or receive payments in specified currencies. Currency swaps usually involve the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Because currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency, the entire principal value of a currency swap is
subject to the risk that the other party to the swap will default on its contractual delivery obligations.
Limitations on Currency Transactions.
A Fund will not hedge a currency in excess of the aggregate market value of the securities that it owns (including receivables for unsettled securities sales),
or has committed to purchase or anticipates purchasing, which are denominated in such currency. Open positions in forward foreign exchange transactions used for non-hedging purposes will be covered by the segregation of liquid assets and are marked
to market daily. A Funds exposure to futures or options on currencies will be covered as described below under Risk Factors in Derivatives.
Risk Factors in Hedging Foreign Currency.
Hedging transactions involving Currency Instruments involve substantial risks, including correlation
risk. While a Funds use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Funds shares, the net asset value of the Funds shares will fluctuate. Moreover,
although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the
Funds hedging strategies will be ineffective. To the extent that a Fund hedges against anticipated currency movements that do not occur, the Fund may realize losses and decrease its total return as the result of its hedging transactions.
Furthermore, a Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur.
In connection with its trading in forward foreign currency contracts, a Fund
will contract with a foreign or domestic bank, or foreign or domestic securities dealer, to make or take future delivery of a specified amount of a particular currency. There are no limitations on daily price moves in such forward contracts, and
banks and dealers are not required to continue to make markets in such contracts. There have been periods during which certain banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually wide
spread between the price at which the bank or dealer is prepared to buy and that at which it is prepared to sell. Governmental imposition of credit controls might limit any such forward contract trading. With respect to its trading of forward
contracts, if any, a Fund will be subject to the risk of bank or dealer failure and the inability of, or refusal by,
II-17
a bank or dealer to perform with respect to such contracts. Any such default would deprive the Fund of any profit potential or force the Fund to cover its commitments for resale, if any, at the
then market price and could result in a loss to the Fund.
It may
not be possible for a Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging
transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available and it is not possible to engage in effective foreign currency hedging. The cost to
a Fund of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the contract period and the market conditions then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit Risk
the risk that the counterparty in a derivative transaction will be unable to honor its financial obligation to a Fund, or the risk that the reference entity in a credit default
swap or similar derivative will not be able to honor its financial obligations.
Currency Risk
the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.
Leverage Risk
the risk associated with certain types of
investments or trading strategies (such as, for example, borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly exceed the amount originally invested.
Liquidity Risk
the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is
currently worth.
Correlation Risk
the risk that
changes in the value of a derivative will not match the changes in the value of the portfolio holdings that are being hedged or of the particular market or security to which the Fund seeks exposure.
Index Risk
If the derivative is linked to the performance of
an index, it will be subject to the risks associated with changes in that index. If the index changes, a Fund could receive lower interest payments or experience a reduction in the value of the derivative to below what that Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite direction to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.
A Fund intends to enter into transactions involving derivatives
only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives. However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a derivative or the Fund will otherwise be able to sell such instrument at
an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial losses, if at all.
Certain transactions in derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose a Fund to
potential losses that exceed the amount originally invested by the Fund. When a Fund engages in such a transaction, the Fund will segregate liquid assets with a value at least equal to the Funds exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Commission). Such segregation will ensure that a Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Funds exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on
the Use of OTC Derivatives.
Certain derivatives traded in OTC
markets, including indexed securities, swaps and OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible for a Fund to sell such instruments promptly at an acceptable price. The absence of
liquidity may also make it more difficult for a Fund to ascertain a market value for such instruments. A Fund will, therefore, acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a
formula price at which the instrument may be terminated or sold, or (ii) for which the Manager anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available,
in which case that dealers quotation may be used.
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Because derivatives traded in OTC markets are not guaranteed by an exchange or clearing corporation and
generally do not require payment of margin, to the extent that a Fund has unrealized gains in such instruments or has deposited collateral with its counterparty the Fund is at risk that its counterparty will become bankrupt or otherwise fail to
honor its obligations. A Fund will attempt to minimize these risks by engaging in transactions in derivatives traded in OTC markets only with financial institutions that have substantial capital or that have provided the Fund with a third-party
guaranty or other credit enhancement.
Distressed
Securities.
A Fund may invest in securities, including loans purchased in the secondary market, that are the subject of bankruptcy proceedings or otherwise in default or in risk of being in default as to the repayment of principal and/or
interest at the time of acquisition by the Fund or that are rated in the lower rating categories by one or more nationally recognized statistical rating organizations (for example, Ca or lower by Moodys and CC or lower by S&P or Fitch) or,
if unrated, are in the judgment of the Manager of equivalent quality (Distressed Securities). Investment in Distressed Securities is speculative and involves significant risks.
A Fund will generally make such investments only when the Manager believes it is reasonably likely that the issuer of the
Distressed Securities will make an exchange offer or will be the subject of a plan of reorganization pursuant to which the Fund will receive new securities in return for the Distressed Securities. However, there can be no assurance that such an
exchange offer will be made or that such a plan of reorganization will be adopted. In addition, a significant period of time may pass between the time at which a Fund makes its investment in Distressed Securities and the time that any such exchange
offer or plan of reorganization is completed. During this period, it is unlikely that a Fund will receive any interest payments on the Distressed Securities, the Fund will be subject to significant uncertainty as to whether or not the exchange offer
or plan of reorganization will be completed and the Fund may be required to bear certain extraordinary expenses to protect and recover its investment. Therefore, to the extent the Fund seeks capital appreciation through investment in distressed
securities, the Funds ability to achieve current income for its shareholders may be diminished. The Fund also will be subject to significant uncertainty as to when and in what manner and for what value the obligations evidenced by the
distressed securities will eventually be satisfied (
e.g.
, through a liquidation of the obligors assets, an exchange offer or plan of reorganization involving the distressed securities or a payment of some amount in satisfaction of the
obligation). Even if an exchange offer is made or plan of reorganization is adopted with respect to Distressed Securities held by a Fund, there can be no assurance that the securities or other assets received by a Fund in connection with such
exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made or no value. Moreover, any securities received by a Fund upon completion of an exchange offer or
plan of reorganization may be restricted as to resale. Similarly, if a Fund participates in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of Distressed Securities, the Fund may be restricted from
disposing of such securities. To the extent that a Fund becomes involved in such proceedings, the Fund may have a more active participation in the affairs of the issuer than that assumed generally by an investor. The Fund, however, will not make
investments for the purpose of exercising day-to-day management of any issuers affairs.
Dollar Rolls.
A dollar roll transaction involves a sale by the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar security at a
later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and a similar maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those
sold. During the period between the sale and repurchase, a Fund will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in additional instruments for the Fund, and the income from
these investments will generate income for the Fund. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Fund compared with what the performance would have been without the use of dollar rolls. At the time a Fund enters into a dollar roll transaction, the Manager or sub-adviser will designate assets on its books
and records in an amount equal to the amount of the Funds commitments and will subsequently monitor the account to ensure that its value is maintained.
Dollar rolls involve the risk that the market value of the securities subject to a Funds forward purchase commitment may decline below, or the
market value of the securities subject to a Funds forward sale commitment may increase above, the exercise price of the forward commitment. In the event the buyer of the securities files for bankruptcy or becomes insolvent, a Funds use
of the proceeds of the current sale portion of the transaction may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Funds obligation to purchase the similar securities in the forward
transaction. Dollar rolls are speculative techniques that can be deemed to involve leverage. At the time a Fund sells securities and agrees to repurchase securities at a future date, the Fund will segregate liquid assets with a value equal to the
repurchase price. A Fund may engage in
II-19
dollar roll transactions to enhance return. Each dollar roll transaction is accounted for as a sale or purchase of a portfolio security and a subsequent purchase or sale of a substantially
similar security in the forward market. Successful use of mortgage dollar rolls may depend upon the Managers ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
Equity Securities.
Equity securities include
common stock and, for certain Funds, preferred stock (including convertible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts; general and limited
partnerships and limited liability companies; and depositary receipts. Stock markets are volatile. The price of equity securities will fluctuate and can decline and reduce the value of a portfolio investing in equities. The price of equity
securities fluctuates based on changes in a companys financial condition and overall market and economic conditions. The value of equity securities purchased by the Fund could decline if the financial condition of the companies the Fund
invests in decline or if overall market and economic conditions deteriorate. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increase in production costs and competitive conditions
within an industry. In addition, they may decline due to general market conditions that are not specifically related to a company or industry, such as real or perceived adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates or generally adverse investor sentiment.
From time to time certain of the Funds may invest in shares of companies through initial public offerings (IPOs). IPOs have the potential to produce, and have in fact produced, substantial
gains for certain Funds. There is no assurance that any Fund will have continued access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future performance. The investment performance of a Fund
during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when it is able to do so. In addition, as a Fund increases in size, the impact of IPOs on its performance will generally decrease. Securities
issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In
addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.
The Funds may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines,
markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter
operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer
market makers and wider price spreads. This may result in greater price movements and less ability to sell a Funds investment than if the Fund held the securities of larger, more established companies.
Exchange Traded Notes (ETNs).
Certain Funds may
invest in ETNs. ETNs are generally notes representing debt of the issuer, usually a financial institution. ETNs combine both aspects of bonds and ETFs. An ETNs returns are based on the performance of one or more underlying assets, reference
rates or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market. However, unlike an ETF, an ETN can be held until the ETNs maturity, at which time the issuer will pay a return
linked to the performance of the specific asset, index or rate (reference instrument) to which the ETN is linked minus certain fees. Unlike regular bonds, ETNs do not make periodic interest payments, and principal is not protected.
The value of an ETN may be influenced by, among other things,
time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying markets, changes in the applicable interest rates, the performance of the reference instrument, changes in the issuers credit rating and
economic, legal, political or geographic events that affect the reference instrument. An ETN that is tied to a reference instrument may not replicate the performance of the reference instrument. ETNs also incur certain expenses not incurred by their
applicable reference instrument. Some ETNs that use leverage can, at times, be relatively illiquid and, thus, they may be difficult to purchase or sell at a fair price. Levered ETNs are subject to the same risk as other instruments that use leverage
in any form. While leverage allows for greater potential return, the potential for loss is also greater. Finally, additional losses may be incurred if the investment loses value because, in addition to the money lost on the investment, the loan
still needs to be repaid.
Because the return on the ETN is
dependent on the issuers ability or willingness to meet its obligations, the value of the ETN may change due to a change in the issuers credit rating, despite no change in the underlying reference instrument. The market value of ETN
shares may differ from the value of the reference instrument. This difference in price may be due to the fact that the supply and demand in the market for ETN shares at any point in
II-20
time is not always identical to the supply and demand in the market for the assets underlying the reference instrument that the ETN seeks to track.
There may be restrictions on the Funds right to redeem its investment
in an ETN, which are generally meant to be held until maturity. The Funds decision to sell its ETN holdings may be limited by the availability of a secondary market. An investor in an ETN could lose some or all of the amount invested.
Foreign Investment Risks.
Certain Funds may invest
in foreign securities, including securities from issuers located in emerging market countries. These securities may be denominated in U.S. dollars or in a foreign currency. Investing in foreign securities involves risks not typically associated with
investing in securities of companies organized and operated in the United States that can increase the chances that a Fund will lose money.
Securities issued by certain companies organized outside the United States may not be deemed to be foreign securities (but rather deemed to be U.S.
securities) if (i) the companys principal operations are conducted from the U.S., (ii) the companys equity securities trade principally on a U.S. stock exchange, (iii) the company does a substantial amount of business in
the U.S. or (iv) the issuer of securities is included in the Funds primary U.S. benchmark index.
In addition to equity securities, foreign investments of the Funds may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state, province or municipality; (b) debt obligations of supranational organizations; (c) debt obligations of foreign banks and bank holding companies; (d) debt
obligations of domestic banks and corporations issued in foreign currencies; (e) debt obligations denominated in the Euro; and (f) foreign corporate debt securities and commercial paper. Such securities may include loan participations and
assignments, convertible securities and zero-coupon securities.
Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes.
Foreign Market Risk.
Funds that may invest in foreign securities
offer the potential for more diversification than a Fund that invests only in the United States because securities traded on foreign markets have often (though not always) performed differently from securities traded in the United States. However,
such investments often involve risks not present in U.S. investments that can increase the chances that a Fund will lose money. In particular, a Fund is subject to the risk that, because there are generally fewer investors on foreign exchanges and a
smaller number of shares traded each day, it may be difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may fluctuate more than prices of securities traded in the United States. Investments
in foreign markets may also be adversely affected by governmental actions such as the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain industries. Any of these actions could severely affect security prices, impair a Funds ability to purchase or sell foreign securities or transfer the Funds assets or income back into the United States, or
otherwise adversely affect a Funds operations. Other potential foreign market risks include exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments
in foreign courts, and political and social conditions, such as diplomatic relations, confiscatory taxation, expropriation, limitation on the removal of funds or assets, or imposition of (or change in) exchange control regulations. Legal remedies
available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries. In addition, changes in government administrations or economic or monetary policies in the
U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Funds operations.
Foreign Economy Risk.
The economies of certain foreign markets often do not compare favorably with that of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources, and balance of payments position. Certain such economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments,
the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures.
Currency Risk and Exchange Risk.
Because foreign securities generally are denominated and pay dividends or interest in
foreign currencies, the value of a Fund that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates. Generally, when the U.S. dollar rises in value against a foreign currency,
a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in
II-21
that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as currency risk, means that a stronger U.S. dollar will reduce returns for U.S.
investors while a weak U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards.
Many foreign governments supervise and regulate stock exchanges, brokers and the sale
of securities less than does the United States. Some countries may not have laws to protect investors comparable to the U.S. securities laws. For example, some foreign countries may have no laws or rules against insider trading. Insider trading
occurs when a person buys or sells a companys securities based on nonpublic information about that company. Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another
country do not require as much detail as U.S. accounting standards, it may be harder for Fund management to completely and accurately determine a companys financial condition. In addition, the U.S. Government has from time to time in the past
imposed restrictions, through penalties and otherwise, on foreign investments by U.S. investors such as the Fund. If such restrictions should be reinstituted, it might become necessary for the Fund to invest all or substantially all of its assets in
U.S. securities. Also, brokerage commissions and other costs of buying or selling securities often are higher in foreign countries than they are in the United States. This reduces the amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States.
A
Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or
no regulatory oversight over their operations. Also, the laws of certain countries may put limits on a Funds ability to recover its assets if a foreign bank or depository or issuer of a security or any of their agents goes bankrupt. In
addition, it is often more expensive for a Fund to buy, sell and hold securities in certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount a Fund can earn on its investments and
typically results in a higher operating expense ratio for the Fund as compared to investment companies that invest only in the United States.
Publicly Available Information.
In general, less information is publicly available with respect to foreign issuers than is available with respect
to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. While the volume of transactions effected on foreign stock exchanges has
increased in recent years, it remains appreciably below that of the New York Stock Exchange. Accordingly, a Funds foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities in U.S.
companies. In addition, there is generally less government supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.
Settlement Risk.
Settlement and clearance procedures in certain
foreign markets differ significantly from those in the United States. Foreign settlement procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates in markets that still rely on physical
settlement. Settlements in certain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult for a Fund to carry out transactions. If a Fund cannot settle or is delayed in settling
a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If a Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable to that party for any losses incurred.
Funding Agreements.
Certain Funds may invest in Guaranteed
Investment Contracts (GICs) and similar funding agreements. In connection with these investments, a Fund makes cash contributions to a deposit fund of an insurance companys general account. The insurance company then credits to the
Fund on a monthly basis guaranteed interest, which is based on an index (such as LIBOR). The funding agreements provide that this guaranteed interest will not be less than a certain minimum rate. The purchase price paid for a funding agreement
becomes part of the general assets of the insurance company, and the contract is paid from the general assets of the insurance company. Generally, funding agreements are not assignable or transferable without the permission of the issuing insurance
companies, and an active secondary market in some funding agreements does not currently exist.
II-22
Guarantees.
A Fund may purchase securities which contain guarantees issued by an entity
separate from the issuer of the security. Generally, the guarantor of a security (often an affiliate of the issuer) will fulfill an issuers payment obligations under a security if the issuer is unable to do so.
Illiquid or Restricted Securities.
Each Fund may invest up to
15% of its net assets in securities that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of a Funds assets in illiquid
securities may restrict the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute
where a Funds operations require cash, such as when the Fund redeems shares or pays dividends, and could result in the Fund borrowing to meet short term cash requirements or incurring capital losses on the sale of illiquid investments.
A Fund may invest in securities that are not registered under
the Securities Act (restricted securities). Restricted securities may be sold in private placement transactions between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In
many cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may
be less liquid and more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than
those originally paid by the Fund or less than their fair market value. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their
securities were publicly traded. If any privately placed securities held by a Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of
registration. Certain of the Funds investments in private placements may consist of direct investments and may include investments in smaller, less seasoned issuers, which may involve greater risks. These issuers may have limited product
lines, markets or financial resources, or they may be dependent on a limited management group. In making investments in such securities, a Fund may obtain access to material nonpublic information, which may restrict the Funds ability to
conduct portfolio transactions in such securities.
Some of these
securities are new and complex, and trade only among institutions; the markets for these securities are still developing, and may not function as efficiently as established markets. Owning a large percentage of restricted or illiquid securities
could hamper the Funds ability to raise cash to meet redemptions. Also, because there may not be an established market price for these securities, the Fund may have to estimate their value, which means that their valuation (and, to a much
smaller extent, the valuation of the Fund) may have a subjective element. Transactions in restricted or illiquid securities may entail registration expense and other transaction costs that are higher than those for transactions in unrestricted or
liquid securities. Where registration is required for restricted or illiquid securities a considerable time period may elapse between the time the Fund decides to sell the security and the time it is actually permitted to sell the security under an
effective registration statement. If during such period, adverse market conditions were to develop, the Fund might obtain less favorable pricing terms that when it decided to sell the security.
Inflation-Indexed Bonds.
Certain Funds may invest in
inflation-indexed bonds, which are fixed income securities or other instruments whose principal value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure
that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index (CPI) accruals as part of a semi-annual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of
five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal
amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months was 1%, the mid-year par value of the bond would
be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole years inflation equaling 3%, the end-of-year par value of the bond would be $1,030
and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and, consequently, the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation.
However, the
II-23
current market value of the bonds is not guaranteed, and will fluctuate. Certain Funds may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a
guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. In addition, if the Fund purchases inflation-indexed bonds offered by foreign issuers, the rate of inflation
measured by the foreign inflation index may not be correlated to the rate of inflation in the United States.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates and the
rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at
a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. There can be no assurance, however, that the value of inflation-indexed bonds will be directly correlated to changes in interest
rates.
While these securities are expected to be protected from
long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bonds inflation measure.
In general, the measure used to determine the periodic adjustment of U.S. inflation-indexed bonds is the Consumer Price Index for Urban Consumers (CPI-U), which is calculated monthly by the
U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted to
reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can
be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their
principal until maturity.
Inflation Risk.
Like all
mutual funds, the Funds are subject to inflation risk. Inflation risk is the risk that the present value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the present
value of a Funds assets can decline as can the value of a Funds distributions.
Information Concerning the Indices.
Standard & Poors
®
500 Index (S&P 500).
Standard & Poors
®
, S&P
®
, S&P 500
®
,
Standard & Poors 500, and 500 are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by certain BlackRock funds. No Fund is sponsored, endorsed, sold or promoted by S&P, a division
of The McGraw Hill Companies, Inc. S&P makes no representation regarding the advisability of investing in any Fund. S&P makes no representation or warranty, express or implied, to the owners of shares of a Fund or any member of the public
regarding the advisability of investing in securities generally or in a Fund particularly or the ability of the S&P 500 to track general stock market performance. S&Ps only relationship to certain Funds is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 which is determined, composed and calculated by S&P without regard to the Fund. S&P has no obligation to take the needs of a Fund or the owners of shares of a Fund into
consideration in determining, composing or calculating the S&P 500. S&P is not responsible for and has not participated in the determination of the prices and amount of any Fund or the timing of the issuance or sale of shares of a Fund or in
the determination or calculation of the equation by which a Fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of any Fund.
S&P does not guarantee the accuracy and/or the completeness of the
S&P 500 Index or any data included therein, and S&P shall have no liability for any errors, omissions, or interruptions therein. S&P makes no warranty, express or implied, as to results to be obtained by a Fund, owners of shares of a
Fund, or any other person or entity from the use of the S&P 500 Index or any data included therein. S&P makes no express or implied warranties and expressly disclaims all warranties of merchantability or fitness for a particular purpose or
use with respect to the S&P 500 Index or any data included therein. Without limiting any of the foregoing, in no event shall S&P have any liability for any special, punitive, indirect, or consequential damages (including lost profits), even
if notified of the possibility of such damages.
Russell
®
Indexes.
No Fund is promoted, sponsored or endorsed by, nor in any way affiliated with Frank Russell Company.
Frank Russell Company is not responsible for and has not reviewed any Fund nor any associated literature
II-24
or publications and Frank Russell Company makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change a Russell Index. Frank Russell Company has no obligation to take the needs of any particular Fund or its participants or any other product or person into consideration in determining, composing or
calculating the Index.
Frank Russell Companys publication
of a Russell Index in no way suggests or implies an opinion by Frank Russell Company as to the attractiveness or appropriateness of investment in any or all securities upon which a Russell Index is based. Frank Russell Company makes no
representation, warranty, or guarantee as to the accuracy, completeness, reliability, or otherwise of the Russell Indexes or any data included in the Russell Indexes. Frank Russell Company makes no representation or warranty regarding the use, or
the results of use, of the Russell Indexes or any data included therein, or any security (or combination thereof) comprising the Russell Indexes. Frank Russell Company makes no other express or implied warranty, and expressly disclaims any warranty,
of any kind, including, without means of limitation, any warranty of merchantability or fitness for a particular purpose with respect to the Russell Indexes or any data or any security (or combination thereof) included therein.
MSCI Europe, Australasia and Far East (Capitalization Weighted) Index
(EAFE Index).
The EAFE Index is the exclusive property of MSCI, Inc. (MSCI). The EAFE Index is a service mark of Morgan Stanley Group Inc. and has been licensed for use by the Manager and its affiliates.
No Fund is sponsored, endorsed, sold or promoted by MSCI. MSCI makes no
representation or warranty, express or implied, to the owners of shares of a Fund or any member of the public regarding the advisability of investing in securities generally or in a Fund particularly or the ability of the EAFE Index to track general
stock market performance. MSCI is the licensor of certain trademarks, service marks and trade names of MSCI and of the EAFE Index. MSCI has no obligation to take the needs of any Fund or the owners of shares of a Fund into consideration in
determining, composing or calculating the EAFE Index. MSCI is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of shares of any Fund to be issued or in the determination or calculation of
the equation by which the shares of any Fund are redeemable for cash. MSCI has no obligation or liability to owners of shares of a Fund in connection with the administration, marketing or trading of the Fund.
Although MSCI shall obtain information for inclusion in or for use in the
calculation of the EAFE Index from sources which MSCI considers reliable, MSCI does not guarantee the accuracy and/or the completeness of the EAFE Index or any data included therein. MSCI makes no warranty, express or implied, as to results to be
obtained by licensee, licensees customers and counterparties, owners of shares of a Fund, or any other person or entity from the use of the EAFE Index or any data included therein in connection with the rights licensed hereunder or for any
other use. MSCI makes no express or implied warranties, and hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the EAFE Index or any data included therein. Without limiting any of the
foregoing, in no event shall MSCI have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
Investment Grade Debt Obligations.
Certain Funds may invest in
investment grade securities, which are securities rated in the four highest rating categories of an NRSRO or deemed to be of equivalent quality by a Funds Manager. Certain Funds may invest in debt securities rated Aaa by
Moodys or AAA by S&P. It should be noted that debt obligations rated in the lowest of the top four ratings (
i.e.
, Baa by Moodys or BBB by S&P) are considered to have some speculative characteristics
and are more sensitive to economic change than higher rated securities. If an investment grade security of a Fund is subsequently downgraded below investment grade, the Funds Manager will consider such an event in determining whether the Fund
should continue to hold the security. Subject to its investment strategies, there is no limit on the amount of such downgraded securities a Fund may hold, although under normal market conditions the manager do not expect to hold these securities to
a material extent.
See Appendix A to this Statement of
Additional Information for a description of applicable securities ratings.
Investment in Emerging Markets.
Certain Funds may invest in the securities of issuers domiciled in various countries with emerging capital markets. Specifically, a country with an emerging
capital market is any country that the World Bank, the International Finance Corporation, the United Nations or its authorities has determined to have a low or middle income economy. Countries with emerging markets can be found in regions such as
Asia, Latin America, Eastern Europe and Africa.
Investments in
the securities of issuers domiciled in countries with emerging capital markets involve certain additional risks that do not generally apply to investments in securities of issuers in more developed capital markets, such as (i) low or
non-existent trading volume, resulting in a lack of liquidity and increased volatility in prices for such
II-25
securities, as compared to securities of comparable issuers in more developed capital markets; (ii) uncertain national policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of inflation or unfavorable diplomatic developments; (iii) possible fluctuations in exchange rates, differing legal systems and the existence or possible imposition of
exchange controls, custodial restrictions or other foreign or U.S. governmental laws or restrictions applicable to such investments; (iv) national policies that may limit a Funds investment opportunities such as restrictions on investment
in issuers or industries deemed sensitive to national interests; and (v) the lack or relatively early development of legal structures governing private and foreign investments and private property. In addition to withholding taxes on investment
income, some countries with emerging markets may impose differential capital gains taxes on foreign investors.
Political and economic structures in emerging market countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability
characteristic of more developed countries. In such a dynamic environment, there can be no assurance that any or all of these capital markets will continue to present viable investment opportunities for a Fund. In the past, governments of such
nations have expropriated substantial amounts of private property, and most claims of the property owners have never been fully settled. There is no assurance that such expropriations will not reoccur. In such an event, it is possible that a Fund
could lose the entire value of its investments in the affected market. As a result the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social
developments may affect the value of investments in these countries and the availability to a Fund of additional investments. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading
in securities in these countries may make investments in the countries illiquid and more volatile than investments in Japan or most Western European countries.
Also, there may be less publicly available information about issuers in emerging markets than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject. In certain countries with emerging capital markets, reporting standards
vary widely. As a result, traditional investment measurements used in the United States, such as price/earnings ratios, may not be applicable. Emerging market securities may be substantially less liquid and more volatile than those of mature
markets, and company shares may be held by a limited number of persons. This may adversely affect the timing and pricing of the Funds acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in part because a Fund will need to use brokers and counterparties that are less well capitalized, and custody and registration of assets in some countries may be unreliable. The
possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to recognize ownership exists in some emerging markets, and, along with other factors, could result in ownership registration being completely lost. A Fund
would absorb any loss resulting from such registration problems and may have no successful claim for compensation.
Investment in non-dollar denominated securities including securities from issuers located in emerging market countries may be on either a currency hedged or unhedged basis, and the Funds may hold from
time to time various foreign currencies pending investment or conversion into U.S. dollars. Some of these instruments may have the characteristics of futures contracts. In addition, certain Funds may engage in foreign currency exchange transactions
to seek to protect against changes in the level of future exchange rates which would adversely affect the Funds performance. These investments and transactions involving foreign securities, currencies, options (including options that relate to
foreign currencies), futures, hedging and cross-hedging are described below and under Interest Rate Transactions and Currency Swaps, Foreign Currency Transactions and Options and Futures Contracts.
Risks of Investing in Asia-Pacific Countries.
In addition to the
risks of foreign investing and the risks of investing in developing markets, the developing market Asia-Pacific countries in which a Fund may invest are subject to certain additional or specific risks. Certain Funds may make substantial investments
in Asia-Pacific countries. In many of these markets, there is a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and
financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region such as in Japan and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in
number and less well capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment companies and the restrictions on foreign investment discussed below, result in potentially
fewer investment opportunities for a Fund and may have an adverse impact on the investment performance of the Fund.
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Many of the developing market Asia-Pacific countries may be subject to a greater degree of economic,
political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian governments or military involvement in political and economic
decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighbouring countries; and (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as Indonesia, have a substantial role in regulating and supervising the economy. Another risk
common to most such countries is that the economy is heavily export oriented and, accordingly, is dependent upon international trade. The existence of overburdened infrastructure and obsolete financial systems also presents risks in certain
countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of factors.
The legal systems in certain developing market Asia-Pacific
countries also may have an adverse impact on the Fund. For example, while the potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is generally limited to the amount of the shareholders investment,
the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies may be more limited than those of shareholders of U.S. corporations. It
may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing market Asia-Pacific countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or
controls many companies, including the largest in the country. Accordingly, government actions in the future could have a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector
companies and a Fund itself, as well as the value of securities in the Funds portfolio. In addition, economic statistics of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
In addition to the relative lack of publicly available
information about developing market Asia-Pacific issuers and the possibility that such issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies, inflation accounting rules in some developing
market Asia-Pacific countries require companies that keep accounting records in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the companys balance sheet in order to express items in
terms of currency of constant purchasing power. Inflation accounting may indirectly generate losses or profits for certain developing market Asia-Pacific companies.
Satisfactory custodial services for investment securities may not be
available in some developing Asia-Pacific countries, which may result in the Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific countries, such as the Philippines, India
and Turkey, are especially large debtors to commercial banks and foreign governments.
On March 11, 2011, a powerful earthquake and resulting tsunami struck northeastern Japan causing major damage along the coast, including damage to nuclear power plants in the region. This disaster,
and the resulting damage, could have a severe and negative impact on a Funds investment portfolio and, in the longer term, could impair the ability of issuers in which the Fund invests to conduct their businesses in the manner normally
conducted.
Fund management may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular developing Asia-Pacific country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or
limited prior experience.
Restrictions on Foreign Investments
in Asia-Pacific Countries.
Some developing Asia-Pacific countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as a Fund. As illustrations,
certain countries may require governmental approval prior to investments by foreign persons or limit the amount of investment by foreign persons in a particular company or limit the investment by foreign persons to only a specific class of
securities of a company which may have less advantageous terms (including price and shareholder rights) than securities of the company available for purchase by nationals. There can be no assurance that a Fund will be able to obtain required
governmental approvals in a timely manner. In addition, changes to restrictions on foreign ownership of securities subsequent to a Funds purchase of such securities may have an adverse effect on the value of such shares. Certain countries may
restrict investment opportunities in issuers or industries deemed important to national interests.
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The manner in which foreign investors may invest in companies in certain developing Asia-Pacific countries,
as well as limitations on such investments, also may have an adverse impact on the operations of a Fund. For example, a Fund may be required in certain of such countries to invest initially through a local broker or other entity and then have the
shares purchased re-registered in the name of the Fund. Re-registration may in some instances not be able to occur on a timely basis, resulting in a delay during which a Fund may be denied certain of its rights as an investor, including rights as to
dividends or to be made aware of certain corporate actions. There also may be instances where a Fund places a purchase order but is subsequently informed, at the time of re-registration, that the permissible allocation of the investment to foreign
investors has been filled, depriving the Fund of the ability to make its desired investment at that time.
Substantial limitations may exist in certain countries with respect to a Funds ability to repatriate investment income, capital or the proceeds of sales of securities by foreign investors. A Fund
could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments. It is possible that certain countries may
impose currency controls or other restrictions relating to their currencies or to securities of issuers in those countries. To the extent that such restrictions have the effect of making certain investments illiquid, securities may not be available
for sale to meet redemptions. Depending on a variety of financial factors, the percentage of a Funds portfolio subject to currency controls may increase. In the event other countries impose similar controls, the portion of the Funds
assets that may be used to meet redemptions may be further decreased. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the operations of a Fund (for example, if funds
may be withdrawn only in certain currencies and/or only at an exchange rate established by the government).
In certain countries, banks or other financial institutions may be among the leading companies or have actively traded securities available for investment. The Investment Company Act restricts a
Funds investments in any equity securities of an issuer that, in its most recent fiscal year, derived more than 15% of its revenues from securities related activities, as defined by the rules thereunder. These provisions may
restrict a Funds investments in certain foreign banks and other financial institutions.
Political and economic structures in emerging market countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability
characteristic of more developed countries. Some of these countries may have in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. As a result the risks described
above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the value of investments in these countries and the availability to a Fund of
additional investments in emerging market countries. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in these countries may make investments in the countries
illiquid and more volatile than investments in Japan or most Western European countries. There may be little financial or accounting information available with respect to issuers located in certain emerging market countries, and it may be difficult
to assess the value or prospects of an investment in such issuers.
The expense ratios of the Funds investing significantly in foreign securities can be expected to be higher than those of Funds investing primarily in
domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as the higher cost of custody of foreign securities, higher commissions paid on comparable transactions on foreign markets and additional
costs arising from delays in settlements of transactions involving foreign securities.
Risks of Investments in Russia.
A Fund may invest a portion of its assets in securities issued by companies located in Russia. Because of the recent formation of the Russian securities markets as
well as the underdeveloped state of Russias banking system, settlement, clearing and registration of securities transactions are subject to significant risks. Ownership of shares is defined according to entries in the companys share
register and normally evidenced by extracts from the register. These extracts are not negotiable instruments and are not effective evidence of securities ownership. The registrars are not necessarily subject to effective state supervision nor are
they licensed with any governmental entity. Also, there is no central registration system for shareholders and it is possible for a Fund to lose its registration through fraud, negligence or mere oversight. While a Fund will endeavor to ensure that
its interest continues to be appropriately recorded either itself or through a custodian or other agent inspecting the share register and by obtaining extracts of share registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent illegal amendment or other fraudulent act may deprive the Fund of its ownership rights or improperly dilute its interest. In addition, while applicable Russian regulations impose liability on
registrars for losses resulting from their errors, it may be difficult for a Fund to enforce any rights it may have
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against the registrar or issuer of the securities in the event of loss of share registration. While a Fund intends to invest directly in Russian companies that use an independent registrar, there
can be no assurance that such investments will not result in a loss to the Fund.
Brady Bonds.
A Funds emerging market debt securities may include emerging market governmental debt obligations commonly referred to as Brady Bonds. Brady Bonds are securities created through
the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the Brady
Plan). Brady Plan debt restructurings have been implemented in a number of countries, including: Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger, Nigeria, Panama, Peru, the Philippines,
Poland, Uruguay and Venezuela.
Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market. Brady Bonds are not considered to be U.S. Government securities. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on
these Brady Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating
rate bonds, initially is equal to at least one years interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to value recovery payments
in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. For example, some Mexican and Venezuelan Brady Bonds include attached value recovery options, which increase interest payments
if oil revenues rise. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized
interest payments; and (iv) any uncollateralized repayment of principal at maturity (the uncollateralized amounts constitute the residual risk).
Brady Bonds involve various risk factors described above associated with
investing in foreign securities, including the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. In light of the residual risk of Brady Bonds and, among other factors, the
history of defaults, investments in Brady Bonds are considered speculative. There can be no assurance that Brady Bonds in which the Funds may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the
Funds to suffer a loss of interest or principal on any of its holdings.
Investment in Other Investment Companies.
Each Fund may, subject to applicable law, invest in other investment companies (including investment companies managed by BlackRock and its
affiliates), including money market funds and exchange traded funds (ETFs), which are typically open-end funds or unit investment trusts listed on a stock exchange. In accordance with the Investment Company Act, a Fund may invest up to
10% of its total assets in securities of other investment companies (measured at the time of such investment). In addition, under the Investment Company Act a Fund may not acquire securities of an investment company if such acquisition would cause
the Fund to own more than 3% of the total outstanding voting stock of such investment company and a Fund may not invest in another investment company if such investment would cause more than 5% of the value of the Funds total assets to be
invested in securities of such investment company. (These limits do not restrict a Feeder Fund from investing all of its assets in shares of its Master Portfolio.) In addition to the restrictions on investing in other investment companies discussed
above, a Fund may not invest in a registered closed-end investment company if such investment would cause the Fund and other BlackRock-advised investment companies to own more than 10% of the total outstanding voting stock of such closed-end
investment company. Pursuant to the Investment Company Act (or alternatively, pursuant to exemptive orders received from the Commission) these percentage limitations do not apply to investments in affiliated money market funds, and under certain
circumstances, do not apply to investments in affiliated investment companies, including ETFs. In addition, many third-party ETFs have obtained exemptive relief from the Commission to permit unaffiliated funds (such as the Funds) to invest in their
shares beyond the statutory limits, subject to certain conditions and pursuant to contractual arrangements between the ETFs and the investing funds. A Fund may rely on these exemptive orders in investing in ETFs. Further, under certain circumstances
a Fund may be able to rely on certain provisions of the Investment Company Act to invest in shares of unaffiliated investment companies beyond the statutory limits noted above, but subject to certain other statutory restrictions.
As with other investments, investments in other investment companies are
subject to market and selection risk.
Shares of investment
companies, such as closed-end fund investment companies, that trade on an exchange may at times be acquired at market prices representing premiums to their net asset values. In addition, investment
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companies held by a Fund that trade on an exchange could trade at a discount from net asset value, and such discount could increase while the Fund holds the shares. If the market price of shares
of an exchange-traded investment company decreases below the price that the Fund paid for the shares and the Fund were to sell its shares of such investment company at a time when the market price is lower than the price at which it purchased the
shares, the Fund would experience a loss.
In addition, if a Fund
acquires shares in investment companies, including affiliated investment companies, shareholders would bear both their proportionate share of expenses in the Fund and, indirectly, the expenses of such investment companies. Such expenses, both at the
Fund level and acquired investment company level, would include management and advisory fees, unless such fees have been waived by BlackRock. Please see the relevant Funds prospectus to determine whether any such management and advisory fees
have been waived by BlackRock. Investments by a Fund in wholly owned investment entities created under the laws of certain countries will not be deemed an investment in other investment companies.
To the extent shares of a Fund are held by an affiliated fund, the ability
of the Fund itself to purchase other affiliated investment companies may be limited. In addition, a fund-of-funds (
e.g.
, an investment company that seeks to meet its investment objective by investing significantly in other investment
companies) may be limited in its ability to purchase affiliated underlying funds if such affiliated underlying funds themselves own shares of affiliated funds.
A number of publicly traded closed-end investment companies have been organized to facilitate indirect foreign investment in developing countries, and
certain of such countries, such as Thailand, South Korea, Chile and Brazil, have specifically authorized such funds. There also are investment opportunities in certain of such countries in pooled vehicles that resemble open-end investment companies.
The restrictions on investments in securities of investment companies set forth above may limit opportunities for a Fund to invest indirectly in certain developing countries.
Junk Bonds.
Non-investment grade or high yield
fixed income or convertible securities commonly known to investors as junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Fund management believes are of
comparable quality. While generally providing greater income and opportunity for gain, non-investment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their
yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated Ba or lower by Moodys or BB or lower by S&P) or will be non-rated. The
credit rating of a high yield security does not necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the issuers financial condition. High yield
securities are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.
The major risks in junk bond investments include the following:
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Junk bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse changes in the issuers industry and to
general economic conditions. Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments or the unavailability of additional financing.
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The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations. The issuers ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability of additional financing. Issuers of high
yield securities are often in the growth stage of their development and/or involved in a reorganization or takeover.
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Junk bonds are frequently ranked junior to claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations, which will potentially limit a Funds ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in high yield securities have a lower degree
of protection with respect to principal and interest payments then do investors in higher rated securities.
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Junk bonds frequently have redemption features that permit an issuer to repurchase the security from a Fund before it matures. If an issuer redeems the
junk bonds, a Fund may have to invest the proceeds in bonds with lower yields and may lose income.
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Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of junk bonds
than on those of other higher rated fixed income securities.
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The secondary markets for high yield securities are not as liquid as the secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and participants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading
volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a
particular issuer. Under certain economic and/or market conditions, a Fund may have difficulty disposing of certain high yield securities due to the limited number of investors in that sector of the market. An illiquid secondary market may adversely
affect the market price of the high yield security, which may result in increased difficulty selling the particular issue and obtaining accurate market quotations on the issue when valuing a Funds assets. Market quotations on high yield
securities are available only from a limited number of dealers, and such quotations may not be the actual prices available for a purchase or sale. When the secondary market for high yield securities becomes more illiquid, or in the absence of
readily available market quotations for such securities, the relative lack of reliable objective data makes it more difficult to value a Funds securities, and judgment plays a more important role in determining such valuations.
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A Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
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The junk bond markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether
or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory developments. These developments could adversely affect a Funds net asset value and investment practices,
the secondary market for high yield securities, the financial condition of issuers of these securities and the value and liquidity of outstanding high yield securities, especially in a thinly traded market. For example, federal legislation requiring
the divestiture by federally insured savings and loan associations of their investments in high yield bonds and limiting the deductibility of interest by certain corporate issuers of high yield bonds adversely affected the market in the past.
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The rating assigned by a rating agency evaluates the issuing agencys assessment of the safety of a non-investment grade securitys principal
and interest payments, but does not address market value risk. Because such ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the sub-adviser
performs its own analysis of the issuers whose non-investment grade securities a Fund holds. Because of this, the Funds performance may depend more on the sub-advisers own credit analysis than in the case of mutual funds investing in
higher-rated securities.
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In selecting
non-investment grade securities, the adviser or sub-adviser considers factors such as those relating to the creditworthiness of issuers, the ratings and performance of the securities, the protections afforded the securities and the diversity of the
Fund. The sub-adviser continuously monitors the issuers of non-investment grade securities held by the Fund for their ability to make required principal and interest payments, as well as in an effort to control the liquidity of the Fund so that it
can meet redemption requests. If a securitys rating is reduced below the minimum credit rating that is permitted for a Fund, the Funds sub-adviser will consider whether the Fund should continue to hold the security.
In the event that a Fund investing in high yield securities experiences an
unexpected level of net redemptions, the Fund could be forced to sell its holdings without regard to the investment merits, thereby decreasing the assets upon which the Funds rate of return is based.
The costs attributable to investing in the junk bond markets are usually
higher for several reasons, such as higher investment research costs and higher commission costs.
Lease Obligations.
A Fund may hold participation certificates in a lease, an installment purchase contract, or a conditional sales contract (lease obligations).
The Manager will monitor the credit standing of each borrower and each
entity providing credit support and/or a put option relating to lease obligations. In determining whether a lease obligation is liquid, the Manager will consider, among other factors, the following: (i) whether the lease can be cancelled;
(ii) the degree of assurance that assets represented by the lease could be sold; (iii) the strength of the lessees general credit (
e.g.
, its debt, administrative, economic and financial characteristics); (iv) in the case
of a municipal lease, the likelihood that the municipality would discontinue appropriating funding for the leased property because the property is no longer deemed essential to the operations of the municipality (
e.g.
, the potential for an
event of nonappropriation); (v) legal recourse in the event of failure to appropriate; (vi) whether the security is backed by a credit enhancement such as insurance; and
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(vii) any limitations which are imposed on the lease obligors ability to utilize substitute property
or services other than those covered by the lease obligation.
Life Settlement Investments.
A Fund may invest in life settlements, which are sales to third parties, such as the Fund, of existing life
insurance contracts for more than their cash surrender value but less than the net benefits to be paid under the policies. When a Fund acquires such a contract, it pays the policy premiums in return for the expected receipt of the net benefit as the
beneficiary under the policy. Investments in these contracts involve certain risks, including liquidity risk, credit risk of the insurance company, and inaccurate estimations of life expectancy of the insured individuals (viators). These policies
are considered illiquid in that they are bought and sold in a secondary market through life settlement agents. As such, a Funds investments in life settlement contracts are subject to the Funds investment restriction relating to illiquid
securities. Also, in the event of a bankruptcy of the insurance carrier for a policy, the Fund may receive reduced or no benefits under the contract. A Fund seeks to minimize credit risk by investing in policies issued by a diverse range of
highly-rated insurance carriers. Furthermore, a Fund may encounter losses on its investments if there is an inaccurate estimation of the life expectancies of viators. A Fund intends to reduce this life expectancy risk by investing only in contracts
where the life expectancy was reviewed by an experienced actuary, as well as by diversifying its investments across viators of varying ages and medical profiles. In addition, it is unclear whether the income from life settlements is qualifying
income for purposes of the Internal Revenue Service 90% gross income test a Fund must satisfy each year to qualify as a regulated investment company (RIC). A Fund intends to monitor its investments to ensure that the Fund remains
qualified as a RIC.
Liquidity Management.
As a
temporary defensive measure, if its Manager determines that market conditions warrant, certain Funds may invest without limitation in high quality money market instruments. Certain Funds may also invest in high quality money market instruments
pending investment or to meet anticipated redemption requests. High quality money market instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign issuers, bank obligations,
including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial paper, repurchase agreements and obligations of supranational organizations. Generally, such obligations will mature within one year from the date of
settlement, but may mature within two years from the date of settlement.
Master Limited Partnerships.
Certain Funds may invest in publicly traded master limited partnerships (MLPs) which are limited partnerships or limited liability companies taxable
as partnerships. MLPs may derive income and gains from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or
natural resources. MLPs generally have two classes of owners, the general partner and limited partners. When investing in an MLP, a Fund intends to purchase publicly traded common units issued to limited partners of the MLP. The general partner is
typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity.
The general partner typically controls the operations and management of the MLP through an up to 2% equity interest in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the
partnership, through ownership of common units, and have a limited role in the partnerships operations and management.
MLPs are typically structured such that common units and general partner interests have first priority to receive quarterly cash distributions up to an
established minimum amount (minimum quarterly distributions or MQD). Common and general partner interests also accrue arrearages in distributions to the extent the MQD is not paid. Once common and general partner interests
have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and subordinated units is distributed to both common and
subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner which results in distributions paid per common unit surpassing
specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions. A common arrangement provides that the
general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs, increase capital expenditures and
acquire assets in order to increase the partnerships cash flow and raise the quarterly cash distribution in order to reach higher tiers. Such results benefit all security holders of the MLP.
MLP common units represent a limited partnership interest in the MLP. Common
units are listed and traded on U.S. securities exchanges, with their value fluctuating predominantly based on prevailing market conditions and the success of the MLP. Certain Funds intend to purchase common units in market transactions. Unlike
owners of
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common stock of a corporation, owners of common units have limited voting rights and have no ability annually to elect directors. In the event of liquidation, common units have preference over
subordinated units, but not over debt or preferred units, to the remaining assets of the MLP.
Merger Transaction Risk.
In replicating its target index, a Fund may buy stock of the target company in an announced merger transaction prior to the consummation of such transaction. In that
circumstance, a Fund would expect to receive an amount (whether in cash, stock of the acquiring company or a combination of both) in excess of the purchase price paid by the Fund for the target companys stock. However, a Fund is subject to the
risk that the merger transaction may be canceled, delayed or restructured, in which case a Funds holding of the target companys stock may not result in any profit for the Fund and may lose significant value.
Mezzanine Investments.
Certain Funds, consistent with their
restrictions on investing in securities of a specific credit quality, may invest in certain high yield securities known as mezzanine investments, which are subordinated debt securities which are generally issued in private placements in connection
with an equity security (
e.g.
, with attached warrants). Such mezzanine investments may be issued with or without registration rights. Similar to other high yield securities, maturities of mezzanine investments are typically seven to ten
years, but the expected average life is significantly shorter at three to five years. Mezzanine investments are usually unsecured and subordinate to other obligations of the issuer.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks.
Certain Funds may
purchase bank obligations, such as certificates of deposit, notes, bankers acceptances and time deposits, including instruments issued or supported by the credit of U.S. or foreign banks or savings institutions having total assets at the time
of purchase in excess of $1 billion. These obligations may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific obligation or by government regulation. The assets of a bank or
savings institution will be deemed to include the assets of its domestic and foreign branches for purposes of a Funds investment policies. Investments in short-term bank obligations may include obligations of foreign banks and domestic
branches of foreign banks, and also foreign branches of domestic banks.
To the extent consistent with their investment objectives, a Fund may invest in debt obligations of domestic or foreign corporations and banks, and may acquire commercial obligations issued by Canadian
corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer.
Money Market Securities.
Certain Funds may invest in a broad range of short-term, high quality, U.S. dollar-denominated instruments, such as
government, bank, commercial and other obligations that are available in the money markets. In particular, the Funds may invest in:
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(a)
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U.S. dollar-denominated obligations issued or supported by the credit of U.S. or foreign banks or savings institutions with total assets in excess of $1 billion
(including obligations of foreign branches of such banks);
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(b)
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high quality commercial paper and other obligations issued or guaranteed by U.S. and foreign corporations and other issuers rated (at the time of purchase) A-2 or
higher by S&P, Prime-2 or higher by Moodys or F-2 or higher by Fitch, as well as high quality corporate bonds rated (at the time of purchase) A or higher by those rating agencies;
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(c)
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unrated notes, paper and other instruments that are of comparable quality to the instruments described in (b) above as determined by the Funds Manager;
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(d)
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asset-backed securities (including interests in pools of assets such as mortgages, installment purchase obligations and credit card receivables);
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(e)
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securities issued or guaranteed as to principal and interest by the U.S. Government or by its agencies or authorities and related custodial receipts;
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(f)
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dollar-denominated securities issued or guaranteed by foreign governments or their political subdivisions, agencies or authorities;
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(g)
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funding agreements issued by highly-rated U.S. insurance companies;
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(h)
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securities issued or guaranteed by state or local governmental bodies;
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(i)
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repurchase agreements relating to the above instruments;
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(j)
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municipal bonds and notes whose principal and interest payments are guaranteed by the U.S. Government or one of its agencies or authorities or which otherwise depend on
the credit of the United States;
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(k)
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fixed and variable rate notes and similar debt instruments rated MIG-2, VMIG-2 or Prime-2 or higher by Moodys, SP-2 or A-2 or higher by S&P, or F-2 or higher
by Fitch;
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(l)
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tax-exempt commercial paper and similar debt instruments rated Prime-2 or higher by Moodys, A-2 or higher by S&P, or F-2 or higher by Fitch;
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(m)
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municipal bonds rated A or higher by Moodys, S&P or Fitch;
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(n)
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unrated notes, paper or other instruments that are of comparable quality to the instruments described above, as determined by the Funds Manager under guidelines
established by the Board; and
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(o)
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municipal bonds and notes which are guaranteed as to principal and interest by the U.S. Government or an agency or instrumentality thereof or which otherwise depend
directly or indirectly on the credit of the United States.
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Mortgage-Related Securities.
Mortgage-Backed Securities.
Mortgage-backed securities represent interests in pools of mortgages in which payments of both principal and interest on the securities are generally made monthly, in
effect passing through monthly payments made by borrowers on the residential or commercial mortgage loans that underlie the securities (net of any fees paid to the issuer or guarantor of the securities). Mortgage-backed securities differ
from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates.
Mortgage-backed securities are subject to the general risks associated with
investing in real estate securities; that is, they may lose value if the value of the underlying real estate to which a pool of mortgages relates declines. In addition, investments in mortgage-backed securities involve certain specific risks. These
risks include the failure of a party to meet its commitments under the related operative documents, adverse interest rate changes and the effects of prepayments on mortgage cash flows. Mortgage-backed securities are pass-through
securities, meaning that principal and interest payments made by the borrower on the underlying mortgages are passed through to a Fund. The value of mortgage-backed securities, like that of traditional fixed income securities, typically increases
when interest rates fall and decreases when interest rates rise. However, mortgage-backed securities differ from traditional fixed income securities because of their potential for prepayment without penalty. The price paid by a Fund for its
mortgage-backed securities, the yield the Fund expects to receive from such securities and the weighted average life of the securities are based on a number of factors, including the anticipated rate of prepayment of the underlying mortgages. In a
period of declining interest rates, borrowers may prepay the underlying mortgages more quickly than anticipated, thereby reducing the yield to maturity and the average life of the mortgage-backed securities. Moreover, when a Fund reinvests the
proceeds of a prepayment in these circumstances, it will likely receive a rate of interest that is lower than the rate on the security that was prepaid.
To the extent that a Fund purchases mortgage-backed securities at a premium, mortgage foreclosures and principal prepayments may result in a loss to the
extent of the premium paid. If a Fund buys such securities at a discount, both scheduled payments of principal and unscheduled prepayments will increase current and total returns and will accelerate the recognition of income, which, when distributed
to shareholders, will be taxable as ordinary income. In a period of rising interest rates, prepayments of the underlying mortgages may occur at a slower than expected rate, creating maturity extension risk. This particular risk may effectively
change a security that was considered short or intermediate-term at the time of purchase into a long-term security. Since the value of long-term securities generally fluctuates more widely in response to changes in interest rates than that of
shorter-term securities, maturity extension risk could increase the inherent volatility of the Fund. Under certain interest rate and prepayment scenarios, a Fund may fail to recoup fully its investment in mortgage-backed securities notwithstanding
any direct or indirect governmental or agency guarantee.
There
are currently three types of mortgage pass-through securities: (1) those issued by the U.S. government or one of its agencies or instrumentalities, such as the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac); (2) those issued by private issuers that represent an interest in or are collateralized by pass-through securities
issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and (3) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or pass-through securities without a
government guarantee but that usually have some form of private credit enhancement.
Ginnie Mae is a wholly owned U.S. government corporation within the Department of Housing and Urban Development. Ginnie Mae is authorized to guarantee, with the full faith and credit of the U.S.
government, the timely payment of principal and interest on securities issued by the institutions approved by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage banks), and backed by pools of Federal Housing
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Administration (FHA)-insured or Veterans Administration (VA)-guaranteed mortgages. Pass-through certificates guaranteed by Ginnie Mae (such certificates are also
known as Ginnie Maes) are guaranteed as to the timely payment of principal and interest by Ginnie Mae, whose guarantee is backed by the full faith and credit of the United States. Ginnie Mae certificates also are supported by the
authority of Ginnie Mae to borrow funds from the U.S. Treasury Department to make payments under its guarantee. Mortgage-related securities issued by Fannie Mae include Fannie Mae guaranteed Mortgage Pass-Through Certificates (also known as
Fannie Maes), which are guaranteed as to timely payment of principal and interest by Fannie Mae. They are not backed by or entitled to the full faith and credit of the United States, but are supported by the right of Fannie Mae to borrow
from the U.S. Treasury Department. Fannie Mae was established as a federal agency in 1938 and in 1968 was chartered by Congress as a private shareholder-owned company. Mortgage-related securities issued by the Freddie Mac include Freddie Mac
Mortgage Participation Certificates (also known as Freddie Macs or PCs). Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Banks 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 Freddie Mac. Freddie Mac guarantees either
ultimate collection or timely payment of all principal payments on the underlying mortgage loans. While Freddie Mac generally does not guarantee timely payment of principal, Freddie Mac 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. On September 6, 2008, Director James Lockhart of the Federal Housing Finance Agency
(FHFA) appointed FHFA as conservator of both Fannie Mae and Freddie Mac. In addition the U.S. Treasury Department agreed to provide Fannie Mae and Freddie Mac up to $100 billion of capital each on an as needed basis to insure that they
continue to provide liquidity to the housing and mortgage markets.
Private mortgage pass-through securities are structured similarly to Ginnie Mae, Fannie Mae, and Freddie Mac mortgage pass-through securities and are
issued by originators of and investors in mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the foregoing.
Pools created by private mortgage pass-through issuers generally offer a
higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the private pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers.
The insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets a Funds investment quality standards. There can be no assurance that the private insurers
or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Private mortgage pass-through securities may be bought without insurance or guarantees if, through an examination of the loan experience and practices
of the originator/servicers and poolers, the Manager determines that the securities meet a Funds quality standards. Any mortgage-related securities that are issued by private issuers have some exposure to subprime loans as well as to the
mortgage and credit markets generally.
In addition,
mortgage-related securities that are issued by private issuers are not subject to the underwriting requirements for the underlying mortgages that are applicable to those mortgage-related securities that have a government or government-sponsored
entity guarantee. As a result, the mortgage loans underlying private mortgage-related securities may, and frequently do, have less favorable collateral, credit risk or other underwriting characteristics than government or government-sponsored
mortgage-related securities and have wider variances in a number of terms including interest rate, term, size, purpose and borrower characteristics. Privately issued pools more frequently include second mortgages, high loan-to-value mortgages and
manufactured housing loans. The coupon rates and maturities of the underlying mortgage loans in a private-label mortgage-related securities pool may vary to a greater extent than those included in a government guaranteed pool, and the pool may
include subprime mortgage loans. Subprime loans refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their loans. For these reasons, the loans underlying these securities have had in
many cases higher default rates than those loans that meet government underwriting requirements.
The risk of non-payment is greater for mortgage-related securities that are backed by mortgage pools that contain subprime loans, but a level of risk exists for all loans. Market factors adversely
affecting mortgage loan repayments may include a general economic turndown, high unemployment, a general slowdown in the real estate market, a drop in the market prices of real estate, or an increase in interest rates resulting in higher mortgage
payments by holders of adjustable rate mortgages.
Privately
issued mortgage-related securities are not traded on an exchange and there may be a limited market for the securities, especially when there is a perceived weakness in the mortgage and real estate market sectors.
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Without an active trading market, mortgage-related securities held in a funds portfolio may be
particularly difficult to value because of the complexities involved in assessing the value of the underlying mortgage loans.
A Fund from time to time may purchase in the secondary market (i) certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (PNC Mortgage) or Midland Loan Services, Inc. (Midland), or (ii) mortgage-related securities containing loans or mortgages originated by PNC Bank, National Association (PNC Bank) or
its affiliates. It is possible that under some circumstances, PNC Mortgage, Midland or other affiliates could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC
Mortgage, Midland or their affiliates. For example, if PNC Mortgage, Midland or their affiliates engaged in negligence or willful misconduct in carrying out its duties as a master servicer, then any holder of the mortgage-backed security could seek
recourse against PNC Mortgage, Midland or their affiliates, as applicable. Also, as a master servicer, PNC Mortgage, Midland or their affiliates may make certain representations and warranties regarding the quality of the mortgages and properties
underlying a mortgage-backed security. If one or more of those representations or warranties is false, then the holders of the mortgage-backed securities could trigger an obligation of PNC Mortgage, Midland or their affiliates, as applicable, to
repurchase the mortgages from the issuing trust. Finally, PNC Mortgage, Midland or their affiliates may own securities that are subordinate to the senior mortgage-backed securities owned by a Fund.
Collateralized Mortgage Obligations (CMOs).
CMOs are debt
obligations collateralized by residential or commercial mortgage loans or residential or commercial mortgage pass-through securities. Interest and prepaid principal are generally paid monthly. CMOs may be collateralized by whole mortgage loans or
private mortgage pass-through securities but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae, Freddie Mac, or Fannie Mae. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit (REMIC). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, often referred to as a tranche, each issued at a specific adjustable or fixed interest rate, and bearing a different stated maturity date and each
must be fully retired no later than its final distribution date. Actual maturity and average life will depend upon the prepayment experience of the collateral, which is ordinarily unrelated to the stated maturity date. CMOs often provide for a
modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is
first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes usually receive principal only after the first class has been retired. An investor may be partially protected against a sooner than
desired return of principal because of the sequential payments.
Certain issuers of CMOs are not considered investment companies pursuant to a rule adopted by the Commission, and a Fund may invest in the securities of
such issuers without the limitations imposed by the Investment Company Act on investments by a Fund in other investment companies. In addition, in reliance on an earlier Commission interpretation, a Funds investments in certain other
qualifying CMOs, which cannot or do not rely on the rule, are also not subject to the limitation of the Investment Company Act on acquiring interests in other investment companies. In order to be able to rely on the Commissions interpretation,
these CMOs must be unmanaged, fixed asset issuers, that: (1) invest primarily in mortgage-backed securities; (2) do not issue redeemable securities; (3) operate under general exemptive orders exempting them from all provisions of the
Investment Company Act; and (4) are not registered or regulated under the Investment Company Act as investment companies. To the extent that a Fund selects CMOs that cannot rely on the rule or do not meet the above requirements, the Fund may
not invest more than 10% of its assets in all such entities and may not acquire more than 3% of the voting securities of any single such entity.
A Fund may also invest in, among other things, parallel pay CMOs, sequential pay CMOs, and floating rate CMOs. Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class, concurrently on a proportionate or disproportionate basis. These simultaneous payments are taken into account in calculating the final distribution date of each class. Sequential pay
CMOs generally pay principal to only one class at a time while paying interest to several classes. A wide variety of REMIC Certificates may be issued in the parallel pay or sequential pay structures. These securities include accrual certificates
(also known as
Z-Bonds),
which only accrue interest at a specified rate until all other certificates having an earlier final distribution date have been retired and are converted thereafter to an
interest-paying security. Floating rate CMOs are securities whose coupon rate fluctuates according to some formula related to an existing market index or rate. Typical indices would include the eleventh district cost-of-funds index
(COFI), LIBOR, one-year Treasury yields, and ten-year Treasury yields.
Classes of CMOs also include planned amortization classes (PACs) and targeted amortization classes (TACs). PAC bonds generally require payments of a specified amount of principal
on each payment date. The
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scheduled principal payments for PAC Certificates generally have the highest priority on each payment date after interest due has been paid to all classes entitled to receive interest currently.
Shortfalls, if any, are added to the amount payable on the next payment date. The PAC Certificate payment schedule is taken into account in calculating the final distribution date of each class of PAC. In order to create PAC tranches, one or more
tranches generally must be created that absorb most of the volatility in the underlying mortgage assets. These tranches (often called supports or companion tranches) tend to have market prices and yields that are more
volatile than the PAC classes.
TACs are similar to PACs in that
they require that specified amounts of principal be applied on each payment date to one or more classes of REMIC Certificates. A PACs payment schedule, however, remains in effect as long as prepayment rates on the underlying mortgages do not
exceed certain ranges. In contrast, a TAC provides investors with protection, to a certain level, against either faster than expected or slower than expected prepayment rates, but not both. TACs thus provide more cash flow stability than a regular
sequential paying class, but less than a PAC. TACs also tend to have market prices and yields that are more volatile than PACs.
Adjustable Rate Mortgage Securities.
Adjustable rate mortgage securities (ARMs) are pass-through securities collateralized by mortgages
with adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage pool generally provide for a fixed initial mortgage interest rate for a set number of scheduled monthly payments. After that schedule of payments has been completed,
the interest rates are subject to periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate may not vary over the lifetime of the security. In addition, certain ARMs provide for additional limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment period. In the event that market rates of interest rise more rapidly to levels above that of the ARMs maximum rate, the ARMs coupon may represent a below
market rate of interest. In these circumstances, the market value of the ARM security will likely have fallen.
Certain ARMs contain limitations on changes in the required monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any such excess interest is added
to the principal balance of the mortgage loan, which is repaid through future monthly payments. If the monthly payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the remaining term of the loan, the excess is then used to reduce the outstanding principal balance of the ARM.
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, homebuilders, mortgage banks, commercial banks, investment banks, and special purpose entities of the foregoing. The cash flow
generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal 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 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 CMO, prevailing interest rates, the amount of administrative expenses and the prepayment
experience on the mortgage assets. In part, the yield to maturity on the CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only (IO) class of stripped
mortgage-related securities. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon
which interest rate adjustments are based. In certain circumstances, a Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through one or more 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,
CMO residuals may or, pursuant to an exemption therefrom, may not have been registered under the Securities Act. Residual interests generally are junior to, and may be significantly more volatile than, regular CMO and REMIC interests.
Stripped Mortgage-Backed Securities.
A Fund may invest in
stripped mortgage-backed securities (SMBSs) issued by agencies or instrumentalities of the United States. SMBSs are derivative multi-class mortgage-backed securities. SMBS arrangements commonly involve two classes of securities that
receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common variety of SMBS is where one class (the
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principal only or PO class) receives some of the interest and most of the principal from the underlying assets, while the other class (the interest only or IO class) receives most of the interest
and the remainder of the principal. In the most extreme case, the IO class receives all of the interest, while the PO class receives all of the principal. While a Fund may purchase securities of a PO class, a Fund is more likely to purchase the
securities of an IO class. The yield to maturity of an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying assets, and a rapid rate of principal payments in excess of that considered in
pricing the securities will have a material adverse effect on an IO securitys yield to maturity. If the underlying mortgage assets experience greater than anticipated payments of principal, a Fund may fail to recoup fully its initial
investment in IOs. In addition, there are certain types of IOs that represent the interest portion of a particular class as opposed to the interest portion of the entire pool. The sensitivity of this type of IO to interest rate fluctuations may be
increased because of the characteristics of the principal portion to which they relate. As a result of the above factors, a Fund generally will purchase IOs only as a component of so called synthetic securities. This means that purchases
of IOs will be matched with certain purchases of other securities, such as POs, inverse floating rate CMOs or fixed rate securities; as interest rates fall, presenting a greater risk of unanticipated prepayments of principal, the negative effect on
a Fund because of its holdings of IOs should be diminished somewhat because of the increased yield on the inverse floating rate CMOs or the increased appreciation on the POs or fixed rate securities.
Tiered Index Bonds.
Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to a specified index or market rate. So long as this index or market rate is below a predetermined strike rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the strike rate, the interest rate of the tiered index bond will decrease. Thus, under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest rates, with the result that the price of the tiered index bond may be considerably more volatile than that of a fixed-rate bond.
Municipal Investments.
The Municipal Funds may invest in obligations
issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, the payments from which, in the opinion of bond counsel to the issuer,
are excludable from gross income for Federal income tax purposes (Municipal Bonds). Certain of the Municipal Funds may also invest in Municipal Bonds that pay interest excludable from gross income for purposes of state and local income
taxes of the designated state and/or allow the value of a Funds shares to be exempt from state and local taxes of the designated state (State Municipal Bonds). The Municipal Funds may also invest in securities not issued by or on
behalf of a state or territory or by an agency or instrumentality thereof, if the Manager believes such securities to pay interest excludable from gross income for purposes of Federal income tax and state and local income taxes of the designated
state and/or state and local personal property taxes of the designated state (Non-Municipal Tax-Exempt Securities). Non-Municipal Tax-Exempt Securities could include trust certificates or other instruments evidencing interest in one or
more long term municipal securities. Non-Municipal Tax-Exempt Securities also may include securities issued by other investment companies that invest in municipal bonds, to the extent such investments are permitted by applicable law. Non-Municipal
Tax-Exempt Securities that pay interest excludable from gross income for Federal income tax purposes will be considered Municipal Bonds for purposes of a Municipal Funds investment objective and policies. Non-Municipal Tax-Exempt
Securities that pay interest excludable from gross income for purposes of Federal income tax and state and local income taxes of a designated state and/or allow the value of a Funds shares to be exempt from state and local personal property
taxes of that state will be considered State Municipal Bonds for purposes of the investment objective and policies of each of California Municipal Bond Fund, New Jersey Municipal Bond Fund, New York Municipal Bond Fund and Pennsylvania
Municipal Bond Fund.
Risk Factors and Special Considerations
Relating to Municipal Bonds.
The risks and special considerations involved in investment in Municipal Bonds vary with the types of instruments being acquired. Investments in Non-Municipal Tax-Exempt Securities may present similar risks,
depending on the particular product. Certain instruments in which a Fund may invest may be characterized as derivatives.
The value of Municipal Bonds generally may be affected by uncertainties in the municipal markets as a result of legislation or litigation, including
legislation or litigation that changes the taxation of Municipal Bonds or the rights of Municipal Bond holders in the event of a bankruptcy. Municipal bankruptcies are rare and certain provisions of the U.S. Bankruptcy Code governing such
bankruptcies are unclear. Further, the application of state law to Municipal Bond issuers could produce varying results among the states or among Municipal Bond issuers within a state. These uncertainties could have a significant impact on the
prices of the Municipal Bonds in which a Fund invests.
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Description of Municipal Bonds.
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition,
certain types of bonds are issued by or on behalf of public authorities to finance various privately owned or operated facilities, including certain facilities for the local furnishing of electric energy or gas, sewage facilities, solid waste
disposal facilities and other specialized facilities. Such obligations are included within the term Municipal Bonds if the interest paid thereon is excluded from gross income for Federal income tax purposes and any applicable state and local taxes.
Other types of private activity bonds, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds, although the current Federal tax laws
place substantial limitations on the size of such issues. The interest on Municipal Bonds may bear a fixed rate or be payable at a variable or floating rate. The two principal classifications of Municipal Bonds are general obligation and
revenue or special obligation bonds, which latter category includes private activity bonds (PABs) (or industrial development bonds under pre-1986 law).
General Obligation Bonds.
General obligation bonds are secured by the
issuers pledge of its full faith, credit and taxing power for the payment of principal and interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys
creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic limits on the
ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on Federal or state aid, access to capital markets or other factors
beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance of its
tax base.
Revenue Bonds.
Revenue bonds are payable only
from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as payments from the user of the facility being financed; accordingly, the
timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source.
Revenue bonds issued by state or local agencies to finance the development
of low-income, multi-family housing involve special risks in addition to those associated with municipal bonds generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are
generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty
and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet
payment obligations on subordinated bonds.
PABs.
PABs
are, in most cases, tax-exempt securities issued by states, municipalities or public authorities to provide funds, usually through a loan or lease arrangement, to a private entity for the purpose of financing construction or improvement of a
facility to be used by the entity. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity, which may or may not be guaranteed by a parent company or otherwise secured. PABs generally are not
secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should understand that repayment of such bonds generally depends on the revenues of a private entity and be aware of the risks that such an investment may
entail. The continued ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors including the size of the entity, its capital structure, demand for its products or
services, competition, general economic conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
Moral Obligation Bonds.
Moral obligation bonds are
normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality that
created the special purpose public authority that issued the bonds.
Municipal Notes.
Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a
shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and a Fund may lose money.
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Municipal Commercial Paper.
Municipal commercial paper is generally unsecured and issued to meet
short-term financing needs. The lack of security presents some risk of loss to a Fund since, in the event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors out of the assets, if any, that remain.
Municipal Lease Obligations.
Also included within the
general category of Municipal Bonds are certificates of participation (COPs) issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. The COPs represent participations
in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are
subject to the risk of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by the issuers covenant
to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses, which provide that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a type of financing that has not yet developed the depth of marketability associated with more conventional securities. Certain investments in lease obligations may be illiquid. A Fund may not invest in
illiquid lease obligations if such investments, together with all other illiquid investments, would exceed 15% of the Funds net assets. A Fund may, however, invest without regard to such limitation in lease obligations that the Manager,
pursuant to guidelines that have been adopted by the Directors and subject to the supervision of the Directors, determines to be liquid. The Manager will deem lease obligations to be liquid if they are publicly offered and have received an
investment grade rating of Baa or better by Moodys, or BBB or better by S&P or Fitch Ratings (Fitch). Unrated lease obligations, or those rated below investment grade, will be considered liquid if the obligations come to the
market through an underwritten public offering and at least two dealers are willing to give competitive bids. In reference to the latter, the Manager must, among other things, also review the creditworthiness of the entity obligated to make payment
under the lease obligation and make certain specified determinations based on such factors as the existence of a rating or credit enhancement such as insurance the frequency of trades or quotes for the obligation and the willingness of
dealers to make a market in the obligation.
The ability of
issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such
non-payment would result in a reduction of income to a Fund, and could result in a reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the net asset value of a Fund. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, a Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and a Fund may not, in
all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Fund might take possession of and manage the assets securing the issuers
obligations on such securities, which may increase a Funds operating expenses and adversely affect the net asset value of a Fund. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and a Fund
would not have the right to take possession of the assets. Any income derived from a Funds ownership or operation of such assets may not be tax-exempt. In addition, a Funds intention to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the Code), may limit the extent to which a Fund may exercise its rights by taking possession of such assets, because as a regulated investment company a Fund is subject
to certain limitations on its investments and on the nature of its income.
Tender Option Bonds.
Certain Funds may, invest in residual interest municipal tender option bonds. The residual interest municipal tender option bonds in which the Funds will invest pay interest or
income that, in the opinion of counsel to the issuer, is exempt from regular Federal income tax. BlackRock will not conduct its own analysis of the tax status of the interest or income paid by residual interest municipal tender option bonds held by
the Funds, but will rely on the opinion of counsel to the issuer. Although volatile, these residual interests typically offer the potential for yields exceeding the yields available on fixed rate Municipal Bonds with comparable credit quality,
coupon, call provisions and maturity. The Funds may invest in residual interests for the purpose of using economic leverage.
Residual interest municipal tender option bonds represent beneficial interests in a special purpose trust formed by a third party sponsor for the purpose
of holding Municipal Bonds purchased from a Fund or from another third party. The special purpose trust typically sells two classes of beneficial interests: short-term floating rate interests (sometimes known as put bonds or
puttable securities), which are sold to third party investors, and residual interests, which a Fund would purchase. The short-term floating rate interests have first priority on the cash flow from the Municipal Bonds. A Fund is paid the
residual cash flow from the special purpose trust. If the Fund is the initial
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seller of the Municipal Bonds to the special purpose trust, it receives the proceeds from the sale of the floating rate interests in the special purpose trust, less certain transaction costs.
These proceeds generally would be used by the Fund to purchase additional Municipal Bonds or other permitted investments. If a Fund ever purchases all or a portion of the short-term floating rate securities sold by the special purpose trust, it may
surrender those short-term floating rate securities together with a proportionate amount of residual interests to the trustee of the special purpose trust in exchange for a proportionate amount of the Municipal Bonds owned by the special purpose
trust. In addition, all voting rights and decisions to be made with respect to any other rights relating to the Municipal Bonds held in the special purpose trust are passed through to the Fund, as the holder of the residual interests.
A Fund may invest in highly leveraged residual interest municipal tender
option bonds. A residual interest municipal tender option bond generally is considered highly leveraged if the principal amount of the short-term floating rate interests issued by the related tender option bond trust exceeds 75% of the principal
amount of the Municipal Bonds owned by the tender option bond trust.
The sponsor of a highly leveraged tender option bond trust generally will retain a liquidity provider that stands ready to purchase the short-term floating rate interests at their original purchase price
upon the occurrence of certain events, such as on a certain date prior to the scheduled expiration date of the transaction, upon a certain percentage of the floating rate interests failing to be remarketed in a timely fashion, upon the bonds owned
by the tender option bond trust being downgraded (but not below investment grade or upon the occurrence of a bankruptcy event with respect to the issuer of the Municipal Bonds) or upon the occurrence of certain regulatory or tax events. However, the
liquidity provider is not required to purchase the floating rate interests upon the occurrence of certain other events, including upon the downgrading of the Municipal Bonds owned by the tender option bond trust below investment grade or certain
events that indicate the issuer of the bonds may be entering bankruptcy. The general effect of these provisions is to pass to the holders of the floating rate interests the most severe credit risks associated with the Municipal Bonds owned by the
tender option bond trust and to leave with the liquidity provider the interest rate risk and certain other risks associated with the Municipal Bonds.
If the liquidity provider acquires the floating rate interests upon the occurrence of an event described above, the liquidity provider generally will be
entitled to an in-kind distribution of the Municipal Bonds owned by the tender option bond trust or to cause the tender option bond trust to sell the bonds and distribute the proceeds to the liquidity provider. The liquidity provider generally will
enter into an agreement with a Fund that will require the Fund to make a payment to the liquidity provider in an amount equal to any loss suffered by the liquidity provider in connection with the foregoing transactions. The net economic effect of
this agreement and these transactions is as if the Fund had entered into a special type of reverse repurchase agreement with the sponsor of the tender option bond trust, pursuant to which the Fund is required to repurchase the Municipal Bonds it
sells to the sponsor only upon the occurrence of certain events (such as a failed remarketing of the floating rate interests most likely due to an adverse change in interest rates) but not others (such as a default of the Municipal Bonds). In
order to cover any potential obligation of the Fund to the liquidity provider pursuant to this agreement, the Fund may designate on its books and records liquid instruments having a value not less than the amount, if any, by which the original
purchase price of the floating rate interests issued by the related tender option bond trust exceeds the market value of the Municipal Bonds owned by the tender option bond trust.
A Fund may also invest in the short-term floating rate interest tender
option bonds. The remarketing agent for the special purpose trust sets a floating or variable rate on typically a weekly basis. These securities grant the Funds the right to require the issuer or a specified third party acting as agent for the
issuer (
e.g.
, a tender agent) to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. The put option or tender option right is typically available to the
investor on a periodic (
e.g.
, daily, weekly or monthly) basis. Typically, the put option is exercisable on dates on which the floating or variable rate changes.
Investments in residual interest and floating rate interest tender option
bonds are not considered derivatives, but are subject to similar risks, including counterparty risk, interest rate risk and volatility.
Yields.
Yields on Municipal Bonds are dependent on a variety of factors, including the general condition of the money market and of the municipal
bond market, the size of a particular offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of a Fund to achieve its investment objective is also dependent on the continuing ability
of the issuers of the securities in which the Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in holding Municipal Bonds, both within a particular classification
and between classifications, depending on numerous factors. Furthermore, the rights of owners of Municipal Bonds and the obligations of the issuer of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court
decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain remedies.
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Variable Rate Demand Obligations (VRDOs) and Participating VRDOs.
VRDOs are tax-exempt
obligations that contain a floating or variable interest rate adjustment formula and a right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to
exceed seven days. Participating VRDOs provide a Fund with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDOs from
the financial institution that issued the participation interest upon a specified number of days notice, not to exceed seven days. In addition, the Participating VRDO is backed by an irrevocable letter of credit or guaranty of the financial
institution. A Fund would have an undivided interest in the underlying obligation and thus participate on the same basis as the financial institution in such obligation except that the financial institution typically retains fees out of the interest
paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment.
There is the possibility that because of default or insolvency the demand feature of VRDOs and Participating VRDOs may not be honored. The interest rates
are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market rate of the VRDOs at approximately the par value of the VRDOs
on the adjustment date. The adjustments typically are based upon the Public Securities Association Index or some other appropriate interest rate adjustment index. The Funds have been advised by counsel that they should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt obligations. It is not contemplated that any Fund will invest more than a limited amount of its total assets in Participating VRDOs.
Because of the interest rate adjustment formula on VRDOs (including
Participating VRDOs), VRDOs are not comparable to fixed rate securities. During periods of declining interest rates, a Funds yield on a VRDO will decrease and its shareholders will forego the opportunity for capital appreciation. During
periods of rising interest rates, however, a Funds yield on a VRDO will increase and the Funds shareholders will have a reduced risk of capital depreciation.
VRDOs that contain a right of demand to receive payment of the unpaid
principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities. A VRDO with a demand notice period exceeding seven days will therefore be subject to a Funds restriction on illiquid
investments unless, in the judgment of the Directors such VRDO is liquid. The Directors may adopt guidelines and delegate to the Manager the daily function of determining and monitoring liquidity of such VRDOs. The Directors, however, will retain
sufficient oversight and will be ultimately responsible for such determinations.
The VRDOs and Participating VRDOs in which a Fund may invest will be in the following rating categories at the time of purchase: MIG-1/ VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through
Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined by
Fitch).
Transactions in Financial Futures Contracts.
The
Municipal Funds and certain other funds deal in financial futures contracts based on a long-term municipal bond index developed by the Chicago Board of Trade (CBT) and The Bond Buyer (the Municipal Bond Index). The Municipal
Bond Index is comprised of 40 tax-exempt municipal revenue and general obligation bonds. Each bond included in the Municipal Bond Index must be rated A or higher by Moodys or S&P and must have a remaining maturity of 19 years or more.
Twice a month new issues satisfying the eligibility requirements are added to, and an equal number of old issues are deleted from, the Municipal Bond Index. The value of the Municipal Bond Index is computed daily according to a formula based on the
price of each bond in the Municipal Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like other contract markets, the CBT assures performance under futures contracts through a clearing corporation, a nonprofit
organization managed by the exchange membership that is also responsible for handling daily accounting of deposits or withdrawals of margin.
The particular municipal bonds comprising the index underlying the Municipal Bond Index financial futures contract may vary from the bonds held by a
Municipal Fund. As a result, a Municipal Funds ability to hedge effectively all or a portion of the value of its Municipal Bonds through the use of such financial futures contracts will depend in part on the degree to which price movements in
the index underlying the financial futures contract correlate with the price movements of the Municipal Bonds held by the Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of a
Municipal Funds investments as compared to those comprising the Municipal Bond Index and general economic or political factors. In addition, the correlation between movements in the value of the Municipal Bond Index may be subject to change
over time as
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additions to and deletions from the Municipal Bond Index alter its structure. The correlation between futures contracts on U.S. Government securities and the Municipal Bonds held by a Municipal
Fund may be adversely affected by similar factors and the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of Municipal Bonds held by a Municipal Fund may be greater. Municipal Bond Index futures
contracts were approved for trading in 1986. Trading in such futures contracts may tend to be less liquid than trading in other futures contracts. The trading of futures contracts also is subject to certain market risks, such as inadequate trading
activity, which could at times make it difficult or impossible to liquidate existing positions.
Call Rights.
A Fund may purchase a Municipal Bond issuers right to call all or a portion of such Municipal Bond for mandatory tender for purchase (a Call Right). A holder of a
Call Right may exercise such right to require a mandatory tender for the purchase of related Municipal Bonds, subject to certain conditions. A Call Right that is not exercised prior to maturity of the related Municipal Bond will expire without
value. The economic effect of holding both the Call Right and the related Municipal Bond is identical to holding a Municipal Bond as a non-callable security. Certain investments in such obligations may be illiquid. A Fund may not invest in such
illiquid obligations if such investments, together with other illiquid investments, would exceed 15% of a Funds net assets.
Municipal Interest Rate Swap Transactions.
In order to hedge the value of a Fund against interest rate fluctuations or to enhance a Funds
income, a Fund may enter into interest rate swap transactions such as Municipal Market Data AAA Cash Curve swaps (MMD Swaps) or the Securities Industry and Financial Market Association Municipal Swap Index swaps (SIFMA
Swaps). To the extent that a Fund enters into these transactions, the Fund expects to do so primarily to preserve a return or spread on a particular investment or portion of its portfolio or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. A Fund intends to use these transactions primarily as a hedge rather than as a speculative investment. However, a Fund also may invest in MMD Swaps and SIFMA Swaps to enhance income or gain
or to increase the Funds yield, for example, during periods of steep interest rate yield curves (
i.e.
, wide differences between short term and long term interest rates).
A Fund may purchase and sell SIFMA Swaps in the SIFMA swap market. In a SIFMA Swap, a Fund exchanges with another party their
respective commitments to pay or receive interest (
e.g.
, an exchange of fixed rate payments for floating rate payments linked to the Bond Market Association Municipal Swap Index). Because the underlying index is a tax-exempt index, SIFMA
Swaps may reduce cross-market risks incurred by a Fund and increase a Funds ability to hedge effectively. SIFMA Swaps are typically quoted for the entire yield curve, beginning with a seven day floating rate index out to 30 years. The duration
of a SIFMA Swap is approximately equal to the duration of a fixed-rate Municipal Bond with the same attributes as the swap (
e.g.
, coupon, maturity, call feature).
A Fund may also purchase and sell MMD Swaps, also known as MMD rate locks.
An MMD Swap permits a Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any
increase in the price of securities to be purchased at a later date. By using an MMD Swap, a Fund can create a synthetic long or short position, allowing the Fund to select the most attractive part of the yield curve. An MMD Swap is a contract
between a Fund and an MMD Swap provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on
the expiration date of the contract. For example, if a Fund buys an MMD Swap and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to the
Fund equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, a Fund will make a payment to
the counterparty equal to the actual level minus the specified level, multiplied by the notional amount of the contract.
In connection with investments in SIFMA and MMD Swaps, there is a risk that municipal yields will move in the opposite direction than anticipated by a
Fund, which would cause the Fund to make payments to its counterparty in the transaction that could adversely affect the Funds performance. A Fund has no obligation to enter into SIFMA or MMD Swaps and may not do so. The net amount of the
excess, if any, of a Funds obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis and an amount of liquid assets that have an aggregate net asset value at least equal to the accrued excess
will be maintained in a segregated account by the Fund.
Insured Municipal Bonds.
Bonds purchased by a Fund may be covered by insurance that guarantees that interest payments on the bond will be made on
time and the principal will be repaid when the bond matures. Either the issuer of the bond or the Fund purchases the insurance. Insurance is expected to protect the Fund against losses caused by a bond issuers failure to make interest or
principal payments. However, insurance does not protect the
II-43
Fund or its shareholders against losses caused by declines in a bonds market value. Also, the Fund cannot be certain that any insurance company does not make these payments. In addition, if
the Fund purchases the insurance, it may pay the premiums, which will reduce the Funds yield. The Fund seeks to use only insurance companies with claims paying ability, financial strength, or equivalent ratings of at least investment grade.
However, if insurance from insurers with these ratings is not available, the Fund may use insurance companies with lower ratings or stop purchasing insurance or insured bonds. If a bonds insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop.
Build
America Bonds.
If a Fund holds Build America Bonds, the Fund may be eligible to receive a Federal income tax credit; however, the issuer of a Build America Bond may instead elect to receive a cash payment directly from the federal government in
lieu of holders such as the fund receiving a tax credit. The interest on Build America Bonds is taxable for Federal income tax purposes. If the Fund does receive tax credits from Build America Bonds or other tax credit bonds on one or more specified
dates during the funds taxable year, and the Fund satisfies the minimum distribution requirement, the Fund may elect for U.S. Federal income tax purposes to pass through to shareholders tax credits otherwise allowable to the Fund for that year
with respect to such bonds. A tax credit bond is defined in the Code as a qualified tax credit bond (which includes a qualified forestry conservation bond, a new clean renewable energy bond, a qualified energy conservation bond, or a
qualified zone academy bond, each of which must meet certain requirements specified in the Code), a Build America Bond (which includes certain qualified bonds issued before January 1, 2011) or certain other specified bonds. If the
Fund were to so elect, a shareholder would be required to include in income and would be entitled to claim as a tax credit an amount equal to a proportionate share of such credits, and such amount would be subject to withholding provisions of the
Code. Certain limitations may apply on the extent to which the credit may be claimed.
Net Interest Margin (NIM) Securities.
A Fund may invest in net interest margin (NIM) securities. These securities are derivative interest-only mortgage securities structured off home
equity loan transactions. NIM securities receive any excess interest computed after paying coupon costs, servicing costs and fees and any credit losses associated with the underlying pool of home equity loans. Like traditional stripped
mortgage-backed securities, the yield to maturity on a NIM security is sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying home equity loans. NIM securities
are highly sensitive to credit losses on the underlying collateral and the timing in which those losses are taken.
Participation Notes.
A Fund may buy participation notes from a bank or broker-dealer (issuer) that entitle the Fund to a return measured by the change in value of an identified
underlying security or basket of securities (collectively, the underlying security). Participation notes are typically used when a direct investment in the underlying security is restricted due to country-specific regulations.
The Fund is subject to counterparty risk associated with each
issuer. Investment in a participation note is not the same as investment in the constituent shares of the company. A participation note represents only an obligation of the issuer to provide the Fund the economic performance equivalent to holding
shares of an underlying security. A participation note does not provide any beneficial or equitable entitlement or interest in the relevant underlying security. In other words, shares of the underlying security are not in any way owned by the Fund.
However each participation note synthetically replicates the economic benefit of holding shares in the underlying security. Because a participation note is an obligation of the issuer, rather than a direct investment in shares of the underlying
security, the Fund may suffer losses potentially equal to the full value of the participation note if the issuer fails to perform its obligations. A Fund attempts to mitigate that risk by purchasing only from issuers which BlackRock deems to be
creditworthy.
The counterparty may, but is not required to,
purchase the shares of the underlying security to hedge its obligation. The fund may, but is not required to, purchase credit protection against the default of the issuer. When the participation note expires or a Fund exercises the participation
note and closes its position, that Fund receives a payment that is based upon the then-current value of the underlying security converted into U.S. dollars (less transaction costs). The price, performance and liquidity of the participation note are
all linked directly to the underlying security. A Funds ability to redeem or exercise a participation note generally is dependent on the liquidity in the local trading market for the security underlying the participation note.
Pay-in-kind Bonds.
Certain Funds may invest in Pay-in-kind, or
PIK, bonds. PIK bonds are bonds which pay interest through the issuance of additional debt or equity securities. Similar to zero coupon obligations, pay-in-kind bonds also carry additional risk as holders of these types of securities realize no cash
until the cash payment date unless a portion of such securities is sold and, if the issuer defaults, a Fund may obtain no return at all on its investment. The market price of pay-in-kind bonds is affected by interest rate changes to a greater
extent, and therefore tends to be more volatile, than that of securities which pay interest in cash. Additionally, current federal tax
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law requires the holder of certain pay-in-kind bonds to accrue income 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 and excise taxes, each Fund may be required to distribute 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.
Portfolio Turnover Rates.
A Funds annual portfolio turnover rate will not be a factor preventing a sale or purchase when the Manager believes investment considerations warrant such
sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover (
i.e.
, 100% or more) may result in increased transaction costs to a Fund, including brokerage commissions,
dealer mark-ups and other transaction costs on the sale of the securities and reinvestment in other securities. The sale of a Funds securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or
loss will likely be short-term capital gain or loss. These effects of higher than normal portfolio turnover may adversely affect a Funds performance.
Preferred Stock.
Certain of the Funds may invest in preferred stocks. Preferred stock has a preference over common stock in liquidation (and
generally dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and
perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the
credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics. Unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuers board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
Real Estate Related Securities.
Although no Fund may invest directly in real estate, certain Funds may invest in equity securities of
issuers that are principally engaged in the real estate industry. Such investments are subject to certain risks associated with the ownership of real estate and with the real estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds or other limitations on access to capital; overbuilding; risks associated with leverage; market
illiquidity; extended vacancies of properties; increase in competition, property taxes, capital expenditures and operating expenses; changes in zoning laws or other governmental regulation; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; tenant bankruptcies or other credit problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in
rents, including decreases in market rates for rents; investment in developments that are not completed or that are subject to delays in completion; and changes in interest rates. To the extent that assets underlying a Funds investments are
concentrated geographically, by property type or in certain other respects, the Fund may be subject to certain of the foregoing risks to a greater extent. Investments by a Fund in securities of companies providing mortgage servicing will be subject
to the risks associated with refinancings and their impact on servicing rights.
In addition, if a Fund receives rental income or income from the disposition of real property acquired as a result of a default on securities the Fund owns, the receipt of such income may adversely affect
the Funds ability to retain its tax status as a regulated investment company because of certain income source requirements applicable to regulated investment companies under the Code.
Real Estate Investment Trusts (REITs).
In pursuing its investment strategy, a Fund may invest in
shares of REITs. REITs possess certain risks which differ from an investment in common stocks. REITs are financial vehicles that pool investors capital to purchase or finance real estate. REITs may concentrate their investments in specific
geographic areas or in specific property types,
i.e.
, hotels, shopping malls, residential complexes and office buildings.
REITs are subject to management fees and other expenses, and so a Fund that invests in REITs will bear its proportionate share of the costs of the
REITs operations. There are three general categories of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest primarily in direct fee ownership or leasehold ownership of real property; they derive most of their income from
rents. Mortgage REITs invest mostly in mortgages on real estate, which may secure construction, development or long-term loans; the main source of their income is mortgage interest payments. Hybrid REITs hold both ownership and mortgage interests in
real estate.
Investing in REITs involves certain unique risks in
addition to those risks associated with investing in the real estate industry in general. The market value of REIT shares and the ability of the REITs to distribute income may be
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adversely affected by several factors, including rising interest rates, changes in the national, state and local economic climate and real estate conditions, perceptions of prospective tenants of
the safety, convenience and attractiveness of the properties, the ability of the owners to provide adequate management, maintenance and insurance, the cost of complying with the Americans with Disabilities Act, increased competition from new
properties, the impact of present or future environmental legislation and compliance with environmental laws, failing to maintain their exemptions from registration under the Investment Company Act, changes in real estate taxes and other operating
expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws and other factors beyond the control of the issuers of the REITs. In addition, distributions received by a Fund from REITs may consist of dividends,
capital gains and/or return of capital. As REITs generally pay a higher rate of dividends (on a pre-tax basis) than operating companies, to the extent application of the Funds investment strategy results in the Fund investing in REIT shares,
the percentage of the Funds dividend income received from REIT shares will likely exceed the percentage of the Funds portfolio which is comprised of REIT shares. Generally, dividends received by a Fund from REIT shares and distributed to
the Funds shareholders will not constitute qualified dividend income eligible for the reduced tax rate applicable to qualified dividend income; therefore, the tax rate applicable to that portion of the dividend income attributable
to REIT shares held by the Fund that shareholders of the Fund receive will be taxed at a higher rate than dividends eligible for the reduced tax rate applicable to qualified dividend income.
REITs (especially mortgage REITs) are also subject to interest rate risk. Rising interest rates may cause REIT investors to
demand a higher annual yield, which may, in turn, cause a decline in the market price of the equity securities issued by a REIT. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of a
Funds REIT investments to decline. During periods when interest rates are declining, mortgages are often refinanced. Refinancing may reduce the yield on investments in mortgage REITs. In addition, since REITs depend on payment under their
mortgage loans and leases to generate cash to make distributions to their shareholders, investments in REITs may be adversely affected by defaults on such mortgage loans or leases.
Investing in certain REITs, which often have small market capitalizations, may also involve the same risks as investing in
other small capitalization companies. REITs may have limited financial resources and their securities may trade less frequently and in limited volume and may be subject to more abrupt or erratic price movements than larger company securities.
Historically, small capitalization stocks, such as REITs, have been more volatile in price than the larger capitalization stocks such as those included in the S&P 500 Index. The management of a REIT may be subject to conflicts of interest with
respect to the operation of the business of the REIT and may be involved in real estate activities competitive with the REIT. REITs may own properties through joint ventures or in other circumstances in which the REIT may not have control over its
investments. REITs may incur significant amounts of leverage.
Repurchase Agreements and Purchase and Sale Contracts.
Under repurchase agreements and purchase and sale contracts, the other party agrees,
upon entering into the contract with a Fund, to repurchase a security sold to the Fund at a mutually agreed-upon time and price in a specified currency, thereby determining the yield during the term of the agreement.
A purchase and sale contract differs from a repurchase agreement in that the
contract arrangements stipulate that securities are owned by the Fund and the purchaser receives any interest on the security paid during the period. In the case of repurchase agreements, the prices at which the trades are conducted do not reflect
accrued interest on the underlying obligation; whereas, in the case of purchase and sale contracts, the prices take into account accrued interest. A Fund may enter into tri-party repurchase agreements. In tri-party repurchase
agreements, an unaffiliated third party custodian maintains accounts to hold collateral for the Fund and its counterparties and, therefore, the Fund may be subject to the credit risk of those custodians.
Some repurchase agreements and purchase and sale contracts are structured to
result in a fixed rate of return insulated from market fluctuations during the term of the agreement, although such return may be affected by currency fluctuations. However, in the event of a default under a repurchase agreement or under a purchase
and sale contract, instead of the contractual fixed rate, the rate of return to the Fund would be dependent upon intervening fluctuations of the market values of the securities underlying the contract and the accrued interest on those securities. In
such event, the Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the default.
Both types of agreement usually cover short periods, such as less than one
week, although they may have longer terms, and may be construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. In the case of a repurchase agreement, as a purchaser, a Funds
Manager or sub-adviser will monitor the creditworthiness of the seller, and a Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the
repurchase agreement. The Fund does not have this right to seek additional collateral as a purchaser in the case of
II-46
purchase and sale contracts. The Funds Manager or sub-adviser will mark-to-market daily the value of the securities. Securities subject to repurchase agreements and purchase and sale
contracts will be held by the Funds custodian (or sub-custodian) in the Federal Reserve/Treasury book-entry system or by another authorized securities depository.
In the event of default by the seller under a repurchase agreement construed
to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute collateral for the sellers obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. If the seller becomes insolvent and subject to liquidation or reorganization under applicable bankruptcy or other laws, a Funds ability to dispose of the underlying securities may be
restricted. Finally, it is possible that a Fund may not be able to substantiate its interest in the underlying securities. To minimize this risk, the securities underlying the repurchase agreement will be held by the custodian at all times in an
amount at least equal to the repurchase price, including accrued interest. If the seller fails to repurchase the securities, a Fund may suffer a loss to the extent proceeds from the sale of the underlying securities are less than the repurchase
price.
A Fund may not invest in repurchase agreements or
purchase and sale contracts maturing in more than seven days if such investments, together with the Funds other illiquid investments, would exceed 15% of the Funds net assets. Repurchase agreements and purchase and sale contracts may be
entered into only with financial institutions that have capital of at least $50 million or whose obligations are guaranteed by an entity that has capital of at least $50 million.
Reverse Repurchase Agreements.
A Fund may enter into reverse
repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities to another party and agrees to repurchase them at a particular date and price. A Fund may
enter into a reverse repurchase agreement when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction.
At the time a Fund enters into a reverse repurchase agreement, it will
segregate liquid assets with a value not less than the repurchase price (including accrued interest). The use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Furthermore, reverse repurchase agreements
involve the risks that (i) the interest income earned in the investment of the proceeds will be less than the interest expense, (ii) the market value of the securities retained in lieu of sale by a Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase, (iii) the market value of the securities sold will decline below the price at which the Fund is required to repurchase them and (iv) the securities will not be returned to the
Fund.
In addition, if the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Funds obligations to repurchase the securities and the Funds use of
the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.
Rights Offerings and Warrants to Purchase.
Certain Funds may participate in rights offerings and may purchase warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a specified price during a specified period of time. Subscription rights normally have a short life span to expiration. The purchase of rights or warrants involves the risk
that a Fund could lose the purchase value of a right or warrant if the right to subscribe to additional shares is not exercised prior to the rights and warrants expiration. Also, the purchase of rights and/or warrants involves the risk
that the effective price paid for the right and/or warrant added to the subscription price of the related security may exceed the value of the subscribed securitys market price such as when there is no movement in the level of the underlying
security. Buying a warrant does not make the Fund a shareholder of the underlying stock.
Securities Lending.
Each Fund may lend portfolio securities to certain borrowers determined to be creditworthy by BlackRock, including to borrowers affiliated with BlackRock. The borrowers
provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned. No securities loan shall be made on behalf of a Fund if, as a result, the aggregate value of all securities loans of the
particular Fund exceeds one-third of the value of such Funds total assets (including the value of the collateral received). A Fund may terminate a loan at any time and obtain the return of the securities loaned. Each Fund receives the value of
any interest or cash or non-cash distributions paid on the loaned securities.
With respect to loans that are collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Funds are compensated by the difference between the amount
earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, a Fund is compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. Any
cash collateral received by the Fund for such loans, and uninvested cash, may be invested, among other things, in a private investment company managed by an affiliate of the Manager or in registered money market funds advised by the Manager or its
affiliates; such investments are subject to investment risk.
II-47
Securities lending involves exposure to certain risks, including operational risk (i.e., the risk of losses
resulting from problems in the settlement and accounting process), gap risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees each Fund has agreed to pay a borrower), and credit, legal,
counterparty and market risk. If a securities lending counterparty were to default, a Fund would be subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the
collateral. In the event a borrower does not return a Funds securities as agreed, the Fund may experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time the
collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences for a Fund. A Fund could lose money if its short-term investment of the collateral declines in
value over the period of the loan. Substitute payments for dividends received by a Fund for securities loaned out by the Fund will not be considered qualified dividend income. The securities lending agent will take the tax effects on shareholders of
this difference into account in connection with the Funds securities lending program. Substitute payments received on tax-exempt securities loaned out will not be tax-exempt income.
Securities of Smaller or Emerging Growth Companies.
Investment in smaller or emerging growth companies involves
greater risk than is customarily associated with investments in more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt or erratic market movements than larger, more established companies or
the market average in general. These companies may have limited product lines, markets or financial resources, or they may be dependent on a limited management group.
While smaller or emerging growth company issuers may offer greater
opportunities for capital appreciation than large cap issuers, investments in smaller or emerging growth companies may involve greater risks and thus may be considered speculative. Fund management believes that properly selected companies of this
type have the potential to increase their earnings or market valuation at a rate substantially in excess of the general growth of the economy. Full development of these companies and trends frequently takes time.
Small cap and emerging growth securities will often be traded only in the
OTC market or on a regional securities exchange and may not be traded every day or in the volume typical of trading on a national securities exchange. As a result, the disposition by a Fund of portfolio securities to meet redemptions or otherwise
may require the Fund to make many small sales over a lengthy period of time, or to sell these securities at a discount from market prices or during periods when, in Fund managements judgment, such disposition is not desirable.
The process of selection and continuous supervision by Fund management does
not, of course, guarantee successful investment results; however, it does provide access to an asset class not available to the average individual due to the time and cost involved. Careful initial selection is particularly important in this area as
many
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new enterprises have promise but lack certain of the fundamental factors necessary to prosper. Investing in small cap and emerging growth companies requires specialized research and analysis. In
addition, many investors cannot invest sufficient assets in such companies to provide wide diversification.
Small companies are generally little known to most individual investors although some may be dominant in their respective industries. Fund management believes that relatively small companies will continue
to have the opportunity to develop into significant business enterprises. A Fund may invest in securities of small issuers in the relatively early stages of business development that have a new technology, a unique or proprietary product or service,
or a favorable market position. Such companies may not be counted upon to develop into major industrial companies, but Fund management believes that eventual recognition of their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.
Equity
securities of specific small cap issuers may present different opportunities for long-term capital appreciation during varying portions of economic or securities market cycles, as well as during varying stages of their business development. The
market valuation of small cap issuers tends to fluctuate during economic or market cycles, presenting attractive investment opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they serve, may
be less susceptible than large companies to intervention from the Federal government by means of price controls, regulations or litigation.
Short Sales.
Certain Funds may make short sales of securities, either as a hedge against potential declines in value of a portfolio security
or to realize appreciation when a security that the Fund does not own declines in value. Certain Funds have a fundamental investment restriction prohibiting short sales of securities unless they are against-the-box. In a short sale
against-the-box, at the time of the sale, the Fund owns or has the immediate and unconditional right to acquire the identical security at no additional cost. When a Fund makes a short sale, it borrows the security sold short and delivers
it to the broker-dealer through which it made the short sale. A Fund may have to pay a fee to borrow particular securities and is often obligated to turn over any payments received on such borrowed securities to the lender of the securities.
A Fund secures its obligation to replace the borrowed security
by depositing collateral with the broker-dealer, usually in cash, U.S. Government securities or other liquid securities similar to those borrowed. With respect to uncovered short positions, a Fund is required to deposit similar collateral with its
custodian, if necessary, to the extent that the value of both collateral deposits in the aggregate is at all times equal to at least 100% of the current market value of the security sold short. Depending on arrangements made with the broker-dealer
from which the Fund borrowed the security, regarding payment received by the Fund on such security, a Fund may not receive any payments (including interest) on its collateral deposited with such broker-dealer.
Because making short sales in securities that it does not own exposes a Fund
to the risks associated with those securities, such short sales involve speculative exposure risk. A Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. As a result, if a Fund makes short sales in securities that increase in value, it will likely underperform similar mutual funds that do not make short sales in securities. A Fund will realize a gain on a
short sale if the security declines in price between those dates. There can be no assurance that a Fund will be able to close out a short sale position at any particular time or at an acceptable price. Although a Funds gain is limited to the
price at which it sold the security short, its potential loss is limited only by the maximum attainable price of the security, less the price at which the security was sold and may, theoretically, be unlimited.
A Fund may also make short sales against the box without being
subject to such limitations.
Sovereign Debt.
Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such
debt. A governmental entitys willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entitys policy towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on
the part of these governments, agencies and others to make such disbursements may be conditioned on the implementation of economic reforms and/or economic performance and the timely service of such debtors obligations. Failure to implement
such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of
II-49
such third parties commitments to lend funds to the governmental entity, which may further impair such debtors ability or willingness to timely service its debts. Consequently,
governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the
event of a default by a governmental entity, there may be few or no effective legal remedies for collecting on such debt.
Standby Commitment Agreements.
Standby commitment agreements commit a Fund, for a stated period of time, to purchase a stated amount of
securities that may be issued and sold to that Fund at the option of the issuer. The price of the security is fixed at the time of the commitment. At the time of entering into the agreement, the Fund is paid a commitment fee, regardless of whether
or not the security is ultimately issued. A Fund will enter into such agreements for the purpose of investing in the security underlying the commitment at a price that is considered advantageous to the Fund. A Fund will limit its investment in such
commitments so that the aggregate purchase price of securities subject to such commitments, together with the value of the Funds other illiquid investments, will not exceed 15% of its net assets taken at the time of the commitment. A Fund
segregates liquid assets in an aggregate amount equal to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery
date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear the risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security pursuant to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued, and the
value of the security thereafter will be reflected in the calculation of a Funds net asset value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.
Stand-by commitments will only be entered into with dealers, banks and broker-dealers which, in the Managers or sub-advisers opinion, present minimal credit risks. A Fund will acquire stand-by
commitments solely to facilitate portfolio liquidity and not to exercise its rights thereunder for trading purposes. Stand-by commitments will be valued at zero in determining net asset value. Accordingly, where a Fund pays directly or indirectly
for a stand-by commitment, its cost will be reflected as an unrealized loss for the period during which the commitment is held by such Fund and will be reflected as a realized gain or loss when the commitment is exercised or expires.
Stripped Securities.
Stripped securities are created when the
issuer separates the interest and principal components of an instrument and sells them as separate securities. In general, one security is entitled to receive the interest payments on the underlying assets (the interest only or IO
security) and the other to receive the principal payments (the principal only or PO security). Some stripped securities may receive a combination of interest and principal payments. The yields to maturity on IOs and POs are sensitive to
the expected or anticipated rate of principal payments (including prepayments) on the related underlying assets, and principal payments may have a material effect on yield to maturity. If the underlying assets experience greater than anticipated
prepayments of principal, a Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying assets experience less than anticipated prepayments of principal, the yield on POs could be adversely affected. Stripped securities
may be highly sensitive to changes in interest rates and rates of prepayment.
The International Bond Portfolio also may purchase stripped securities that evidence ownership in the future interest payments or principal payments on obligations of non-U.S. governments.
Structured Notes.
Structured notes and other
related instruments purchased by the Fund are generally privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a specific asset, benchmark asset, market or interest rate
(reference measure). Issuers of structured notes include corporations and banks. The interest rate or the principal amount payable upon maturity or redemption may increase or decrease, depending upon changes in the value of the reference
measure. The terms of a structured note may provide that, in certain circumstances, no principal is due at maturity and, therefore, may result in a loss of invested capital by a Fund. The interest and/or principal payments that may be made on a
structured product may vary widely, depending on a variety of factors, including the volatility of the reference measure.
Structured notes may be positively or negatively indexed, so the appreciation of the reference measure may produce an increase or a decrease in the
interest rate or the value of the principal at maturity. The rate of return on
II-50
structured notes may be determined by applying a multiplier to the performance or differential performance of reference measures. Application of a multiplier involves leverage that will serve to
magnify the potential for gain and the risk of loss.
The
purchase of structured notes exposes a Fund to the credit risk of the issuer of the structured product. Structured notes may also be more volatile, less liquid, and more difficult to price accurately than less complex securities and instruments or
more traditional debt securities. The secondary market for structured notes could be illiquid making them difficult to sell when the Fund determines to sell them. The possible lack of a liquid secondary market for structured notes and the resulting
inability of the Fund to sell a structured note could expose the Fund to losses and could make structured notes more difficult for the Fund to value accurately.
Supranational Entities.
A Fund may invest in debt securities
of supranational entities. Examples of such entities include the International Bank for Reconstruction and Development (the World Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The
government members, or stockholders, usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its
borrowings. There is no guarantee that one or more stockholders of a supranational entity will continue to make any necessary additional capital contributions. If such contributions are not made, the entity may be unable to pay interest or repay
principal on its debt securities, and a Fund may lose money on such investments.
Tax-Exempt Derivatives.
Certain Funds may hold tax-exempt derivatives which may be in the form of participations, beneficial interests in a trust, partnership interests or other forms. A
number of different structures have been used. For example, interests in long-term fixed-rate municipal debt obligations, held by a bank as trustee or custodian, are coupled with tender option, demand and other features when the tax-exempt
derivatives are created. Together, these features entitle the holder of the interest to tender (or put) the underlying municipal debt obligation to a third party at periodic intervals and to receive the principal amount thereof. In some cases,
municipal debt obligations are represented by custodial receipts evidencing rights to receive specific future interest payments, principal payments, or both, on the underlying securities held by the custodian. Under such arrangements, the holder of
the custodial receipt has the option to tender the underlying securities at their face value to the sponsor (usually a bank or broker dealer or other financial institution), which is paid periodic fees equal to the difference between the
securities fixed coupon rate and the rate that would cause the securities, coupled with the tender option, to trade at par on the date of a rate adjustment. A participation interest gives the Fund an undivided interest in a Municipal Bond in
the proportion the Funds participation bears to the total principal amount of the Municipal Bond, and typically provides for a repurchase feature for all or any part of the full principal amount of the participation interest, plus accrued
interest. Trusts and partnerships are typically used to convert long-term fixed rate high quality bonds of a single state or municipal issuer into variable or floating rate demand instruments. The Municipal Bond Funds may hold tax-exempt
derivatives, such as participation interests and custodial receipts, for municipal debt obligations which give the holder the right to receive payment of principal subject to the conditions described above. The Internal Revenue Service (the
IRS) has not ruled on whether the interest received on tax-exempt derivatives in the form of participation interests or custodial receipts is tax-exempt, and accordingly, purchases of any such interests or receipts are based on the
opinions of counsel to the sponsors of such derivative securities. Neither a Fund nor its investment adviser or sub-advisers will review the proceedings related to the creation of any tax-exempt derivatives or the basis for such opinions.
Tax-Exempt Preferred Shares.
Certain Funds may
invest in preferred interests of other investment funds that pay dividends that are exempt from regular Federal income tax. Such funds in turn invest in municipal bonds and other assets that pay interest or make distributions that are exempt from
regular Federal income tax, such as revenue bonds issued by state or local agencies to fund the development of low-income, multi-family housing. Investment in such tax-exempt preferred shares involves many of the same issues as investing in other
investment companies. These investments also have additional risks, including liquidity risk, the absence of regulation governing investment practices, capital structure and leverage, affiliated transactions and other matters, and concentration of
investments in particular issuers or industries. The Municipal Bond Funds will treat investments in tax-exempt preferred shares as investments in municipal bonds.
Taxability Risk.
Certain of the Funds intends to minimize the
payment of taxable income to shareholders by investing in tax-exempt or municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross
income for Federal income tax purposes. Such securities, however, may be determined to pay, or have paid, taxable income subsequent to the Funds acquisition of the securities. In that event, the IRS may demand that the Fund pay Federal income
taxes on the affected interest income, and, if the Fund agrees to do so, the Funds yield could be adversely affected. In
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addition, the treatment of dividends previously paid or to be paid by the Fund as exempt interest dividends could be adversely affected, subjecting the Funds shareholders to
increased Federal income tax liabilities. If the interest paid on any tax-exempt or municipal security held by the Fund is subsequently determined to be taxable, the Fund will dispose of that security as soon as reasonably practicable. In addition,
the treatment of dividends previously paid or to be paid by the Fund as exempt interest dividends could be adversely affected, subjecting the Funds shareholders to increased Federal income tax liabilities. If the interest paid on
any tax-exempt or municipal security held by the Fund is subsequently determined to be taxable, the Fund will dispose of that security as soon as reasonably practicable. In addition, future laws, regulations, rulings or court decisions may cause
interest on municipal securities to be subject, directly or indirectly, to Federal income taxation or interest on state municipal securities to be subject to state or local income taxation, or the value of state municipal securities to be subject to
state or local intangible personal property tax, or may otherwise prevent the Fund from realizing the full current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities, and thus
the value of an investment in the Fund.
Trust Preferred
Securities.
Certain of the Funds may invest in trust preferred securities. Trust preferred securities are typically issued by corporations, generally in the form of interest bearing notes with preferred securities characteristics, or by an
affiliated business trust of a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The trust preferred securities market consists of both fixed and adjustable coupon rate
securities that are either perpetual in nature or have stated maturity dates.
Trust preferred securities are typically junior and fully subordinated liabilities of an issuer and benefit from a guarantee that is junior and fully subordinated to the other liabilities of the
guarantor. In addition, trust preferred securities typically permit an issuer to defer the payment of income for five years or more without triggering an event of default. Because of their subordinated position in the capital structure of an issuer,
the ability to defer payments for extended periods of time without default consequences to the issuer, and certain other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on
the trust preferred securities have not been made), these trust preferred securities are often treated as close substitutes for traditional preferred securities, both by issuers and investors.
Trust preferred securities include but are not limited
to trust originated preferred securities (TOPRS
®
); monthly income preferred securities (MIPS
®
); quarterly income bond securities (QUIBS
®
); quarterly income debt securities (QUIDS
®
); quarterly income preferred securities (QUIPS
SM
); corporate trust securities (CORTS
®
); public income notes
(PINES
®
); and other trust preferred securities.
Trust preferred securities are typically issued with a final maturity date,
although some are perpetual in nature. In certain instances, a final maturity date may be extended and/or the final payment of principal may be deferred at the issuers option for a specified time without default. No redemption can typically
take place unless all cumulative payment obligations have been met, although issuers may be able to engage in open-market repurchases without regard to whether all payments have been paid.
Many trust preferred securities are issued by trusts or other special purpose entities established by operating companies and
are not a direct obligation of an operating company. At the time the trust or special purpose entity sells such preferred securities to investors, it purchases debt of the operating company (with terms comparable to those of the trust or special
purpose entity securities), which enables the operating company to deduct for tax purposes the interest paid on the debt held by the trust or special purpose entity. The trust or special purpose entity is generally required to be treated as
transparent for Federal income tax purposes such that the holders of the trust preferred securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly, payments on the trust preferred securities
are treated as interest rather than dividends for Federal income tax purposes. The trust or special purpose entity in turn would be a holder of the operating companys debt and would have priority with respect to the operating companys
earnings and profits over the operating companys common shareholders, but would typically be subordinated to other classes of the operating companys debt. Typically a preferred share has a rating that is slightly below that of its
corresponding operating companys senior debt securities.
U.S. Government Obligations.
A Fund may purchase obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury. Others are supported by the right of the issuer to borrow from the U.S. Treasury; and
still others are supported only by the credit of the agency or instrumentality issuing the obligation. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored instrumentalities if it is not
obligated to do so by law. Certain U.S. Treasury and agency securities may be held by trusts that issue participation certificates (such as Treasury income growth
II-52
receipts (TIGRs) and certificates of accrual on Treasury certificates (CATs)). These certificates, as well as Treasury receipts and other stripped securities, represent
beneficial ownership interests in either future interest payments or the future principal payments on U.S. Government obligations. These instruments are issued at a discount to their face value and may (particularly in the case of
stripped mortgage-backed securities) exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors.
Examples of the types of U.S. Government obligations that may be held by the Funds include U.S. Treasury Bills, Treasury Notes
and Treasury Bonds and the obligations of the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Ginnie Mae, Fannie Mae, Federal Financing Bank, General Services
Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan Banks, Freddie Mac, Federal Intermediate Credit Banks, Federal Land Banks, Farm Credit Banks System, Maritime Administration, Tennessee Valley
Authority and Washington D.C. Armory Board. The Funds may also invest in mortgage-related securities issued or guaranteed by U.S. Government agencies and instrumentalities, including such instruments as obligations of Ginnie Mae, Fannie Mae and
Freddie Mac.
Utility Industries.
Risks that are
intrinsic to the utility industries include difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary period, restrictions on operations and increased cost and delays
attributable to environmental considerations and regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological innovations that may render existing plants,
equipment or products obsolete, the potential impact of natural or man-made disasters, increased costs and reduced availability of certain types of fuel, occasional reduced availability and high costs of natural gas for resale, the effects of energy
conservation, the effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with the design, construction, licensing, regulation and operation of nuclear facilities for electric generation,
including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes. There are substantial differences among the regulatory practices and policies of various jurisdictions, and
any given regulatory agency may make major shifts in policy from time to time. There is no assurance that regulatory authorities will, in the future, grant rate increases or that such increases will be adequate to permit the payment of dividends on
common stocks issued by a utility company. Additionally, existing and possible future regulatory legislation may make it even more difficult for utilities to obtain adequate relief. Certain of the issuers of securities held in the Funds
portfolio may own or operate nuclear generating facilities. Governmental authorities may from time to time review existing policies and impose additional requirements governing the licensing, construction and operation of nuclear power plants.
Prolonged changes in climatic conditions can also have a significant impact on both the revenues of an electric and gas utility as well as the expenses of a utility, particularly a hydro-based electric utility.
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities. Such regulation is intended to ensure appropriate standards of service and adequate capacity to meet public demand.
Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting the public while ensuring that the rate of return earned by utility companies is sufficient to allow them to attract capital in order
to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return will continue in the future.
The nature of regulation of the utility industries continues to evolve both in the United States and in foreign countries. In recent years, changes in
regulation in the United States increasingly have allowed utility companies to provide services and products outside their traditional geographic areas and lines of business, creating new areas of competition within the industries. In some
instances, utility companies are operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to the field of telecommunications, non-regulated providers of utility
services have become a significant part of their respective industries. The Manager believes that the emergence of competition and deregulation will result in certain utility companies being able to earn more than their traditional regulated rates
of return, while others may be forced to defend their core business from increased competition and may be less profitable. Reduced profitability, as well as new uses of funds (such as for expansion, operations or stock buybacks) could result in cuts
in dividend payout rates. The Manager seeks to take advantage of favorable investment opportunities that may arise from these structural changes. Of course, there can be no assurance that favorable developments will occur in the future.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign utility companies may be more heavily regulated by their respective
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governments than utilities in the United States and, as in the United States, generally are required to seek government approval for rate increases. In addition, many foreign utilities use fuels
that may cause more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed pollution restrictions. Foreign regulatory systems vary from country to country and
may evolve in ways different from regulation in the United States.
A Funds investment policies are designed to enable it to capitalize on evolving investment opportunities throughout the world. For example, the
rapid growth of certain foreign economies will necessitate expansion of capacity in the utility industries in those countries. Although many foreign utility companies currently are government-owned, thereby limiting current investment opportunities
for a Fund, the Manager believes that, in order to attract significant capital for growth, foreign governments are likely to seek global investors through the privatization of their utility industries. Privatization, which refers to the trend toward
investor ownership of assets rather than government ownership, is expected to occur in newer, faster-growing economies and in mature economies. Of course, there is no assurance that such favorable developments will occur or that investment
opportunities in foreign markets will increase.
The revenues of
domestic and foreign utility companies generally reflect the economic growth and development in the geographic areas in which they do business. The Manager will take into account anticipated economic growth rates and other economic developments when
selecting securities of utility companies.
Electric.
The
electric utility industry consists of companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide other energy-related services. In the past, electric utility companies, in general,
have been favorably affected by lower fuel and financing costs and the full or near completion of major construction programs. In addition, many of these companies have generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance with environmental and safety
regulations and changes in the regulatory climate. As interest rates declined, many utilities refinanced high cost debt and in doing so improved their fixed charges coverage. Regulators, however, lowered allowed rates of return as interest rates
declined and thereby caused the benefits of the rate declines to be shared wholly or in part with customers. In a period of rising interest rates, the allowed rates of return may not keep pace with the utilities increased costs. The
construction and operation of nuclear power facilities are subject to strict scrutiny by, and evolving regulations of, the Nuclear Regulatory Commission and state agencies which have comparable jurisdiction. Strict scrutiny might result in higher
operating costs and higher capital expenditures, with the risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk that a company may not be permitted to operate or complete construction of a facility. In
addition, operators of nuclear power plants may be subject to significant costs for disposal of nuclear fuel and for decommissioning such plants.
The rating agencies look closely at the business profile of utilities. Ratings for companies are expected to be impacted to a greater extent in the future
by the division of their asset base. Electric utility companies that focus more on the generation of electricity may be assigned less favorable ratings as this business is expected to be competitive and the least regulated. On the other hand,
companies that focus on transmission and distribution, which is expected to be the least competitive and the more regulated part of the business, may see higher ratings given the greater predictability of cash flow.
A number of states are considering or have enacted deregulation proposals.
The introduction of competition into the industry as a result of such deregulation has at times resulted in lower revenue, lower credit ratings, increased default risk, and lower electric utility security prices. Such increased competition may also
cause long-term contracts, which electric utilities previously entered into to buy power, to become stranded assets which have no economic value. Any loss associated with such contracts must be absorbed by ratepayers and investors. In
addition, some electric utilities have acquired electric utilities overseas to diversify, enhance earnings and gain experience in operating in a deregulated environment. In some instances, such acquisitions have involved significant borrowings,
which have burdened the acquirers balance sheet. There is no assurance that current deregulation proposals will be adopted. However, deregulation in any form could significantly impact the electric utilities industry.
Telecommunications.
The telecommunications industry today includes
both traditional telephone companies, with a history of broad market coverage and highly regulated businesses, and cable companies, which began as small, lightly regulated businesses focused on limited markets. Today these two historically different
businesses are converging in an industry that is trending toward larger, competitive national and international markets with an
II-54
emphasis on deregulation. Companies that distribute telephone services and provide access to the telephone networks still comprise the greatest portion of this segment, but non-regulated
activities such as wireless telephone services, paging, data transmission and processing, equipment retailing, computer software and hardware and internet services are becoming increasingly significant components as well. In particular, wireless and
internet telephone services continue to gain market share at the expense of traditional telephone companies. The presence of unregulated companies in this industry and the entry of traditional telephone companies into unregulated or less regulated
businesses provide significant investment opportunities with companies that may increase their earnings at faster rates than had been allowed in traditional regulated businesses. Still, increasing competition, technological innovations and other
structural changes could adversely affect the profitability of such utilities and the growth rate of their dividends. Given mergers and proposed legislation and enforcement changes, it is likely that both traditional telephone companies and cable
companies will continue to provide an expanding range of utility services to both residential, corporate and governmental customers.
Gas.
Gas transmission companies and gas distribution companies are undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. In the opinion of the Manager, however, environmental considerations
could improve the gas industry outlook in the future. For example, natural gas is the cleanest of the hydrocarbon fuels, and this may result in incremental shifts in fuel consumption toward natural gas and away from oil and coal, even for
electricity generation. However, technological or regulatory changes within the industry may delay or prevent this result.
Water.
Water supply utilities are companies that collect, purify, distribute and sell water. In the United States and around the world the industry
is highly fragmented because most of the supplies are owned by local authorities. Companies in this industry are generally mature and are experiencing little or no per capita volume growth. In the opinion of the Manager, there may be opportunities
for certain companies to acquire other water utility companies and for foreign acquisition of domestic companies. The Manager believes that favorable investment opportunities may result from consolidation of this segment. As with other utilities,
however, increased regulation, increased costs and potential disruptions in supply may adversely affect investments in water supply utilities.
Utility Industries Generally.
There can be no assurance that the positive developments noted above, including those relating to privatization and
changing regulation, will occur or that risk factors other than those noted above will not develop in the future.
When Issued Securities, Delayed Delivery Securities and Forward Commitments.
A Fund may purchase or sell securities that it is entitled to receive on a when issued basis. A Fund may also
purchase or sell securities on a delayed delivery basis or through a forward commitment (including on a TBA (to be announced) basis). These transactions involve the purchase or sale of securities by a Fund at an established price with
payment and delivery taking place in the future. The Fund enters into these transactions to obtain what is considered an advantageous price to the Fund at the time of entering into the transaction. When a Fund purchases securities in these
transactions, the Fund segregates liquid securities in an amount equal to the amount of its purchase commitments.
Pursuant to recommendations of the Treasury Market Practices Group, which is sponsored by the Federal Reserve Bank of New York, beginning January 1, 2014, a Fund or its counterparty generally will be
required to post collateral when entering into certain forward-settling transactions, including without limitation TBA transactions.
There can be no assurance that a security purchased on a when issued basis will be issued or that a security purchased or sold on a delayed delivery basis
or through a forward commitment will be delivered. Also, the value of securities in these transactions on the delivery date may be more or less than the price paid by the Fund to purchase the securities. The Fund will lose money if the value of the
security in such a transaction declines below the purchase price and will not benefit if the value of the security appreciates above the sale price during the commitment period.
If deemed advisable as a matter of investment strategy, a Fund may dispose
of or renegotiate a commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a taxable capital gain
or loss.
When a Fund engages in when-issued, TBA or forward
commitment transactions, it relies on the party to consummate the trade. Failure of such party to do so may result in the Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into account when determining the market value of a Fund starting on the day the Fund agrees to purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the settlement date.
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Yields and Ratings.
The yields on certain obligations are dependent on a variety of factors,
including general market conditions, conditions in the particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the ratings of the issue. The ratings of Moodys,
Fitch and S&P represent their respective opinions as to the quality of the obligations they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently, obligations with the same rating, maturity and
interest rate may have different market prices. Subsequent to its purchase by a Fund, a rated security may cease to be rated. A Funds Manager or sub-adviser will consider such an event in determining whether the Fund should continue to hold
the security.
Zero Coupon Securities.
Zero coupon
securities are securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity
at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero coupon security is entitled to receive the par value of the security.
While interest payments are not made on such securities, holders of such
securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned
not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as
high as the implicit yield on the zero coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price
fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero coupon bonds are more exposed to interest rate risk than shorter term zero coupon bonds. These investments
benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
A Fund accrues income with respect to these securities for Federal income
tax and accounting purposes prior to the receipt of cash payments. Zero coupon securities may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash
interest at regular intervals.
Further, to maintain its
qualification for pass-through treatment under the Federal tax laws, a Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or
may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in a Funds exposure to zero coupon securities.
In addition to the above-described risks, there are certain other risks
related to investing in zero coupon securities. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, a Funds investment exposure to
these securities and their risks, including credit risk, will increase during the time these securities are held in the Funds portfolio.
Suitability (All Funds)
The economic benefit of an investment in any Fund depends upon many factors beyond the control of the Fund, the Manager and its affiliates. Each Fund
should be considered a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in a Fund will depend upon, among other things, such investors investment
objectives and such investors ability to accept the risks associated with investing in securities, including the risk of loss of principal.
Investment Restrictions (All Funds)
See Investment Restrictions in Part I of each Funds Statement of Additional Information for the specific fundamental and non-fundamental
investment restrictions adopted by each Fund. In addition to those investment restrictions, each Fund is also subject to the restrictions discussed below.
The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid
securities. Therefore, each Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if, as a result of any such transaction, the sum of the market value of OTC
options currently outstanding that are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding that were sold by the Fund and margin deposits on the Funds existing OTC options on
financial futures contracts would exceed 15% of the net
II-56
assets of the Fund, taken at market value, together with all other assets of the Fund that are determined to be illiquid. However, if an OTC option is sold by a Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid only such
amount of the underlying securities as is equal to the repurchase price less the amount by which the option is in-the-money (
i.e.
, current market value of the underlying securities minus the options strike price). The
repurchase price with the primary dealers is typically a formula price that is generally based on a multiple of the premium received for the option, plus the amount by which the option is in-the-money. This policy as to OTC options is
not a fundamental policy of any Fund and may be amended by the Board of Directors of the Fund without the approval of the Funds shareholders.
Each Funds investments will be limited in order to allow the Fund to qualify as a regulated investment company for purposes of the Code.
See Dividends and Taxes Taxes. To qualify, among other requirements, each Fund will limit its investments so that, at the close of each quarter of the taxable year, (i) at least 50% of the market value of each Funds
assets is represented by cash, securities of other regulated investment companies, U.S. government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the Funds
assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. government securities or securities of other regulated
investment companies) of any one issuer, any two or more issuers of which 20% or more of the voting stock is held by the Fund and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or in the
securities of one or more qualified publicly traded partnerships (
i.e.
, partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest,
dividends, capital gains and other traditionally permitted mutual fund income). For purposes of this restriction, the Municipal Funds generally will regard each state and each of its political subdivisions, agencies or instrumentalities and each
multi-state agency of which the state is a member as a separate issuer. Each public authority that issues securities on behalf of a private entity generally will also be regarded as a separate issuer, except that if the security is backed only by
the assets and revenues of a non-government entity, then the entity with the ultimate responsibility for the payment of interest and principal may be regarded as the sole issuer. Foreign government securities (unlike U.S. government securities) are
not exempt from the diversification requirements of the Code and the securities of each foreign government issuer are considered to be obligations of a single issuer. These tax-related limitations may be changed by the Directors of a Fund to the
extent necessary to comply with changes to the Federal tax requirements. A Fund that is diversified under the Investment Company Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets.
Code of Ethics
Each Fund, the Manager, each Sub-Adviser and the Distributor has adopted a
Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Codes of Ethics establish procedures for personal investing and restrict certain transactions. Employees subject to the Code of Ethics may invest in securities for their
personal investment accounts, including securities that may be purchased or held by a Fund.
M
ANAGEMENT
AND
O
THER
S
ERVICE
A
RRANGEMENTS
Directors and Officers
See Information on Directors and Officers,
Biographical Information, Share Ownership and Compensation of Directors in Part I of each Funds Statement of Additional Information for biographical and certain other information relating to the
Directors and officers of your Fund, including Directors compensation.
Management Arrangements
Management Services.
The Manager provides each Fund with investment advisory and management services. Subject to the oversight of the Board of Directors, the Manager is responsible for the actual
management of a Funds portfolio and reviews the Funds holdings in light of its own research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the
Manager. The Manager performs certain of the other administrative services and provides all the office space, facilities, equipment and necessary personnel for management of each Fund.
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Each Feeder Fund invests all or a portion of its assets in shares of a Master Portfolio. To the extent a
Feeder Fund invests all of its assets in a Master Portfolio, it does not invest directly in portfolio securities and does not require management services. For such Feeder Funds, portfolio management occurs at the Master Portfolio level.
Management Fee.
Each Fund has entered into a Management Agreement
with the Manager pursuant to which the Manager receives for its services to the Fund monthly compensation at an annual rate based on the average daily net assets of the Fund. For information regarding specific fee rates for your Fund and the fees
paid by your Fund to the Manager for the Funds last three fiscal years or other applicable periods, see Management and Advisory Arrangements in Part I of each Funds Statement of Additional Information.
For Funds that do not have an administrator, each Management Agreement
obligates the Manager to provide management services and to pay all compensation of and furnish office space for officers and employees of a Fund in connection with investment and economic research, trading and investment management of the Fund, as
well as the fees of all Directors of the Fund who are interested persons of the Fund. Each Fund pays all other expenses incurred in the operation of that Fund, including among other things: taxes; expenses for legal and auditing services; costs of
preparing, printing and mailing proxies, shareholder reports, prospectuses and statements of additional information, except to the extent paid by BlackRock Investments, LLC (BRIL or the Distributor); charges of the custodian
and sub-custodian, and the transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal, state or foreign laws; fees and expenses of Directors who are not interested persons of a Fund as defined
in the Investment Company Act; accounting and pricing costs (including the daily calculations of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly
payable by the Fund. Certain accounting services are provided to each Fund by State Street Bank and Trust Company (State Street) or BNY Mellon Investment Servicing (US) Inc. (BNY Mellon) pursuant to an agreement between State
Street or BNY Mellon, as applicable, and each Fund. Each Fund pays a fee for these services. In addition, the Manager provides certain accounting services to each Fund and the Fund pays the Manager a fee for such services. The Distributor pays
certain promotional expenses of the Funds incurred in connection with the offering of shares of the Funds. Certain expenses are financed by each Fund pursuant to distribution plans in compliance with Rule 12b-1 under the Investment Company Act. See
Purchase of Shares Distribution Plans.
Sub-Advisory Fee.
The Manager of certain Funds has entered into one or more sub-advisory agreements (the Sub-Advisory Agreements) with
the sub-adviser or sub-advisers identified in each such Funds prospectus (the Sub-Adviser) pursuant to which the Sub-Adviser provides sub-advisory services to the Manager with respect to the Fund. For information relating to the
fees, if any, paid by the Manager to the Sub-Adviser pursuant to the Sub-Advisory Agreement for the Funds last three fiscal years or other applicable periods, see Management and Advisory Arrangements in Part I of each Funds
Statement of Additional Information.
Organization of the
Manager.
BlackRock Advisors, LLC is a Delaware limited liability company and BlackRock Fund Advisors is a California corporation. Each Manager is an indirect, wholly owned subsidiary of BlackRock, Inc. BlackRock, Inc., through its subsidiaries
and divisions, provides (i) investment management services to individuals and institutional investors through separate account management, non-discretionary advisory programs and commingled investment vehicles; (ii) risk management
services, investment accounting and trade processing tools; (iii) transition management services, and (iv) securities lending services.
Duration and Termination.
Unless earlier terminated as described below, each Management Agreement and each Sub-Advisory Agreement will remain in
effect for an initial two year period and from year to year thereafter if approved annually (a) by the Board of Directors or by a vote of a majority of the outstanding voting securities of a Fund and (b) by a majority of the Directors of
the Fund who are not parties to such agreement or interested persons (as defined in the Investment Company Act) of any such party. Each Management Agreement automatically terminates on assignment and may be terminated without penalty on 60
days written notice at the option of either party thereto or by the vote of the shareholders of the applicable Fund.
Other Service Arrangements
Administrative Services and Administrative Fee.
Certain Funds have entered into an administration agreement (the Administration
Agreement) with an administrator identified in the Funds Prospectus and Part I of the Funds Statement of Additional Information (each an Administrator). For its services to a Fund, the Administrator receives monthly
compensation at the annual rate set forth in each applicable Funds prospectus. For information regarding any administrative fees paid by your Fund to the Administrator for the periods indicated, see Management and Advisory
Arrangements in Part I of that Funds Statement of Additional Information.
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For Funds that have an Administrator, the Administration Agreement obligates the Administrator to provide
certain administrative services to the Fund and to pay, or cause its affiliates to pay, for maintaining its staff and personnel and to provide office space, facilities and necessary personnel for the Fund. Each Administrator is also obligated to
pay, or cause its affiliates to pay, the fees of those officers and Directors of the Fund who are affiliated persons of the Administrator or any of its affiliates.
Duration and Termination of Administration Agreement.
Unless earlier
terminated as described below, each Administration Agreement will continue for an initial two year period and from year to year if approved annually (a) by the Board of Directors of each applicable Fund or by a vote of a majority of the
outstanding voting securities of such Fund and (b) by a majority of the Directors of the Fund who are not parties to such contract or interested persons (as defined in the Investment Company Act) of any such party. Such contract is not
assignable and may be terminated without penalty on 60 days written notice at the option of either party thereto or by the vote of the shareholders of the Fund.
Transfer Agency Services.
BNY Mellon Investment Servicing (US) Inc.
(in this capacity, the Transfer Agent), a subsidiary of The Bank of New York Mellon Corporation, acts as each Funds Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement
(the Transfer Agency Agreement) with the Funds. Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts.
Each Fund pays the Transfer Agent a fee for the services it receives based on the type of account and the level of services required. Each Fund reimburses the Transfer Agents reasonable out-of-pocket expenses and pays a fee of 0.10% of account
assets for certain accounts that participate in certain fee-based programs sponsored by the Manager or its affiliates. For purposes of each Transfer Agency Agreement, the term account includes a shareholder account maintained directly by
the Transfer Agent and any other account representing the beneficial interest of a person in the relevant share class on a recordkeeping system. Effective July 1, 2010, the Transfer Agent ceased to be an affiliate of the Funds.
Independent Registered Public Accounting Firm.
The Audit Committee of
each Fund, which is comprised solely of the Funds non-interested Directors, has selected an independent registered public accounting firm for that Fund that audits the Funds financial statements. Please see the inside back cover page of
your Funds Prospectus for information on your Funds independent registered public accounting firm.
Custodian Services.
The name and address of the custodian (the Custodian) of each Fund are provided on the inside back cover page of the Funds Prospectus. The Custodian is
responsible for safeguarding and controlling the Funds cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Funds investments. The Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund to be held in its offices outside the United States and with certain foreign banks and securities depositories.
For certain Feeder Funds, the Custodian also acts as the custodian of the
Master Portfolios assets.
With respect to each Fund, under
an arrangement effective January 1, 2010, on a monthly basis, the Custodian nets the Funds daily positive and negative cash balances and calculates a credit (custody credit) or a charge based on that net amount. The custodian
fees, including the amount of any overdraft charges, may be reduced by the amount of such custody credits, and any unused credits at the end of a given month may be carried forward to a subsequent month. Any such credits unused by the end of a
Funds fiscal year will not expire. Net debits at the end of a given month are added to the Funds custody bill and paid by the Fund.
Accounting Services.
Each Fund has entered into an agreement with State Street or BNY Mellon, pursuant to which State Street or BNY Mellon provides
certain accounting services to the Fund. Each Fund pays a fee for these services. State Street or BNY Mellon provides similar accounting services to the Master LLCs. The Manager or the Administrator also provides certain accounting services to each
Fund and each Fund reimburses the Manager or the Administrator for these services.
See Management and Advisory Arrangements Accounting Services in Part I of each Funds Statement of Additional Information for information on the amounts paid by your Fund and, if
applicable, Master LLC to State Street and the Manager or, if applicable, the Administrator for the periods indicated.
Distribution Expenses.
Each Fund has entered into a distribution agreement with the Distributor in connection with the continuous offering of each
class of shares of the Fund (the Distribution Agreements). The Distribution Agreements obligate the Distributor to pay certain expenses in connection with the offering of each class of shares of the Funds. After the prospectuses,
statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of these documents used
II-59
in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. Each Distribution Agreement is subject to the
same renewal requirements and termination provisions as the Management Agreement described above.
Code of Ethics
Each Fund, the Manager, each Sub-Adviser and the Distributor has adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The
Codes of Ethics establish procedures for personal investing and restrict certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased or
held by a Fund.
S
ELECTIVE
D
ISCLOSURE
OF
P
ORTFOLIO
H
OLDINGS
The Board of Directors/Trustees each
of the Funds and the Board of Directors of the Manager have each approved Portfolio Information Distribution Guidelines (the Guidelines) regarding the disclosure of the Funds portfolio securities, as applicable, and other portfolio
information. The purpose of the Guidelines is to ensure that (i) shareholders and prospective shareholders of the Fund have equal access to portfolio holdings and characteristics and (ii) third parties (such as consultants, intermediaries
and third-party data providers) have access to such information no more frequently than shareholders and prospective shareholders.
Pursuant to the Guidelines, the Funds and the Manager may, under certain circumstances as set forth below, make selective disclosure with respect to the
Funds portfolio holdings. The Funds Board has approved the adoption by the Funds of the Guidelines, and employees of the Manager are responsible for adherence to the Guidelines. The Funds Board provides ongoing oversight of the
Funds and Managers compliance with the Guidelines. Examples of the types of information that may be disclosed pursuant to the Guidelines are provided below. This information may be both material non-public information (Confidential
Information) and proprietary information of the Manager. Information that is non-material or that may be obtained from public sources (
i.e.
, information that has been publicly disclosed via a filing with the Securities and Exchange
Commission (
e.g.
, fund annual report), through a press release or placement on a publicly-available internet web site) shall not be deemed Confidential Information.
Except as otherwise provided in the Guidelines, Confidential Information
relating to the Funds may not be distributed to persons not employed by the Manager unless: the Fund has a legitimate business purpose for doing so. Confidential Information may be disclosed to the Funds Board members and their counsel,
outside counsel for the Funds and the Funds independent registered public accounting firm, and may be disclosed to the Funds service providers and other appropriate parties with the approval of the Funds Chief Compliance Officer,
the Managers General Counsel, the Managers Chief Compliance Officer or the designee of such persons, and in addition, in the case of disclosure to third parties, subject to a confidentiality or non-disclosure agreement, as necessary in
accordance with the Guidelines. Information may also be disclosed as required by applicable laws and regulation.
Examples of instances in which selective disclosure of a Funds portfolio securities or other portfolio information may be appropriate include: (i) disclosure for due diligence purposes to an
investment adviser that is in merger or acquisition talks with the Manager; (ii) disclosure to a newly-hired investment adviser or sub-adviser prior to its commencing its duties; (iii) disclosure to a third-party feeder fund consistent
with its agreement with a master portfolio advised by BlackRock; (iv) disclosure to third-party service providers of legal, auditing, custody, proxy voting, pricing and other services to the Fund; or (v) disclosure to a rating or ranking
organization.
Asset and Return Information.
Data on NAVs,
asset levels (by total fund and share class), accruals, yields, capital gains, dividends and fund returns (net of fees by share class) are generally available to shareholders, prospective shareholders, consultants and third-party data providers upon
request, as soon as such data is available. Data on number of shareholders (total and by share class) and benchmark returns (including performance measures such as standard deviation, information ratio, Sharpe ratio, alpha, and beta) are generally
available to shareholders, prospective shareholders, consultants and third-party data providers as soon as such data is released after month-end.
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Portfolio Characteristics.
Examples of portfolio characteristics include sector allocation, credit
quality breakdown, maturity distribution, duration and convexity measures, average credit quality, average maturity, average coupon, top 10 holdings with percent of the fund held, average market capitalization, capitalization range, ROE, P/E, P/B,
P/CF, P/S and EPS.
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1.
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Month-end portfolio characteristics are available to shareholders, prospective shareholders, intermediaries and consultants on the fifth calendar day
after month-end.
1
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2.
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Fund Fact Sheets, which contain certain portfolio characteristics, are available, in both hard copy and electronically, to shareholders, prospective shareholders,
intermediaries and consultants on a monthly or quarterly basis no earlier than the fifth calendar day after the end of a month or quarter.
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3.
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Money Market Performance Reports, which contain money market fund performance for the recent month, rolling 12-month average yields and benchmark performance, are
available on a monthly basis to shareholders, prospective shareholders, intermediaries and consultants by the tenth calendar day of the month. This information may also be obtained electronically upon request.
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Portfolio Holdings.
In addition to position description, portfolio
holdings may also include issuer name, CUSIP, ticker symbol, total shares and market value for equity portfolios and issuer name, CUSIP, ticker symbol, coupon, maturity, current face value and market value for fixed income portfolios. Other
information that may be provided includes quantity, SEDOL, market price, yield, weighted average life, duration and convexity of each security in the Fund as of a specific date.
The following shall not be deemed a disclosure of Confidential Information:
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Generally, month-end portfolio holdings may be made available to fund shareholders, prospective shareholders, intermediaries, consultants and third
party data providers (
e.g.
, Lipper, Morningstar and Bloomberg) on the 20th calendar day after the end of each month; except for BlackRock Global Allocation Fund, Inc., BlackRock Long-Horizon Equity Fund, BlackRock Global Allocation Portfolio
of BlackRock Series Fund, Inc. and BlackRock Global Allocation V.I. Fund of BlackRock Variable Series Funds, Inc., whose holdings may be made available on the 40th calendar day after the end of the quarter (based on each Funds fiscal year
end).
1
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The following information as it relates to money market funds, unless made
available to the public, shall be deemed a disclosure of Confidential Information and, subject to the Guidelines, requires a confidentiality or non-disclosure arrangement:
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Weekly portfolio holdings made available to fund shareholders, prospective shareholders, intermediaries and consultants on the next business day after
the end of the weekly period.
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Weekly portfolio holdings and characteristics made available to third-party data providers (
e.g.
, Lipper, Morningstar, Bloomberg, S&P,
Fitch, Moodys, Crane Data and iMoneyNet, Inc.) on the next business day after the end of the weekly period.
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Other Information.
The Guidelines shall also apply to other Confidential Information of a Fund such as attribution analyses or security-specific
information (
e.g.
, information about Fund holdings where an issuer has been downgraded, been acquired or declared bankruptcy).
Implementation.
All employees of the Manager must adhere to the Guidelines when responding to inquiries from shareholders, prospective
shareholders, consultants, and third-party databases. The Funds Chief Compliance Officer is responsible for oversight of compliance with the Guidelines and will recommend to the Funds Board any changes to the Guidelines that he or she
deems necessary or appropriate to ensure the Funds and the Managers compliance.
Ongoing Arrangements.
The Manager has entered into ongoing agreements to provide selective disclosure of each Funds portfolio holdings to the following persons or entities:
1.
|
Funds Board of Directors and, if necessary independent Directors counsel and Fund counsel
|
4.
|
Funds Administrator, if applicable
|
5.
|
Funds independent registered public accounting firm
|
1
|
|
The precise number of days specified above may vary slightly from period to period depending on whether specified calendar day falls on a weekend or
holiday
|
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6.
|
Funds accounting services provider
|
7.
|
Independent rating agencies Morningstar, Inc., Lipper Inc., S&P, Moodys, Fitch
|
8.
|
Information aggregators Markit on Demand, Thomson Financial and Bloomberg, eVestments Alliance, Informa/PSN Investment Solutions, Crane Data, and iMoneyNet
|
9.
|
Sponsors of 401(k) plans that include BlackRock-advised funds E.I. Dupont de Nemours and Company, Inc.
|
10.
|
Consultants for pension plans that invest in BlackRock-advised funds Rocaton Investment Advisors, LLC, Mercer Investment Consulting, Callan Associates,
Brockhouse & Cooper, Cambridge Associates, Morningstar/Investorforce, Russell Investments (Mellon Analytical Solutions), and Wilshire Associates
|
11.
|
Pricing Vendors Reuters Pricing Service, Bloomberg, FT Interactive Data (FT IDC), ITG, Telekurs Financial, FactSet Research Systems, Inc., JP Morgan Pricing
Direct (formerly Bear Stearns Pricing Service), Standard and Poors Security Evaluations Service, Lehman Index Pricing, Bank of America High Yield Index, Loan Pricing Corporation (LPC), LoanX, Super Derivatives, IBOXX Index, Barclays Euro
Govt Inflation-Linked Bond Index, JPMorgan Emerging & Developed Market Index, Reuters/WM Company, Nomura BPI Index, Japan Securities Dealers Association, Valuation Research Corporate and Murray, Devine & Co., Inc.
|
12.
|
Portfolio Compliance Consultants Oracle/i-Flex Solutions, Inc.
|
13.
|
Third-party feeder funds Hewitt Money Market Fund, Hewitt Series Fund, Hewitt Financial Services LLC, Homestead, Inc., Transamerica, State Farm Mutual Fund,
Sterling Capital Funds and their respective boards, sponsors, administrators and other service providers
|
14.
|
Affiliated feeder funds BlackRock Cayman Prime Money Market Fund, Ltd. and BlackRock Cayman Treasury Money Market Fund Ltd., and their respective boards,
sponsors, administrators and other service providers
|
15.
|
Other Investment Company Institute
|
With respect to each such arrangement, the Fund has a legitimate business purpose for the release of information. The release of the information is
subject to confidential treatment to prohibit the entity from sharing with an unauthorized source or trading upon the information provided. The Fund, the Manager and their affiliates do not receive any compensation or other consideration in
connection with such arrangements.
The Funds and the Manager
monitor, to the extent possible, the use of Confidential Information by the individuals or firms to which it has been disclosed. To do so, in addition to the requirements of any applicable confidentiality agreement and/or the terms and conditions of
the Funds and Managers Code of Ethics and Code of Business Conduct and Ethics all of which require persons or entities in possession of Confidential Information to keep such information confidential and not to trade on such
information for their own benefit the Managers compliance personnel under the supervision of the Funds Chief Compliance Officer, monitor the Managers securities trading desks to determine whether individuals or firms who
have received Confidential Information have made any trades on the basis of that information. In addition, the Manager maintains an internal restricted list to prevent trading by the personnel of the Manager or its affiliates in securities
including securities held by the Funds about which the Manager has Confidential Information. There can be no assurance, however, that the Funds policies and procedures with respect to the selective disclosure of Fund portfolio holdings
will prevent the misuse of such information by individuals or firms that receive such information.
Potential Conflicts of Interest
The PNC Financial Services Group, Inc. (PNC) has a significant economic interest in BlackRock, Inc., the parent of BlackRock Advisors, LLC, the Funds investment adviser. PNC is
considered to be an affiliate of BlackRock, Inc., under the Investment Company Act. Certain activities of BlackRock Advisors, LLC, BlackRock, Inc. and their affiliates (collectively, BlackRock) and PNC and its affiliates (collectively,
PNC and together with BlackRock, Affiliates), with respect to the Funds and/or other accounts managed by BlackRock or PNC may give rise to actual or perceived conflicts of interest such as those described below.
BlackRock is one of the worlds largest asset management
firms. PNC is a diversified financial services organization spanning the retail, business and corporate markets. BlackRock, PNC and their respective affiliates (including, for these purposes, their directors, partners, trustees, managing members,
officers and employees), including the entities and personnel who may be involved in the investment activities and business operations of a Fund, are engaged worldwide in businesses, including equity, fixed income, cash management and alternative
investments, and have interests other than that of managing the Funds. These are considerations of which investors in a Fund should be aware, and which may cause conflicts of interest that could disadvantage the Fund and its
II-62
shareholders. These activities and interests include potential multiple advisory, transactional, financial and other interests in securities and other instruments, and companies that may be
purchased or sold by a Fund.
BlackRock and its Affiliates have
proprietary interests in, and may manage or advise with respect to, accounts or funds (including separate accounts and other funds and collective investment vehicles) that have investment objectives similar to those of a Fund and/or that engage in
transactions in the same types of securities, currencies and instruments as the Fund. One or more Affiliates are also major participants in the global currency, equities, swap and fixed income markets, in each case both on a proprietary basis and
for the accounts of customers. As such, one or more Affiliates are or may be actively engaged in transactions in the same securities, currencies, and instruments in which a Fund invests. Such activities could affect the prices and availability of
the securities, currencies, and instruments in which a Fund invests, which could have an adverse impact on the Funds performance. Such transactions, particularly in respect of most proprietary accounts or customer accounts, will be executed
independently of a Funds transactions and thus at prices or rates that may be more or less favorable than those obtained by the Fund.
When BlackRock and its Affiliates seek to purchase or sell the same assets for their managed accounts, including a Fund, the assets actually purchased or
sold may be allocated among the accounts on a basis determined in their good faith discretion to be equitable. In some cases, this system may adversely affect the size or price of the assets purchased or sold for a Fund. In addition, transactions in
investments by one or more other accounts managed by BlackRock or its Affiliates may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of a Fund, particularly, but not limited to, with respect to
small capitalization, emerging market or less liquid strategies. This may occur when investment decisions regarding a Fund are based on research or other information that is also used to support decisions for other accounts. When BlackRock or its
Affiliates implements a portfolio decision or strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for a Fund, market impact, liquidity constraints, or other factors could result in the Fund
receiving less favorable trading results and the costs of implementing such decisions or strategies could be increased or the Fund could otherwise be disadvantaged. BlackRock or its Affiliates may, in certain cases, elect to implement internal
policies and procedures designed to limit such consequences, which may cause a Fund to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do so.
Conflicts may also arise because portfolio decisions regarding a Fund may
benefit other accounts managed by BlackRock or its Affiliates. For example, the sale of a long position or establishment of a short position by a Fund may impair the price of the same security sold short by (and therefore benefit) one or more
Affiliates or their other accounts, and the purchase of a security or covering of a short position in a security by a Fund may increase the price of the same security held by (and therefore benefit) one or more Affiliates or their other accounts.
BlackRock and its Affiliates and their clients may pursue or
enforce rights with respect to an issuer in which a Fund has invested, and those activities may have an adverse effect on the Fund. As a result, prices, availability, liquidity and terms of the Funds investments may be negatively impacted by
the activities of BlackRock or its Affiliates or their clients, and transactions for the Fund may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case.
The results of a Funds investment activities may differ significantly
from the results achieved by BlackRock and its Affiliates for their proprietary accounts or other accounts (including investment companies or collective investment vehicles) managed or advised by them. It is possible that one or more
Affiliate-managed accounts and such other accounts will achieve investment results that are substantially more or less favorable than the results achieved by a Fund. Moreover, it is possible that a Fund will sustain losses during periods in which
one or more Affiliates or Affiliate-managed accounts achieve significant profits on their trading for proprietary or other accounts. The opposite result is also possible. The investment activities of one or more Affiliates for their proprietary
accounts and accounts under their management may also limit the investment opportunities for a Fund in certain emerging and other markets in which limitations are imposed upon the amount of investment, in the aggregate or in individual issuers, by
affiliated foreign investors.
From time to time, a Funds
activities may also be restricted because of regulatory restrictions applicable to one or more Affiliates, and/or their internal policies designed to comply with such restrictions. As a result, there may be periods, for example, when BlackRock,
and/or one or more Affiliates, will not initiate or recommend certain types of transactions in certain securities or instruments with respect to which BlackRock and/or one or more Affiliates are performing services or when position limits have been
reached.
II-63
In connection with its management of a Fund, BlackRock may have access to certain fundamental analysis and
proprietary technical models developed by one or more Affiliates. BlackRock will not be under any obligation, however, to effect transactions on behalf of a Fund in accordance with such analysis and models. In addition, neither BlackRock nor any of
its Affiliates will have any obligation to make available any information regarding their proprietary activities or strategies, or the activities or strategies used for other accounts managed by them, for the benefit of the management of a Fund and
it is not anticipated that BlackRock will have access to such information for the purpose of managing the Fund. The proprietary activities or portfolio strategies of BlackRock and its Affiliates, or the activities or strategies used for accounts
managed by them or other customer accounts could conflict with the transactions and strategies employed by BlackRock in managing a Fund.
In addition, certain principals and certain employees of BlackRock are also principals or employees of BlackRock or another Affiliate. As a result, the
performance by these principals and employees of their obligations to such other entities may be a consideration of which investors in a Fund should be aware.
BlackRock may enter into transactions and invest in securities, instruments and currencies on behalf of a Fund in which customers of BlackRock or its
Affiliates, or, to the extent permitted by the Commission, BlackRock or another Affiliate, serves as the counterparty, principal or issuer. In such cases, such partys interests in the transaction will be adverse to the interests of the Fund,
and such party may have no incentive to assure that the Fund obtains the best possible prices or terms in connection with the transactions. In addition, the purchase, holding and sale of such investments by a Fund may enhance the profitability of
BlackRock or its Affiliates. One or more Affiliates may also create, write or issue derivatives for their customers, the underlying securities, currencies or instruments of which may be those in which a Fund invests or which may be based on the
performance of the Fund. A Fund may, subject to applicable law, purchase investments that are the subject of an underwriting or other distribution by one or more Affiliates and may also enter into transactions with other clients of an Affiliate
where such other clients have interests adverse to those of the Fund.
At times, these activities may cause departments of BlackRock or its Affiliates to give advice to clients that may cause these clients to take actions adverse to the interests of the Fund. To the extent
affiliated transactions are permitted, a Fund will deal with BlackRock and its Affiliates on an arms-length basis. BlackRock or its Affiliates may also have an ownership interest in certain trading or information systems used by a Fund. A
Funds use of such trading or information systems may enhance the profitability of BlackRock and its Affiliates.
One or more Affiliates may act as broker, dealer, agent, lender or adviser or in other commercial capacities for a Fund. It is anticipated that the
commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees, compensation or profits, rates, terms and conditions charged by an Affiliate will be
in its view commercially reasonable, although each Affiliate, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to the Affiliate and such sales personnel.
Subject to applicable law, the Affiliates (and their personnel and other
distributors) will be entitled to retain fees and other amounts that they receive in connection with their service to the Funds as broker, dealer, agent, lender, adviser or in other commercial capacities and no accounting to the Funds or their
shareholders will be required, and no fees or other compensation payable by the Funds or their shareholders will be reduced by reason of receipt by an Affiliate of any such fees or other amounts.
When an Affiliate acts as broker, dealer, agent, adviser or in other
commercial capacities in relation to the Funds, the Affiliate may take commercial steps in its own interests, which may have an adverse effect on the Funds. A Fund will be required to establish business relationships with its counterparties based on
the Funds own credit standing. Neither BlackRock nor any of the Affiliates will have any obligation to allow their credit to be used in connection with a Funds establishment of its business relationships, nor is it expected that the
Funds counterparties will rely on the credit of BlackRock or any of the Affiliates in evaluating the Funds creditworthiness.
Purchases and sales of securities for a Fund may be bunched or aggregated with orders for other BlackRock client accounts. BlackRock and its Affiliates,
however, are not required to bunch or aggregate orders if portfolio management decisions for different accounts are made separately, or if they determine that bunching or aggregating is not practicable, required or with cases involving client
direction.
Prevailing trading activity frequently may make
impossible the receipt of the same price or execution on the entire volume of securities purchased or sold. When this occurs, the various prices may be averaged, and the Funds will be charged or credited with the average price. Thus, the effect of
the aggregation may operate on some occasions to the disadvantage of the Funds. In addition, under certain circumstances, the Funds will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated
order.
II-64
BlackRock may select brokers (including, without limitation, Affiliates) that furnish BlackRock, the Funds,
other BlackRock client accounts or other Affiliates or personnel, directly or through correspondent relationships, with research or other appropriate services which provide, in BlackRocks view, appropriate assistance to BlackRock in the
investment decision-making process (including with respect to futures, fixed-price offerings and over-the-counter transactions). Such research or other services may include, to the extent permitted by law, research reports on companies, industries
and securities; economic and financial data; financial publications; proxy analysis; trade industry seminars; computer data bases; research-oriented software and other services and products.
Research or other services obtained in this manner may be used in servicing any or all of the Funds and other BlackRock client
accounts, including in connection with BlackRock client accounts other than those that pay commissions to the broker relating to the research or other service arrangements. Such products and services may disproportionately benefit other BlackRock
client accounts relative to the Funds based on the amount of brokerage commissions paid by the Funds and such other BlackRock client accounts. For example, research or other services that are paid for through one clients commissions may not be
used in managing that clients account. In addition, other BlackRock client accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products and services that may be
provided to the Funds and to such other BlackRock client accounts. To the extent that BlackRock uses soft dollars, it will not have to pay for those products and services itself.
BlackRock may receive research that is bundled with the trade execution,
clearing, and/or settlement services provided by a particular broker-dealer. To the extent that BlackRock receives research on this basis, many of the same conflicts related to traditional soft dollars may exist. For example, the research
effectively will be paid by client commissions that also will be used to pay for the execution, clearing, and settlement services provided by the broker-dealer and will not be paid by BlackRock.
BlackRock may endeavor to execute trades through brokers who, pursuant to
such arrangements, provide research or other services in order to ensure the continued receipt of research or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time to time choose not to
engage in the above described arrangements to varying degrees. BlackRock may also enter into commission sharing arrangements under which BlackRock may execute transactions through a broker-dealer, including, where permitted, an Affiliate, and
request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to BlackRock. To the extent that BlackRock engages in commission sharing arrangements, many of the same conflicts
related to traditional soft dollars may exist.
BlackRock may
utilize certain electronic crossing networks (ECNs) in executing client securities transactions for certain types of securities. These ECNs may charge fees for their services, including access fees and transaction fees. The transaction
fees, which are similar to commissions or markups/markdowns, will generally be charged to clients and, like commissions and markups/markdowns, would generally be included in the cost of the securities purchased. Access fees may be paid by BlackRock
even though incurred in connection with executing transactions on behalf of clients, including the Funds. In certain circumstances, ECNs may offer volume discounts that will reduce the access fees typically paid by BlackRock. This would have the
effect of reducing the access fees paid by BlackRock. BlackRock will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock has adopted policies and procedures designed to prevent conflicts
of interest from influencing proxy voting decisions that it makes on behalf of advisory clients, including the Funds, and to help ensure that such decisions are made in accordance with BlackRocks fiduciary obligations to its clients.
Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of BlackRock may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock and/or its
Affiliates, provided that BlackRock believes such voting decisions to be in accordance with its fiduciary obligations. For a more detailed discussion of these policies and procedures, see Proxy Voting Policies and Procedures.
It is also possible that, from time to time, BlackRock or its Affiliates
may, although they are not required to, purchase and hold shares of a Fund. Increasing a Funds assets may enhance investment flexibility and diversification and may contribute to economies of scale that tend to reduce the Funds expense
ratio. BlackRock and its Affiliates reserve the right to redeem at any time some or all of the shares of a Fund acquired for their own accounts. A large redemption of shares of a Fund by BlackRock or its Affiliates could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Funds investment flexibility, portfolio diversification and expense ratio. BlackRock will consider the effect of redemptions on a Fund and other shareholders in deciding whether
to redeem its shares.
II-65
It is possible that a Fund may invest in securities of companies with which an Affiliate has or is trying to
develop investment banking relationships as well as securities of entities in which BlackRock or its Affiliates has significant debt or equity investments or in which an Affiliate makes a market. A Fund also may invest in securities of companies to
which an Affiliate provides or may someday provide research coverage. Such investments could cause conflicts between the interests of a Fund and the interests of other clients of BlackRock or its Affiliates. In making investment decisions for a
Fund, BlackRock is not permitted to obtain or use material non-public information acquired by any division, department or Affiliate of BlackRock in the course of these activities. In addition, from time to time, the activities of an Affiliate may
limit a Funds flexibility in purchases and sales of securities. When an Affiliate is engaged in an underwriting or other distribution of securities of an entity, BlackRock may be prohibited from purchasing or recommending the purchase of
certain securities of that entity for a Fund.
BlackRock and its
Affiliates, their personnel and other financial service providers have interests in promoting sales of the Funds. With respect to BlackRock and its Affiliates and their personnel, the remuneration and profitability relating to services to and sales
of the Funds or other products may be greater than remuneration and profitability relating to services to and sales of certain funds or other products that might be provided or offered. BlackRock and its Affiliates and their sales personnel may
directly or indirectly receive a portion of the fees and commissions charged to the Funds or their shareholders. BlackRock and its advisory or other personnel may also benefit from increased amounts of assets under management. Fees and commissions
may also be higher than for other products or services, and the remuneration and profitability to BlackRock or its Affiliates and such personnel resulting from transactions on behalf of or management of the Funds may be greater than the remuneration
and profitability resulting from other funds or products.
BlackRock and its Affiliates and their personnel may receive greater compensation or greater profit in connection with an account for which BlackRock
serves as an adviser than with an account advised by an unaffiliated investment adviser. Differentials in compensation may be related to the fact that BlackRock may pay a portion of its advisory fee to its Affiliate, or relate to compensation
arrangements, including for portfolio management, brokerage transactions or account servicing. Any differential in compensation may create a financial incentive on the part of BlackRock or its Affiliates and their personnel to recommend BlackRock
over unaffiliated investment advisers or to effect transactions differently in one account over another.
BlackRock and its Affiliates may provide valuation assistance to certain clients with respect to certain securities or other investments and the valuation recommendations made for their clients
accounts may differ from the valuations for the same securities or investments assigned by a Funds pricing vendors, especially if such valuations are based on broker-dealer quotes or other data sources unavailable to the Funds pricing
vendors. While BlackRock will generally communicate its valuation information or determinations to a Funds pricing vendors and/or fund accountants, there may be instances where the Funds pricing vendors or fund accountants assign a
different valuation to a security or other investment than the valuation for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in Pricing of Shares Determination of Net Asset Value in this Statement of Additional Information, when
market quotations are not readily available or are believed by BlackRock to be unreliable, a Funds investments may be valued at fair value by BlackRock, pursuant to procedures adopted by the Funds Board of Directors. When determining an
assets fair value, BlackRock seeks to determine the price that a Fund might reasonably expect to receive from the current sale of that asset in an
arms-length
transaction. The price
generally may not be determined based on what a Fund might reasonably expect to receive for selling an asset at a later time or if it holds the asset to maturity. While fair value determinations will be based upon all available factors that
BlackRock deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using proprietary or third party valuation models, fair value represents only a good faith approximation of the value of a
security. The fair value of one or more securities may not, in retrospect, be the price at which those assets could have been sold during the period in which the particular fair values were used in determining a Funds net asset value. As a
result, a Funds sale or redemption of its shares at net asset value, at a time when a holding or holdings are valued by BlackRock (pursuant to Board-adopted procedures) at fair value, may have the effect of diluting or increasing the economic
interest of existing shareholders.
To the extent permitted by
applicable law, a Fund may invest all or some of its short term cash investments in any money market fund or similarly-managed private fund advised or managed by BlackRock. In connection with any such investments, a Fund, to the extent permitted by
the Investment Company Act, may pay its share of expenses of a money market fund in which it invests, which may result in a Fund bearing some additional expenses.
BlackRock and its Affiliates and their directors, officers and employees,
may buy and sell securities or other investments for their own accounts, and may have conflicts of interest with respect to investments made on behalf of
II-66
a Fund. As a result of differing trading and investment strategies or constraints, positions may be taken by directors, officers, employees and Affiliates of BlackRock that are the same,
different from or made at different times than positions taken for the Fund. To lessen the possibility that a Fund will be adversely affected by this personal trading, the Fund, BRIL and BlackRock each have adopted a Code of Ethics in compliance
with Section 17(j) of the Investment Company Act that restricts securities trading in the personal accounts of investment professionals and others who normally come into possession of information regarding the Funds portfolio
transactions. Each Code of Ethics can be reviewed and copied at the Commissions Public Reference Room in Washington, D.C. Information about obtaining documents on the Commissions website may be obtained by calling the Commission at
(800) SEC-0330. Each Code of Ethics is also available on the EDGAR Database on the Commissions Internet site at http://www.sec.gov, and copies may be obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov or by writing
the Commissions Public Reference Section, Washington, DC 20549-0102.
BlackRock and its Affiliates will not purchase securities or other property from, or sell securities or other property to, a Fund, except that the Fund may in accordance with rules adopted under the
Investment Company Act engage in transactions with accounts that are affiliated with the Fund as a result of common officers, directors, or investment advisers or pursuant to exemptive orders granted to the Funds and/or BlackRock by the Commission.
These transactions would be affected in circumstances in which BlackRock determined that it would be appropriate for the Fund to purchase and another client of BlackRock to sell, or the Fund to sell and another client of BlackRock to purchase, the
same security or instrument on the same day. From time to time, the activities of a Fund may be restricted because of regulatory requirements applicable to BlackRock or its Affiliates and/or BlackRocks internal policies designed to comply
with, limit the applicability of, or otherwise relate to such requirements. A client not advised by BlackRock would not be subject to some of those considerations. There may be periods when BlackRock may not initiate or recommend certain types of
transactions, or may otherwise restrict or limit their advice in certain securities or instruments issued by or related to companies for which an Affiliate is performing investment banking, market making, advisory or other services or has
proprietary positions. For example, when an Affiliate is engaged in an underwriting or other distribution of securities of, or advisory services for, a company, the Funds may be prohibited from or limited in purchasing or selling securities of that
company. In addition, when BlackRock is engaged to provide advisory or risk management services for a company, BlackRock may be prohibited from or limited in purchasing or selling securities of that company on behalf of a Fund, particularly where
such services result in BlackRock obtaining material non-public information about the company. Similar situations could arise if personnel of BlackRock or its Affiliates serve as directors of companies the securities of which the Funds wish to
purchase or sell. However, if permitted by applicable law, and where consistent with BlackRocks policies and procedures (including the necessary implementation of appropriate information barriers), the Funds may purchase securities or
instruments that are issued by such companies, are the subject of an underwriting, distribution, or advisory assignment by an Affiliate or are the subject of an advisory or risk management assignment by BlackRock, or where personnel of BlackRock or
its Affiliates are directors or officers of the issuer.
In
certain circumstances where the Funds invest in securities issued by companies that operate in certain regulated industries, in certain emerging or international markets, or are subject to corporate or regulatory ownership definitions, there may be
limits on the aggregate amount invested by Affiliates (including BlackRock) for their proprietary accounts and for client accounts (including the Funds) that may not be exceeded without the grant of a license or other regulatory or corporate
consent, or, if exceeded, may cause BlackRock, the Funds or other client accounts to suffer disadvantages or business restrictions. As a result, BlackRock on behalf of its clients (including the Funds) may limit purchases, sell existing investments,
or otherwise restrict or limit the exercise of rights (including voting rights) when BlackRock, in its sole discretion, deems it appropriate in light of potential regulatory or other restrictions on ownership or other consequences resulting from
reaching investment thresholds.
In those circumstances where
ownership thresholds or limitations must be observed, BlackRock seeks to allocate limited investment opportunities equitably among clients (including the Funds), taking into consideration benchmark weight and investment strategy. When ownership in
certain securities nears an applicable threshold, BlackRock may limit purchases in such securities to the issuers weighting in the applicable benchmark used by BlackRock to manage the Fund. If client (including Fund) holdings of an issuer
exceed an applicable threshold and BlackRock is unable to obtain relief to enable the continued holding of such investments, it may be necessary to sell down these positions to meet the applicable limitations. In these cases, benchmark overweight
positions will be sold prior to benchmark positions being reduced to meet applicable limitations.
In addition to the foregoing, other ownership thresholds may trigger reporting requirements to governmental and regulatory authorities, and such reports may entail the disclosure of the identity of a
client or BlackRocks intended strategy with respect to such security or asset.
II-67
BlackRock and its Affiliates may maintain securities indices as part of their product offerings. Index based
funds seek to track the performance of securities indices and may use the name of the index in the fund name. Index providers, including BlackRock and its Affiliates may be paid licensing fees for use of their index or index name. BlackRock and its
Affiliates will not be obligated to license their indices to BlackRock, and BlackRock cannot be assured that the terms of any index licensing agreement with BlackRock and its Affiliates will be as favorable as those terms offered to other index
licensees.
BlackRock and its Affiliates may serve as Authorized
Participants in the creation and redemption of exchange traded funds, including funds advised by affiliates of BlackRock. BlackRock and its Affiliates may therefore be deemed to be participants in a distribution of such exchange traded funds, which
could render them statutory underwriters.
The custody
arrangement described in Management and Other Service Arrangements may lead to potential conflicts of interest with BlackRock where BlackRock has agreed to waive fees and/or reimburse ordinary operating expenses in order to cap expenses
of the Funds. This is because the custody arrangements with the Funds custodian may have the effect of reducing custody fees when the Funds leave cash balances uninvested. When a Funds actual operating expense ratio exceeds a stated cap,
a reduction in custody fees reduces the amount of waivers and/or reimbursements BlackRock would be required to make to the Fund. This could be viewed as having the potential to provide BlackRock an incentive to keep high positive cash balances for
Funds with expense caps in order to offset fund custody fees that BlackRock might otherwise reimburse. However, BlackRocks portfolio managers do not intentionally keep uninvested balances high, but rather make investment decisions that they
anticipate will be beneficial to fund performance.
Present and
future activities of BlackRock and its Affiliates, including BlackRock Advisors, LLC, in addition to those described in this section, may give rise to additional conflicts of interest.
P
URCHASE
OF
S
HARES
Most BlackRock-advised open-end funds offer multiple classes of shares under
a plan adopted under Rule 18f-3 under the Investment Company Act. Investor A Shares are sold to investors choosing the initial sales charge alternative and Investor B and Investor C Shares are sold to investors choosing the deferred sales charge
alternative. Effective July 1, 2009, Investor B Shares of each Fund are no longer available for purchase except through exchanges, dividend reinvestments, and for purchase by certain employer-sponsored retirement plans. Shareholders with
investments in Investor B Shares as of July 1, 2009 may continue to hold such shares until they automatically convert to Investor A Shares under the existing conversion schedule. All other features of Investor B Shares, including the Rule 12b-1
distribution and service fees, contingent deferred sales charge schedules and conversion features, remain unchanged and continue in effect. Institutional Shares and Institutional Daily Shares are sold to certain eligible investors without a sales
charge. Certain Funds offer Class R Shares, which are available only to certain employer-sponsored retirement plans and are sold without a sales charge. In addition, certain Funds offer Service Shares, BlackRock Shares and/or Class K Shares that are
available only to certain eligible investors. Please see the appropriate Prospectus for your Fund to determine which classes are offered by your Fund and under what circumstances. Each class has different exchange privileges. See Shareholder
Services Exchange Privilege.
The applicable
offering price for purchase orders is based on the net asset value of a Fund next determined after receipt of the purchase order by a dealer or other financial intermediary (Selling Dealer) that has been authorized by the Distributor by
contract to accept such orders. As to purchase orders received by Selling Dealers prior to the close of business on the New York Stock Exchange (NYSE) (generally, the NYSE closes at 4:00 p.m. Eastern time), on the day the order is
placed, including orders received after the close of business on the previous day, the applicable offering price is based on the net asset value determined as of the close of business on the NYSE on that day. If the purchase orders are not received
by the Selling Dealer before the close of business on the NYSE, such orders are deemed received on the next business day. It is the responsibility of brokers to transmit purchase orders and payment on a timely basis. Generally, if payment is not
received within the period described in the prospectuses, the order will be canceled, notice thereof will be given, and the broker and its customers will be responsible for any loss to the Fund or its shareholders. Orders of less than $500 may be
mailed by a broker to the Transfer Agent.
The minimum investment
for the initial purchase of shares is set forth in the prospectus for each Fund. The minimum initial investment for employees of a Fund, a Funds Manager, Sub-Advisers or BRIL or employees of their affiliates is $100, unless payment is made
through a payroll deduction program in which case the minimum investment is $25.
II-68
Each Fund has lower investment minimums for other categories of shareholders eligible to purchase
Institutional Shares, including selected fee-based programs. Each Fund may permit a lower initial investment for certain investors if their purchase, combined with purchases by other investors received together by the Fund, meets the minimum
investment requirement. Each Fund may reject any purchase order, modify or waive the minimum initial or subsequent investment requirements and suspend and resume the sale of any share class of any Fund at any time.
Under certain circumstances, each Fund may permit certain firms to convert
shares of a Fund from one class of shares to another class of shares of the same Fund. Shareholders should consult with their own tax advisors regarding any tax consequences relating to such conversions.
Each Fund or the Distributor may suspend the continuous offering of the
Funds shares of any class at any time in response to conditions in the securities markets or otherwise and may resume offering the shares from time to time. Any order may be rejected by a Fund or the Distributor. Neither the Distributor, the
securities dealers nor other financial intermediaries are permitted to withhold placing orders to benefit themselves by a price change.
The term purchase, as used in the Prospectus and this Statement of Additional Information, refers to (i) a single purchase by an
individual, (ii) concurrent purchases by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his, her or their own account, and (iii) single purchases by a trustee or other fiduciary
purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary may be involved. The term purchase also includes purchases by any company, as that term is defined in the Investment
Company Act, but does not include purchases by (i) any company that has not been in existence for at least six months, (ii) a company that has no purpose other than the purchase of shares of a Fund or shares of other registered investment
companies at a discount, or (iii) any group of individuals whose sole organizational nexus is that its participants are credit cardholders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser.
In-Kind Purchases
Payment for shares of a Fund may, at the discretion of
BlackRock, be made in the form of securities that are permissible investments for the Fund and that meet the investment objective, policies and limitations of the Fund as described herein. In connection with an in-kind securities payment, the Fund
may require, among other things, that the securities: (i) be valued on the day of purchase in accordance with the pricing methods used by the Fund; (ii) be accompanied by satisfactory assurance that the Fund will have good and marketable
title to such securities; (iii) not be subject to any restrictions upon resale by the Fund; (iv) be in proper form for transfer to the Fund; and (v) be accompanied by adequate information concerning the basis and other tax matters
relating to the securities. All dividends, interest, subscription or other rights pertaining to such securities shall become the property of the Fund engaged in the in-kind purchase transaction and must be delivered to the Fund by the investor upon
receipt from the issuer. Shares purchased in exchange for securities generally cannot be redeemed until the transfer has settled.
Institutional Shares and Institutional Daily Shares
Institutional and Institutional Daily Shares may be purchased at net asset value without a sales charge. Only certain investors are eligible to purchase
Institutional Shares. Investors who are eligible to purchase Institutional Shares should purchase Institutional Shares because they are not subject to any sales charge and have lower ongoing expenses than Investor A, Investor A1, Investor B,
Investor B1, Investor B3, Investor C, Investor C1, Investor C2, Investor C3, Class R or Service Shares. A Fund may in its discretion waive or modify any minimum investment amount, may reject any order for any class of shares and may suspend and
resume the sale of shares of any Fund at any time.
Eligible
Institutional Share Investors.
Institutional Shares of
the Funds may be purchased by customers of broker-dealers and agents that have established a servicing relationship with the Fund on behalf of their customers. These broker-dealers and agents may impose additional or different conditions on the
purchase or redemption of Fund shares by their customers and may charge their customers transaction, account or other fees on the purchase and redemption of Fund shares. Each broker-dealer or agent is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different conditions regarding purchases and redemptions. Shareholders who are customers of such broker-dealers or agents should consult them for information regarding these fees
and conditions.
Payment for Institutional Shares must normally
be made in Federal funds or other funds immediately available by 4 p.m. (Eastern time) on the first business day following receipt of the order. Payment may also, in the discretion of
II-69
the Fund, be made in the form of securities that are permissible investments for the Fund. If payment for a purchase order is not received by the prescribed time, an investor may be liable for
any resulting losses or expenses incurred by the Fund.
Payment
for Institutional Daily Shares must normally by made in Federal funds or other funds immediately available by the close of the Federal funds wire (normally 6:00 p.m. Eastern time) on the same business day as the receipt of the order. Payment may
also, in the discretion of the Fund, be made in the form of securities that are permissible investments for the Fund. If payment for a purchase order is not received by the prescribed time, the order will generally be canceled and the investor may
be liable for any resulting losses or expenses incurred by the Fund.
Investors who currently own Institutional Shares or Institutional Daily Shares in a shareholder account are entitled to purchase additional Institutional Shares or Institutional Daily Shares of a Fund in
that account. In addition, the following investors may purchase Institutional Shares or Institutional Daily Shares: employees, officers and directors/trustees of BlackRock, Inc., BlackRock Funds, Bank of America Corporation (BofA Corp.),
The PNC Financial Services Group Inc., Barclays PLC or their respective affiliates and any trust, pension, profit-sharing or other benefit plan for such persons; institutional and individual retail investors with a minimum investment of $2 million
who purchase through certain broker-dealers or directly from the Fund; certain employer-sponsored retirement plans (which, for this purpose, do not include SEP IRAs, SIMPLE IRAs or SARSEPs); investors in selected fee based programs; clients of
registered investment advisers who have $250,000 invested in the Funds; clients of the trust departments of PNC Bank and Bank of America, N.A. and their affiliates for whom they (i) act in a fiduciary capacity (excluding participant directed
employee benefit plans); (ii) otherwise have investment discretion; or (iii) act as custodian for at least $2 million in assets; unaffiliated banks, thrifts or trust companies that have agreements with the Distributor; certain state
sponsored 529 college savings plans; and holders of certain BofA Corp. sponsored unit investment trusts (UITs) who reinvest dividends received from such UITs in shares of a Fund.
Purchase Privileges of Certain Persons.
Employees, officers,
directors/trustees of BlackRock, Inc., BlackRock Funds, BofA Corp., The PNC Financial Services Group Inc., or their respective affiliates; and any trust, pension, profit-sharing or other benefit plan for such persons may purchase Institutional
Shares at lower investment minimums than stated in each Funds prospectus. In addition, employees, officers, directors/trustees previously associated with PNC Global Investment Servicing (US) Inc. in its capacity as the Funds former
Transfer Agent and/or accounting agent, and who, prior to July 1, 2010, acquired Investor A Shares in a Fund without paying a sales charge based on a waiver for such persons previously in effect, may continue to buy Investor A Shares in such
Fund without paying a sales charge. A Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the Fund. Employees, directors, and board members of other funds wishing to purchase
shares of a Fund must satisfy the Funds suitability standards.
Initial Sales Charge Alternative Investor A Shares
Investors who prefer an initial sales charge alternative may elect to purchase Investor A Shares. Investor A1 Shares generally are not continuously offered but are offered (i) for purchase by certain
employer-sponsored retirement plans and (ii) to certain investors who currently hold Investor A1 Shares for dividend and capital gain reinvestment only. For ease of reference, Investor A and Investor A1 Shares are sometimes referred to herein
as front-end load shares.
Investors qualifying for
significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with
investments in Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares (sometimes referred to herein as CDSC shares). Investors who do not qualify for reduced initial sales charges and who expect
to maintain their investment for an extended period of time also may elect to purchase Investor A Shares, because over time the accumulated ongoing service and distribution fees on CDSC shares may exceed the front-end load shares initial sales
charge and service fee. Although some investors who previously purchased Institutional Shares may no longer be eligible to purchase Institutional Shares of other Funds, those previously purchased Institutional Shares, together with all BlackRock
front-end load and CDSC share holdings, will count toward a right of accumulation that may qualify the investor for a reduced initial sales charge on new initial sales charge purchases. In addition, the ongoing CDSC shares service and distribution
fees will cause CDSC shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing front-end load shares service fees will cause Investor A, Investor A1 and Service
Shares to have a higher expense ratio, pay lower dividends and have a lower total return than Institutional Shares.
II-70
See Information on Sales Charges and Distribution Related Expenses Investor A Sales Charge
Information in Part I of each Funds Statement of Additional Information for information about amounts paid to the Distributor in connection with Investor A and Investor A1 Shares for the periods indicated.
The Distributor may reallow discounts to selected securities dealers and
other financial intermediaries and retain the balance over such discounts. At times a Distributor may reallow the entire sales charge to such dealers. Since securities dealers and other financial intermediaries selling front-end load shares of a
Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Certain investors may be eligible for a reduction in or waiver of a sales load due to the nature of the investors and/or the reduced sales efforts
necessary to obtain their investments.
Reinvested
Dividends.
No sales charges are imposed upon shares issued as a result of the automatic reinvestment of dividends.
Rights of Accumulation.
Investors have a right of accumulation under which the current value of an investors
existing Investor A, Investor A1, Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Institutional Shares in most BlackRock Funds and the investment in the BlackRock College Advantage 529 Program by the
investor or by or on behalf of the investors spouse and minor children may be combined with the amount of the current purchase in determining whether an investor qualifies for a breakpoint and a reduced front-end sales charge. Financial
intermediaries may value current holdings of their customers differently for purposes of determining whether an investor qualifies for a breakpoint and a reduced front-end sales charge, although customers of the same financial intermediary will be
treated similarly. In order to use this right, the investor must alert BlackRock to the existence of any previously purchased shares.
Letter of Intent.
An investor may qualify for a reduced front-end sales charge immediately by signing a Letter of Intent
stating the investors intention to buy a specified amount of Investor A, Investor B, Investor C or Institutional Shares in one or more BlackRock Funds within the next 13 months that would, if bought all at once, qualify the investor for a
reduced sales charge. The initial investment must meet the minimum initial purchase requirement. The 13-month Letter of Intent period commences on the day that the Letter of Intent is received by the Fund, and the investor must tell the Fund that
later purchases are subject to the Letter of Intent. Purchases submitted prior to the date the Letter of Intent is received by the Fund are not counted toward the sales charge reduction. During the term of the Letter of Intent, the Fund will hold
Investor A Shares representing up to 5% of the indicated amount in an escrow account for payment of a higher sales load if the full amount indicated in the Letter of Intent is not purchased. If the full amount indicated is not purchased within the
13-month period, and the investor does not pay the higher sales load within 20 days, the Fund will redeem enough of the Investor A Shares held in escrow to pay the difference.
Purchase Privileges of Certain Persons.
BlackRock may pay placement fees to dealers on purchases of Investor A Shares
of all Funds, which may depend on the policies, procedures and trading platforms of your financial intermediary.
Except as noted below these placement fees may be up to the following amounts:
|
|
|
|
|
$1 million but less than $3 million
|
|
1.00%
|
|
|
$3 million but less than $15 million
|
|
0.50%
|
|
|
$15 million and above
|
|
0.25%
|
With respect to BlackRock Balanced Capital
Fund and BlackRock U.S. Mortgage Portfolio the placement fees may be up to the following amounts:
|
|
|
|
|
$1 million but less than $3 million
|
|
0.75%
|
|
|
$3 million but less than $15 million
|
|
0.50%
|
|
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$15 million and above
|
|
0.25%
|
With respect to Franklin Templeton Total
Return FDP Fund the placement fees may be up to the following amounts:
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|
$1 million but less than $3 million
|
|
0.50%
|
II-71
|
|
|
|
|
$3 million but less than $15 million
|
|
0.25%
|
|
|
$15 million and above
|
|
0.15%
|
For the tables above, the placement fees
indicated will apply up to the indicated breakpoint (so that, for example, a sale of $4 million worth of Franklin Templeton Total Return FDP Fund Investor A Shares will result in a placement fee of up to 0.50% on the first $3 million and 0.25% on
the final $1 million).
Other.
The following persons may
also buy Investor A Shares without paying a sales charge: (a) certain employer-sponsored retirement plans (for purposes of this waiver, employer-sponsored retirement plans do not include SEP IRAs, SIMPLE IRAs or SARSEPs); (b) rollovers of
current investments through certain employer-sponsored retirement plans provided the shares are transferred to the same BlackRock Fund as either a direct rollover, or subsequent to distribution, the rolled-over proceeds are contributed to a
BlackRock IRA through an account directly with the Fund; or purchases by IRA programs that are sponsored by financial intermediary firms provided the financial intermediary firm has entered into a Class A Net Asset Value agreement with respect
to such program with the Distributor; (c) insurance company separate accounts; (d) registered investment advisers, trust companies and bank trust departments exercising discretionary investment authority with respect to amounts to be
invested in a Fund; (e) persons participating in a fee-based program (such as a wrap account) under which they pay advisory fees to a broker-dealer or other financial institution; (f) financial intermediaries who have entered into an
agreement with the Distributor and have been approved by the Distributor to offer Fund shares to self-directed investment brokerage accounts that may or may not charge a transaction fee; (g) state sponsored 529 college savings plans; and
(h) persons involuntarily liquidated from a Fund, who within 60 days of liquidation buy new shares of another BlackRock Fund (but only up to the amount that was liquidated). The following persons associated with the Funds, the Funds
Manager, Sub-Advisers, Transfer Agent, Distributor, fund accounting agents, Barclays PLC and their affiliates may buy Investor A Shares of each of the Funds without paying a sales charge to the extent permitted by these firms including:
(a) officers, directors and partners; (b) employees and retirees; (c) employees of firms who have entered into selling agreements to distribute shares of BlackRock-advised funds; (d) immediate family members of such persons
(immediate family members shall be defined as the investor, the investors spouse or domestic partner, children, parents and siblings); and (e) any trust, pension, profit-sharing or other benefit plan for any of the persons set
forth in (a) through (d). Investors who qualify for any of these exemptions from the sales charge should purchase Investor A Shares. The availability of Investor A Shares sales charge waivers may depend upon the policies, procedures and trading
platforms of your financial intermediary; consult your financial adviser.
If you invest $1,000,000 ($250,000 for BlackRock Short-Term Municipal Fund of BlackRock Municipal Bond Fund, Inc., $500,000 for BlackRock Low Duration Bond Portfolio, BlackRock Floating Rate Income
Portfolio, BlackRock Strategic Income Opportunities and BlackRock Secured Credit Portfolio of BlackRock Funds II) or more in Investor A or Investor A1 Shares, you may not pay an initial sales charge. However, if you redeem your Investor A or
Investor A1 Shares within eighteen months after purchase, you may be charged a deferred sales charge. The deferred sales charge on Investor A Shares is not charged in connection with: (a) redemptions of Investor A Shares purchased through
certain employer-sponsored retirement plans and rollovers of current investments in a Fund through such plans; (b) exchanges described in Exchange Privilege below; (c) redemptions made in connection with minimum required
distributions due to the shareholder reaching age 70
1
/
2
from IRA and 403(b)(7) accounts; (d) certain post-retirement withdrawals from an IRA or other retirement plan if you
are over 59
1
/
2
years old and you purchased your shares prior to October 2, 2006; (e) redemptions made with respect to certain retirement plans sponsored by a Fund, BlackRock or its affiliates;
(f) redemptions (i) within one year of a shareholders death or, if later, the receipt of a certified probate settlement (including in connection with the distribution of account assets to a beneficiary of the decedent) or
(ii) in connection with a shareholders disability (as defined in the Code) subsequent to the purchase of Investor A Shares; (g) involuntary redemptions of Investor A Shares in accounts with low balances; (h) certain redemptions
made pursuant to the Systematic Withdrawal Plan (described below); (i) redemptions related to the payment of BNY Mellon Investment Servicing Trust Company custodial IRA fees; and (j) redemptions when a shareholder can demonstrate hardship,
in the absolute discretion of a Fund.
With respect
to certain employer-sponsored retirement plans, if a dealer waives its right to receive a placement fee, the Fund may, at its own discretion, waive the CDSC (as defined below) related to purchases of $1,000,000 ($250,000 for BlackRock Short-Term
Municipal Fund of BlackRock Municipal Bond Fund, Inc., and $500,000 for BlackRock Low Duration Bond Portfolio, BlackRock Floating Rate Income Portfolio, BlackRock Strategic Income Opportunities and BlackRock Secured Credit Portfolio of BlackRock
Funds II) or more of Investor A Shares. This may depend upon the policies, procedures and trading platforms of your financial intermediary; consult your financial adviser.
II-72
Investor A Shares are also available at net asset value to investors that, for regulatory reasons, are
required to transfer investment positions from a foreign registered investment company advised by BlackRock or its affiliates to a U.S. registered BlackRock-advised fund.
Acquisition of Certain Investment Companies.
Investor A Shares may be
offered at net asset value in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company.
Purchases Through Certain Financial Intermediaries.
Reduced sales charges may be applicable for purchases of Investor A
or Investor A1 Shares of a Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Manager from time to time.
Deferred Sales Charge Alternative Investor B and Investor C Shares
Investor B , Investor B1 and Investor B3 Shares generally are
not continuously offered but are offered by exchange (Investor B Shares only) and also to certain investors who currently hold Investor B, Investor B1 or Investor B3 Shares for dividend and capital gain reinvestment. In addition, certain
employer-sponsored retirement plans that currently hold Investor B, Investor B1 or Investor B3 Shares may purchase additional Investor B, Investor B1 or Investor B3 Shares or effect exchanges between Funds in those classes.
Investors choosing the deferred sales charge alternative should consider
Investor C Shares if they are uncertain as to the length of time they intend to hold their assets in a Fund. If you select Investor C Shares, you do not pay an initial sales charge at the time of purchase. A Fund will not accept a purchase order of
$500,000 or more for Investor C Shares.
If you select Investor
C, Investor C1, Investor C2 or Investor C3 Shares, you do not pay an initial sales charge at the time of purchase. Investor C1, Investor C2 and Investor C3 Shares generally are not continuously offered but are offered (i) for purchase by
certain employer-sponsored retirement plans and (ii) to certain investors who currently hold Investor C1, Investor C2 or Investor C3 Shares for dividend and capital gain reinvestment.
The deferred sales charge alternatives may be particularly appealing to investors who do not qualify for the reduction in
initial sales charges. CDSC shares are subject to ongoing service fees and distribution fees; however, these fees potentially may be offset to the extent any return is realized on the additional funds initially invested in CDSC shares. In addition,
certain Investor B, Investor B1 and Investor B3 Shares will be converted into Investor A or Investor A1 Shares, as set forth in each Funds prospectus, of a Fund after a conversion period of approximately eight years, and, thereafter,
investors will be subject to lower ongoing fees.
BlackRock
compensates financial advisers and other financial intermediaries for selling CDSC shares at the time of purchase from its own funds. Proceeds from the CDSC (as defined below) and the distribution fee are paid to the Distributor and are used by the
Distributor to defray the expenses of securities dealers or other financial intermediaries related to providing distribution-related services to each Fund in connection with the sale of the CDSC shares. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of each Fund to sell the CDSC shares without a sales charge being deducted at the time of purchase. See Distribution Plans below. Imposition of the CDSC and the distribution fee on CDSC shares is
limited by the NASD asset-based sales charge rule. See Limitations on the Payment of Deferred Sales Charges below.
Dealers will generally receive commissions equal to 4.00% of Investor B Shares sold by them plus ongoing fees under the Funds Distribution and
Service Plan. Dealers may not receive a commission in connection with sales of Investor B, Investor B1 or Investor B3 Shares to certain employer-sponsored retirement plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees
under the Distribution and Service Plan. These commissions and payments may be different than the reallowances, placement fees and commissions paid to dealers in connection with sales of Investor A, Investor A1, Investor C, Investor C1, Investor C2
and Investor C3 Shares.
Dealers will generally immediately
receive commissions equal to 1.00% of the Investor C Shares sold by them plus ongoing fees under the Funds Distribution and Service Plan. Dealers may not receive a commission in connection with sales of Investor C, Investor C1,
Investor C2 or Investor C3 Shares to certain employer-sponsored retirement plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees under the Amended and Restated Distribution and Service Plan. These commissions and
payments may be different than the reallowances, placement fees and commissions paid to dealers in connection with sales of Investor A, Investor A1, Investor B, Investor B1 and Investor B3 Shares. These may depend upon the policies, procedures
and trading platforms of your financial intermediary; consult your financial adviser.
II-73
Contingent Deferred Sales Charges
Investor B, Investor B1 and Investor B3 Shares.
If
you redeem Investor B, Investor B1 or Investor B3 Shares within six years of purchase (three years for Investor B1 Shares of BlackRock Total Return Fund of BlackRock Bond Fund, Inc., and Investor B Shares of BlackRock Short Term Municipal Fund and
BlackRock Intermediate Municipal Fund), you may be charged a contingent deferred sales charge (CDSC) at the rates indicated in the Funds Prospectus and below. The CDSC will be calculated in a manner that results in the lowest
applicable rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares acquired through reinvestment of dividends. The order of redemption will be first of shares held for over six years or three years, as applicable, in the case of Investor B
Shares, next of shares acquired pursuant to reinvestment of dividends, and finally of shares in the order of those held longest. The same order of redemption will apply if you transfer shares from your account to another account. If you exchange
your Investor B or Investor B1 Shares for Investor B Shares of another fund, the CDSC schedule that applies to the shares that you originally purchased will continue to apply to the shares you acquire in the exchange.
The following table sets forth the CDSC schedule that applies to the
Investor B Shares for the following Funds: BlackRock Total Return Fund of BlackRock Bond Fund, Inc., BlackRock World Income Fund, Inc., Franklin Templeton FDP Fund of FDP Series, Inc., BlackRock California Municipal Bond Fund of BlackRock California
Municipal Series Trust, BlackRock Municipal Fund and BlackRock National Municipal Bond Fund of BlackRock Municipal Series Fund, Inc., BlackRock New York Municipal Bond Fund of BlackRock Multi-State Municipal Series Trust, and to the Investor B1
Shares for all Funds, as applicable, except for BlackRock Total Return Fund of BlackRock Bond Fund, Inc. and BlackRock National Municipal Fund, and to the Investor B3 Shares for all Funds, as applicable:
|
|
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Years Since Purchase
Payment Made
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|
CDSC as a Percentage
of Dollar Amount
Subject to Charge*
|
|
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0 1
|
|
4.00%
|
|
|
1 2
|
|
4.00%
|
|
|
2 3
|
|
3.00%
|
|
|
3 4
|
|
3.00%
|
|
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4 5
|
|
2.00%
|
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5 6
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|
1.00%
|
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6 and thereafter
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None
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The following table sets forth the CDSC
schedule that applies to the Investor B Shares of BlackRock GNMA Portfolio, BlackRock High Yield Bond Portfolio, BlackRock Inflation Protected Bond Portfolio, BlackRock U.S. Government Bond Portfolio, BlackRock Core Bond Portfolio, BlackRock Low
Duration Bond Portfolio, each of BlackRock Funds II:
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|
|
Years Since Purchase
Payment Made
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|
CDSC as a Percentage
of Dollar Amount
Subject to Charge*
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0 1
|
|
4.50%
|
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1 2
|
|
4.00%
|
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|
2 3
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|
3.50%
|
|
|
3 4
|
|
3.00%
|
|
|
4 5
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|
2.00%
|
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|
5 6
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|
1.00%
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6 and thereafter
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None
|
*
|
|
The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through
reinvestment of dividends are not subject to a deferred sales charge. Not all BlackRock funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the original charge will apply.
|
To provide an example, assume an investor
purchased 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time
the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to a CDSC because they were issued through dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to
the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 3.00% (the applicable rate in the third year after purchase).
II-74
The following table sets forth the CDSC schedule that applies to the Investor B Shares for BlackRock
Short-Term Municipal Fund of BlackRock Municipal Bond Fund and BlackRock Intermediate Municipal Fund and to the Investor B1 Shares for Total Return Fund of BlackRock Bond Fund, Inc.:
|
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Years Since Purchase
Payment Made
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CDSC as a Percentage
of Dollar Amount
Subject to Charge*
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0 1
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|
1.00%
|
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1 2
|
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0.50%
|
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|
2 3
|
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0.25%
|
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3 and thereafter
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None
|
*
|
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The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through
reinvestment of dividends are not subject to a deferred sales charge. Not all BlackRock funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the original charge will apply.
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Conversion of Investor B Shares, Investor B1
and Investor B3 Shares to Investor A Shares or A1 Shares.
Approximately eight years after purchase (the Conversion Period), Investor B, Investor B1 and Investor B3 Shares of each Fund will convert automatically into Investor A or
Investor A1 Shares, as set forth each Funds prospectus, of that Fund (the Conversion). The Conversion will occur at least once each month (on the Conversion Date) on the basis of the relative net asset value of the
shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. The Conversion will not be deemed a purchase or sale of the shares for Federal income tax purposes.
Shares acquired through reinvestment of dividends on Investor B, Investor
B1 or Investor B3 Shares will also convert automatically to Investor A or Investor A1 Shares, as set forth in each Funds prospectus. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time
the shares underlying the dividend reinvestment shares were outstanding.
In general, Investor B Shares of equity funds will convert approximately eight years after initial purchase and Investor B, Investor B1 or Investor B3 Shares of taxable and tax-exempt fixed income
Funds will convert approximately ten years after initial purchase. A seven year Conversion Period will apply to certain shares of certain Funds issued in connection with the acquisition of another fund. If you exchange Investor B, Investor B1 or
Investor B3 Shares with an eight-year Conversion Period for Investor B Shares with a ten-year Conversion Period, or vice versa, the Conversion Period that applies to the shares you acquire in the exchange will apply and the holding period for the
shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period also may be modified for investors that participate in certain fee-based programs. See Shareholder Services Fee-Based
Programs.
If you own shares of a Fund that, in the
past, issued stock certificates and you continue to hold such stock certificates, you must deliver any certificates for Investor B Shares of the Fund to be converted to the Transfer Agent at least one week prior to the Conversion Date applicable to
those shares. If the Transfer Agent does not receive the certificates at least one week prior to the Conversion Date, your Investor B, Investor B1 or Investor B3 Shares will convert to Investor A or Investor A1 Shares, as set forth in each
Funds prospectus, on the next scheduled Conversion Date after the certificates are delivered.
Contingent Deferred Sales Charge Investor C Shares
Investor C, Investor C1, Investor C2 and Investor C3 Shares that are redeemed within one year of purchase may be subject to a 1.00% CDSC charged as a percentage of the dollar amount subject thereto. In
determining whether an Investor C, Investor C1, Investor C2 or Investor C3 Shares CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price of Investor C, Investor C1,
Investor C2 and Investor C3 Shares. In addition, no CDSC will be assessed on Investor C, Investor C1, Investor C2 and Investor C3 Shares acquired through reinvestment of dividends. It will be assumed that the redemption is first of shares held for
over one year or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A transfer of shares from a shareholders account to another account will be assumed to be made in the same order
as a redemption.
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See Information on Sales Charges and Distribution Related Expenses Investor B and Investor C
Sales Charge Information in Part I of each Funds Statement of Additional Information for information about amounts paid to the Distributor in connection with CDSC shares for the periods indicated.
Investor B and Investor C Shares Contingent Deferred Sales Charge
Waivers and Reductions
The CDSC on
Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares is not charged in connection with: (1) redemptions of Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3
Shares purchased through certain employer-sponsored retirement plans and rollovers of current investments in the Fund through such plans; (2) exchanges described in Exchange Privilege below; (3) redemptions made in connection
with minimum required distributions due to the shareholder reaching age 70
1
/
2
from IRA and 403(b)(7) accounts; (4) certain post-retirement withdrawals from an IRA or other retirement plan if you
are over 59
1
/
2
years old and you purchased your shares prior to October 2, 2006; (5) redemptions made with respect to certain retirement plans sponsored by the Fund, BlackRock or its affiliates;
(6) redemptions in connection with a shareholders death as long as the waiver request is made within one year of death or, if later, reasonably promptly following completion of probate (including in connection with the distribution of
account assets to a beneficiary of the decedent) or disability (as defined in the Code) subsequent to the purchase of Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares; (7) withdrawals resulting
from shareholder disability (as defined in the Code) as long as the disability arose subsequent to the purchase of the shares; (8) involuntary redemptions of Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares in accounts with low balances as described in Redemption of Shares below; (9) redemptions made pursuant to a systematic withdrawal plan, subject to the limitations set forth under Systematic Withdrawal Plan
below; (10) redemptions related to the payment of BNY Mellon Investment Servicing Trust Company custodial IRA fees; and (11) redemptions when a shareholder can demonstrate hardship, in the absolute discretion of the Fund. In addition, no
CDSC is charged on Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares acquired through the reinvestment of dividends or distributions.
Class R Shares
Certain of the Funds offer Class R Shares as described in each such
Funds Prospectus. Class R Shares are available only to certain employer-sponsored retirement plans. Class R Shares are not subject to an initial sales charge or a CDSC but are subject to an ongoing distribution fee of 0.25% per year and
an ongoing service fee of 0.25% per year. Distribution fees are used to support the Funds marketing and distribution efforts, such as compensating financial advisers and other financial intermediaries, advertising and promotion. Service
fees are used to compensate securities dealers and other financial intermediaries for service activities.
If Class R Shares are held over time, these fees may exceed the maximum sales charge that an investor would have paid as a shareholder of one of the other share classes.
Class K Shares
Certain of the Funds offer Class K Shares as described in each such
Funds Prospectus. Class K Shares are available only to (i) qualified recordkeepers with a distribution and/or fund servicing agreement (establishing an omnibus trading relationship) maintained with the Funds distributor, or
(ii) defined benefit plans, defined contribution plans, endowments and foundations with greater than $10 million in a qualified tax-exempt plan, or (iii) employers with greater than $10 million in the aggregate between qualified and
non-qualified plans that they sponsor.
Service Shares
Certain Funds offer Service Shares,
which are available only to certain investors, including: (i) certain financial institutions, such as banks and brokerage firms, acting on behalf of their customers; (ii) certain persons who were shareholders of the Compass Capital Group
of Funds at the time of its combination with The PNC
®
Fund in 1996; and (iii) participants in the Capital
DirectionsSM asset allocation program. Service Shares are not subject to an initial sales charge or a CDSC but are subject to an ongoing service fee of 0.25% per year.
BlackRock Shares
Certain Funds offer BlackRock Shares, which are available only to certain
investors. BlackRock Shares are offered without a sales charge to institutional investors, registered investment advisers and certain fee-based programs.
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Distribution Plans
Each Fund has entered into a distribution agreement with BRIL under which
BRIL, as agent, offers shares of each Fund on a continuous basis. BRIL has agreed to use appropriate efforts to effect sales of the shares, but it is not obligated to sell any particular amount of shares. BRILs principal business address is 40
East 52nd Street, New York, NY 10022. BRIL is an affiliate of BlackRock.
Pursuant to the distribution plans of the Investor A, Investor A1, Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class R Shares (each, a
Plan), the Fund may pay BRIL and/or BlackRock or any other affiliate or significant shareholder of BlackRock fees for distribution and sales support services. Currently, as described further below, only Investor B, Investor B1,
Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class R Shares bear the expense of distribution fees under a Plan. In addition, the Fund may pay to brokers, dealers, financial institutions and industry professionals (including
BlackRock, BRIL, PNC, Barclays and their affiliates) (collectively, Service Organizations) fees for the provision of personal services to shareholders. In the past, BlackRock or BRIL has retained a portion of the shareholder servicing
fees paid by the Fund.
Each Funds Plans are subject to the
provisions of Rule 12b-1 under the Investment Company Act. In their consideration of a Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of the Plan to the Fund and the related class of
shareholders. In approving a Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is reasonable likelihood that the Plan will benefit the Fund and its related class of shareholders.
The Plan provides, among other things, that: (i) the Board of Directors
shall receive quarterly reports regarding the amounts expended under the Plan and the purposes for which such expenditures were made; (ii) the Plan will continue in effect for so long as its continuance is approved at least annually by the
Board of Directors in accordance with Rule 12b-1 under the Investment Company Act; (iii) any material amendment thereto must be approved by the Board of Directors, including the directors who are not interested persons of the Fund
(as defined in the Investment Company Act) and who have no direct or indirect financial interest in the operation of the Plan or any agreement entered into in connection with the Plan (the 12b-1 Directors), acting in person at a meeting
called for said purpose; (iv) any amendment to increase materially the costs which any class of shares may bear for distribution services pursuant to the Plan shall be effective only upon approval by a vote of a majority of the outstanding
shares of such class and by a majority of the 12b-1 Directors; and (v) while the Plan remains in effect, the selection and nomination of the Funds Directors who are not interested persons of the Fund shall be committed to the
discretion of the Funds non-interested Directors. Rule 12b-1 further requires that each Fund preserve copies of each Plan and any report made pursuant to such plan for a period of not less than six years from the date of the Plan or such
report, the first two years in an easily accessible place.
Payments under the Plans are based on a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred.
As a result, distribution-related revenues from the Plans may be more or less than distribution-related expenses of the related class. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their
consideration quarterly. Distribution-related revenues consist of the service fees, the distribution fees and the CDSCs. Distribution-related expenses consist of financial adviser compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing expenses and interest expense. Distribution-related revenues paid with respect to one class will not be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of shares.
The Plan is terminable as to any class of shares without penalty at any time by a vote of a majority of the 12b-1 Directors, or by vote of the holders of a majority of the shares of such class.
See Distribution Related Expenses in Part I of each
Funds Statement of Additional Information for information relating to the fees paid by your Fund to the Distributor under each Plan during the Funds most recent fiscal year.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD imposes a limitation on certain asset-based sales charges such
as the distribution fee borne by Class R Shares, and the distribution fee and the CDSC borne by the CDSC shares. This limitation does not apply to the service fee. The maximum sales charge rule is applied separately to each class and limits the
aggregate of distribution fee payments and CDSCs payable by a Fund to (1) 6.25% of eligible gross sales of CDSC shares and Class R Shares, computed separately (excluding shares issued pursuant to dividend reinvestments and exchanges), plus
(2) interest on the unpaid balance for the respective class,
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computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC).
See Part I, Section V Information on Sales Charges and Distribution
Related Expenses of each Funds Statement of Additional Information for comparative information as of your Funds most recent fiscal year end with respect to the CDSC shares and, if applicable, Class R Shares of your Fund.
Other Compensation to Selling Dealers
Pursuant to each Funds Distribution Agreements and Distribution and
Service Plans (the Plans), each Fund may pay BRIL and/or BlackRock or any other affiliate of BlackRock fees for distribution and sales support services. In addition, each Fund may pay to brokers, dealers, financial institutions and
industry professionals (including BlackRock, Merrill Lynch, Hilliard Lyons and their affiliates) (collectively, Service Organizations) fees for the provision of personal services to shareholders. In the past, BlackRock has retained a
portion of the shareholder servicing fees paid by a Fund.
With
respect to Class R Shares, the front-end sales charge and the applicable distribution fee payable under the Plan are used to pay commissions and other fees payable to Service Organizations and other broker/dealers who sell Class R Shares.
With respect to Investor B, Investor B1 and Investor B3 Shares,
Service Organizations and other broker/dealers receive commissions from BRIL for selling Investor B, Investor B1 and Investor B3 Shares, which are paid at the time of the sale. The applicable distribution fees payable under the Plans are intended to
cover the expense to BRIL of paying such up-front commissions, as well as to cover ongoing commission payments to broker-dealers or other Service Organizations. The contingent deferred sales charge is calculated to charge the investor with any
shortfall that would occur if Investor B, Investor B1 or Investor B3 Shares are redeemed prior to the expiration of the conversion period, after which Investor B, Investor B1 and Investor B3 Shares automatically convert to Investor A Shares or
Investor A1 Shares, as applicable.
With respect to Investor C,
Investor C1, Investor C2 and Investor C3 Shares, Service Organizations and other broker-dealers receive commissions from BRIL for selling Investor C, Investor C1, Investor C2 and Investor C3 Shares, which are paid at the time of the sale. The
applicable distribution fees payable under the Plans are intended to cover the expense to BRIL of paying such up-front commissions, as well as to cover ongoing commission payments to the broker-dealers or other Service Organizations. The contingent
deferred sales charge is calculated to charge the investor with any shortfall that would occur if Investor C, Investor C1, Investor C2 or Investor C3 Shares are redeemed within 12 months of purchase.
From time to time BRIL and/or BlackRock and their affiliates may voluntarily
waive receipt of distribution fees under each Plan, which waivers may be terminated at any time. Payments are made by the Fund pursuant to each Plan regardless of expenses incurred by BRIL or BlackRock.
The Funds currently do not make distribution payments with respect to
Investor A, Investor A1, Service, Institutional or BlackRock Shares under the Plans. However, the Plans permit BRIL, BlackRock and certain of their affiliates to make payments relating to distribution and sales support activities out of their past
profits or other sources available to them (and not as an additional charge to the Fund). From time to time, BRIL, BlackRock or their affiliates may compensate affiliated and unaffiliated Service Organizations for the sale and distribution of shares
of a Fund or for services to a Fund and its shareholders. These non-Plan payments would be in addition to a Funds payments described in this Statement of Additional Information for distribution and shareholder servicing. These non-Plan
payments may take the form of, among other things, due diligence payments for a dealers examination of the Funds and payments for providing extra employee training and information relating to Funds; listing fees for the
placement of the Funds on a dealers list of mutual funds available for purchase by its customers; finders fees for directing investors to the Fund; distribution and marketing support fees or revenue sharing
for providing assistance in promoting the sale of the Funds shares; payments for the sale of shares and/or the maintenance of share balances; CUSIP fees; maintenance fees; and set-up fees regarding the establishment of new accounts. The
payments made by BRIL, BlackRock and their affiliates may be a fixed dollar amount or may be based on a percentage of the value of shares sold to, or held by, customers of the Service Organization involved, and may be different for different Service
Organizations. The payments described above are made from BRILs, BlackRocks or their affiliates own assets pursuant to agreements with Service Organizations and do not change the price paid by investors for the purchase of the
Funds shares or the amount the Fund will receive as proceeds from such sales.
As of the date of this Statement of Additional Information, as amended or supplemented from time to time, the following Service Organizations are receiving such payments: Ameriprise Financial Services,
AXA Advisors, Cetera
II-78
Advisor Networks LLC, Cetera Advisors LLC, Cetera Financial Specialists LLC, Cetera Investment Services LLC, Chase Investment Services Corp, CCO Investment Services, Commonwealth Equity Services
(Commonwealth Financial Network), Donegal Securities, FSC Securities Corporation, ING Financial Partners, Investacorp, Inc., LPL Financial Corporation, Merrill Lynch, MetLife Securities, Morgan Stanley Smith Barney, New England Securities
Corporation, Oppenheimer & Co., PFS Investments, Raymond James, RBC Capital Markets, Robert W. Baird & Co., Royal Alliance Associates, SagePoint Financial, Securities America, State Farm VP Management Corp., Tower Square
Securities, Triad Advisors, Inc., UBS Financial Services, U.S. Bancorp Investments, Walnut Street Securities, Wells Fargo, Woodbury Financial Services, Inc. and/or broker dealers and other financial services firms under common control with the above
organizations (or their successors or assignees). The level of payments made to these Service Organizations in any year will vary, may be limited to specific Funds or share classes, and normally will not exceed the sum of (a) 0.25% of such
years Fund sales by that Service Organization, and (b) 0.21% of the assets attributable to that Service Organization invested in a Fund. In certain cases, the payments described in the preceding sentence are subject to certain minimum
payment levels. In addition, from time to time BRIL, BlackRock or certain of their affiliates may make fixed dollar amount payments to certain Service Organizations listed above that are not based on the value of the shares sold to, or held by, the
Service Organizations customers and may be different for different Service Organizations.
Other Distribution Arrangements
Certain Funds and BlackRock have entered into a distribution agreement with UBS AG whereby UBS AG may, in certain circumstances, sell certain shares of the Funds in certain jurisdictions. The level of
payments made to UBS AG in any year for the sale and distribution of a Funds shares will vary and normally will not exceed the sum of the service fee payable on the assets attributable to UBS AG plus an additional fee equal to a percentage of
such assets which shall range up to 0.25%.
In lieu of payments
pursuant to the foregoing, BRIL, BlackRock, PNC or their affiliates may make payments to the above named Service Organizations of an agreed-upon amount which, subject to certain agreed-upon minimums, will generally not exceed the amount that would
have been payable pursuant to the formula, and may also make similar payments to other Service Organizations.
If investment advisers, distributors or affiliates of mutual funds pay bonuses and incentives in differing amounts, financial firms and their financial consultants may have financial incentives for
recommending a particular mutual fund over other mutual funds. In addition, depending on the arrangements in place at any particular time, a financial firm and its financial consultants may also have a financial incentive for recommending a
particular share class over other share classes.
You should consult your financial adviser and review carefully any disclosure by the financial firm as to compensation received by your financial adviser for more information about the payments
described above.
Furthermore, BRIL, BlackRock and their
affiliates may contribute to various non-cash and cash incentive arrangements to promote the sale of shares, and may sponsor various contests and promotions subject to applicable FINRA regulations in which participants may receive prizes such as
travel awards, merchandise and cash. Subject to applicable FINRA regulations, BRIL, BlackRock and their affiliates may also: (i) pay for the travel expenses, meals, lodging and entertainment of broker/dealers, financial institutions and their
salespersons in connection with educational and sales promotional programs, (ii) sponsor speakers, educational seminars and charitable events and (iii) provide other sales and marketing conferences and other resources to broker-dealers,
financial institutions and their salespersons.
BlackRock, Inc.,
the parent company of BlackRock, has agreed to pay PNC Bank, National Association and certain of its affiliates fees for administration and servicing with respect to assets of the Fund attributable to shares held by customers of such entities. These
assets are predominantly in the Institutional Share class of a Fund, with respect to which the Fund does not pay shareholder servicing fees under a Plan. The fees are paid according to the following schedule: certain money market funds 0.15%
of net assets; certain fixed income funds 0.20% of net assets; and certain equity funds 0.25% of net assets (except that with respect to the Index Equity Fund, the fee is 0.04% of net assets).
Service Organizations may charge their clients additional fees for
account-related services. Service Organizations may charge their customers a service fee in connection with the purchase or redemption of Fund shares. The amount and applicability of such a fee is determined and disclosed to its customers by each
individual Service Organization. Service fees typically are fixed, nominal dollar amounts and are in addition to the sales and other charges described in the Prospectuses and this Statement of Additional Information. Your Service Organization will
provide you with specific information about any service fees you will be charged.
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Pursuant to the Plans, each Fund enters into service arrangements with Service Organizations pursuant to
which Service Organizations will render certain support services to their customers (Customers) who are the beneficial owners of Service, Investor A, Investor A1, Investor B, Investor B1, Investor C, Investor C1, Investor C2 and Class R
Shares of all Funds. Such services will be provided to Customers who are the beneficial owners of shares of such classes and are intended to supplement the services provided by the Funds Administrators and Transfer Agent to the Funds
shareholders of record. In consideration for payment of the applicable service fee Service Organizations may provide general shareholder liaison services, including, but not limited to: (i) answering customer inquiries regarding account status
and history, the manner in which purchases, exchanges and redemptions of shares may be effected and certain other matters pertaining to the Customers investments; and (ii) assisting Customers in designating and changing dividend options,
account designations and addresses.
To the extent a shareholder
is not associated with a Service Organization, the shareholder servicing fees will be paid to BlackRock, and BlackRock will provide services. In addition to, rather than in lieu of, distribution and shareholder servicing fees that a Fund may pay to
a Service Organization pursuant to the Plan and fees the Fund pays to its transfer agent, the Fund may enter into non-Plan agreements with Service Organizations pursuant to which the Fund will pay a Service Organization for administrative,
networking, recordkeeping, sub-transfer agency and shareholder services. These non-Plan payments are generally based on either: (1) a percentage of the average daily net assets of Fund shareholders serviced by a Service Organization or
(2) a fixed dollar amount for each account serviced by a Service Organization. The aggregate amount of these payments may be substantial. From time to time, BlackRock, BRIL or their affiliates also may pay a portion of the fees for
administrative, networking, omnibus, operational and recordkeeping, sub-transfer agency and shareholder services described above at its or their own expense and out of its or their legitimate profits.
For information regarding the purchase of shares of the BlackRock Basic
Value V.I. Fund, BlackRock Capital Appreciation V.I. Fund, BlackRock Equity Dividend V.I. Fund, BlackRock Global Allocation V.I. Fund, BlackRock Global Opportunities V.I. Fund, BlackRock High Yield V.I. Fund, BlackRock International V.I. Fund,
BlackRock Large Cap Core V.I. Fund, BlackRock Large Cap Growth V.I. Fund, BlackRock Large Cap Value V.I. Fund, BlackRock Managed Volatility V.I. Fund, BlackRock Money Market V.I. Fund, BlackRock S&P 500 Index V.I. Fund, BlackRock Total Return
V.I. Fund, BlackRock U.S. Government Bond V.I. Fund and BlackRock Value Opportunities V.I. Fund, each a series of BlackRock Variable Series Funds, Inc., and the BlackRock Balanced Capital Portfolio, BlackRock Capital Appreciation Portfolio,
BlackRock Global Allocation Portfolio, BlackRock High Yield Portfolio, BlackRock U.S. Government Bond Portfolio, BlackRock Large Cap Core Portfolio, BlackRock Money Market Portfolio and BlackRock Total Return Portfolio, each a series of BlackRock
Series Fund, Inc., please see the Purchase of Shares section of Part I of this SAI.
R
EDEMPTION
OF
S
HARES
Shares normally will be redeemed for cash upon receipt of a request in proper form, although each Fund retains the right to redeem some or all of its
shares in-kind under unusual circumstances (valued in the same way as they would be valued for purposes of computing a Funds NAV), in order to protect the interests of remaining shareholders, or to accommodate a request by a particular
shareholder that does not adversely affect the interest of the remaining shareholders, by delivery of securities selected from the Funds assets at its discretion. In-kind payment means payment will be made in portfolio securities rather than
cash. If this occurs, the redeeming shareholder might incur brokerage or other transaction costs to convert the securities to cash. Each Fund has elected, however, to be governed by Rule 18f-1 under the Investment Company Act so that the Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day period for any shareholder of the Fund. The redemption price is the net asset value per share next determined after the initial
receipt of proper notice of redemption. The value of shares of each Fund at the time of redemption may be more or less than your cost at the time of purchase, depending in part on the market value of the securities held by the Fund at such time.
Except for any CDSC or redemption fee that may be applicable, there will be no redemption charge if your redemption request is sent directly to the Transfer Agent. If you are liquidating your holdings you will receive all dividends reinvested
through the date of redemption.
The right to redeem shares may
be suspended or payment upon redemption may be delayed for more than seven days only (i) for any period during which trading on the NYSE is restricted as determined by the Commission or during which the NYSE is closed (other than customary
weekend and holiday closings), (ii) for any period during which an emergency exists, as defined by the Commission, as a result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably
practicable, or (iii) for such other periods as the Commission may by order permit for the protection of shareholders of the Fund. (A Fund may also suspend or postpone the recordation of the transfer of its shares upon the occurrence of any of
the foregoing conditions.)
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Each Fund, with other investment companies advised by the Manager, has entered into a joint committed line
of credit with a syndicate of banks that is intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from shareholders in extraordinary or emergency circumstances.
The Fund may redeem shares involuntarily to reimburse a Fund for any loss
sustained by reason of the failure of a shareholder to make full-payment for shares purchased by the shareholder or to collect any charge relating to a transaction effected for the benefit of a shareholder. The Fund reserves the express right to
redeem shares of each Fund involuntarily at any time if the Funds Board determines, in its sole discretion, that failure to do so may have adverse consequences to the holders of shares in the Fund. Upon such redemption the holders of shares so
redeemed shall have no further right with respect thereto other than to receive payment of the redemption price.
Redemption
Investor, Institutional, Institutional Daily and Class R Shares
Redeem by Telephone:
You may sell Investor Shares held at BlackRock
by telephone request if certain conditions are met and if the amount being sold is less than (i) $100,000 for payments by check or (ii) $250,000 for payments through the Automated Clearing House Network (ACH) or wire transfer.
Certain redemption requests, such as those in excess of these amounts, and those where (i) the Fund does not have verified banking information on file; or (ii) the proceeds are not paid to the record owner at the record address, must be in
writing with a medallion signature guarantee provided by any eligible guarantor institution as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the Exchange Act), whose existence and validity may be verified
by the Transfer Agent through the use of industry publications. For Institutional Shares, certain redemption requests may require written instructions with a medallion signature guarantee. Call (800) 441-7762 for details. You can obtain a
medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and loan association, national securities exchange or registered securities association. The three recognized medallion programs are
Securities Transfer Agent Medallion Program, Stock Exchanges Medallion Program and New York Stock Exchange, Inc. Medallion Signature Program. Signature guarantees which are not a part of these programs will not be accepted. A notary public seal
will not be acceptable. Generally, a properly signed written request with any required signature guarantee is all that is required for a redemption. In some cases, however, other documents may be necessary. Additional documentary evidence of
authority is required by BNY Mellon in the event redemption is requested by a corporation, partnership, trust, fiduciary, executor or administrator.
If you make a redemption request before a Fund has collected payment for the purchase of shares, the Fund may delay mailing your proceeds. This delay will
usually not exceed ten days. A Fund, its Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Telephone redemption requests will not be honored if: (i) the
accountholder is deceased, (ii) the proceeds are to be sent to someone other than the shareholder of record, (iii) a Fund does not have verified information on file, (iv) the request is by an individual other than the accountholder of
record, (v) the account is held by joint tenants who are divorced, (vi) the address on the account has changed within the last 30 days or share certificates have been issued on the account, or (vii) to protect against fraud, if the
caller is unable to provide the account number, the name and address registered on the account and the social security number registered on the account. The Fund and its service providers will not be liable for any loss, liability, cost or expense
for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures. Before telephone requests will be honored, signature approval from all shareholders of record on the account must be obtained. The
Fund may refuse a telephone redemption request if it believes it is advisable to do so. During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Please find below alternative redemption methods.
Redemption orders for Institutional Shares placed prior to 4:00
p.m. (Eastern time) on a business day will be priced at the NAV determined that day. If redemption orders are received by 4:00 p.m. (Eastern time) on a business day, payment for redeemed Institutional Shares will normally be wired in Federal Funds
on the next business day. If the Federal Reserve Bank of Philadelphia is not open on the business day following receipt of the redemption order, the redemption order will be accepted and processed the next succeeding business day when the Federal
Reserve Bank of Philadelphia is open, provided that the Funds custodian is also open for business.
Redemption orders for Institutional Daily Shares placed prior to 12:00 p.m. (Eastern time) on a business day will be priced at the NAV determined that day. If redemption orders are received by 12:00 p.m.
(Eastern time) on a business day, payment for redeemed Institutional Daily Shares will normally be wired in Federal Funds on that same day, provided that the Funds custodian is also open for business. If the Federal Reserve Bank of
Philadelphia is not
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open on that business day, the redemption order will be accepted and processed the next succeeding business day when the Federal Reserve Bank of Philadelphia is open, provided that the
Funds custodian is also open for business.
Redeem by
VRU:
Investor Shares may also be redeemed by use of a Funds automated voice response unit service (VRU). Payment for Investor Shares redeemed by VRU may be made for non-retirement accounts in amounts up to $25,000, either
through check, ACH or wire.
Redeem by Internet:
You may
redeem in your account, by logging onto the BlackRock website at www.blackrock.com/funds. Proceeds from Internet redemptions may be sent via check, ACH or wire to the bank account of record. Payment for Investor Shares redeemed by Internet may be
made for non-retirement accounts in amounts up to $25,000, either through check, ACH or wire. Different maximums may apply to investors in Institutional Shares.
Redeem in Writing:
If you hold shares with the Transfer Agent you may
redeem such shares without charge by writing to BlackRock, P.O. Box 9819, Providence, Rhode Island 02940-8019. Redemption requests delivered other than by mail should be sent to BlackRock, 4400 Computer Drive, Westborough, Massachusetts 01588. If
you hold share certificates issued by your Fund, the letter must be accompanied by certificates for the shares. All shareholders on the account must sign the letter. A medallion signature guarantee will generally be required but may be waived in
certain limited circumstances. You can obtain a medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and loan association, national securities exchange or registered securities association. A
notary public seal will not be acceptable. If you hold stock certificates, return the certificates with the letter. Proceeds from redemptions may be sent via check, ACH or wire to the bank account of record.
The Funds or the Transfer Agent may temporarily suspend telephone
transactions at any time.
If you redeem shares directly with the
Transfer Agent, payments will generally be mailed within seven days of receipt of the proper notice of redemption. A Fund may delay the mailing of a redemption check until good payment (that is, cash, Federal funds or certified check drawn on a U.S.
bank) has been collected for the purchase of Fund shares, which delay will usually not exceed 10 days. If your account is held directly with the Transfer Agent and contains a fractional share balance following a redemption, the fractional share
balance will be automatically redeemed by the Fund.
Note on
Low Balance Accounts.
Because of the high cost of maintaining smaller shareholder accounts, BlackRock has set a minimum balance of $500 in each Fund position you hold within your account (Fund Minimum), and may take one of two
actions if the balance in your Fund falls below the Fund Minimum.
First, the Fund may redeem the shares in your account (without charging any deferred sales charge) if the net asset value of your account falls below $250
for any reason, including market fluctuation. You will be notified that the value of your account is less than $250 before the Fund makes an involuntary redemption. The notification will provide you with a 90 calendar day period to make an
additional investment in order to bring the value of your account to at least $250 before the Fund makes an involuntary redemption or to the Fund Minimum in order not to be assessed an annual low balance fee of $20, as set forth below. This
involuntary redemption may not apply to accounts of certain employer-sponsored retirement plans, selected fee-based programs, accounts established under the Uniform Gifts or Transfers to Minors Acts, and certain intermediary accounts.
Second, the Fund charges an annual $20 low balance fee on all Fund accounts
that have a balance below the Fund Minimum for any reason, including market fluctuation. The fee will be deducted from the Fund account only once per calendar year. You will be notified that the value of your account is less than the Fund Minimum
before the fee is imposed. You will then have a 90 calendar day period to make an additional investment to bring the value of your account to the Fund Minimum before the Fund imposes the low balance fee. This low balance fee does not apply to
accounts of certain employer-sponsored retirement plans, selected fee-based programs, or accounts established under the Uniform Gifts or Transfers to Minors Acts.
Repurchase
A Fund normally will accept orders to repurchase shares from Selling Dealers for their customers. Shares will be priced at the
net asset value of the Fund next determined after receipt of the repurchase order by a Selling Dealer that has been authorized by the Distributor by contract to accept such orders. As to repurchase orders received by Selling Dealers prior to the
close of business on the NYSE (generally, the NYSE closes at 4:00 p.m. Eastern time), on the day the order is placed, which includes orders received after the close of business on the previous day, the
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repurchase price is the net asset value determined as of the close of business on the NYSE on that day. If the orders for repurchase are not received by the Selling Dealer before the close of
business on the NYSE, such orders are deemed received on the next business day.
These repurchase arrangements are for your convenience and do not involve a charge by the Fund (other than any applicable CDSC). However, Selling Dealers may charge a processing fee in connection with
such transactions. In addition, securities firms that do not have selected dealer agreements with the Distributor may impose a transaction charge for transmitting the notice of repurchase to the Fund. Each Fund reserves the right to reject any order
for repurchase. A shareholder whose order for repurchase is rejected by a Fund, however, may redeem shares as set out above.
Reinstatement Privilege Investor A Shares
Upon redemption of Investor A, Investor A1 or Institutional Shares, as applicable, shareholders may reinvest all or a portion of their redemption proceeds
(after paying any applicable CDSC) in Investor A Shares of the same or another BlackRock fund without paying a front-end sales charge. This right may be exercised once a year and within 60 days of the redemption, provided that the Investor A Shares
of that fund is currently open to new investors or the shareholder has a current account in that closed fund. Shares will be purchased at the NAV calculated at the close of trading on the day the request is received in good order. To exercise this
privilege, the Transfer Agent must receive written notification from the shareholder of record or the registered representative of record, at the time of purchase. Investors should consult a tax adviser concerning the tax consequences of exercising
this reinstatement privilege.
S
HAREHOLDER
S
ERVICES
Each Fund offers one or more of the shareholder services described below that
are designed to facilitate investment in its shares. You can obtain more information about these services from each Fund by calling the telephone number on the cover page, or from the Distributor, your financial adviser, your selected securities
dealer or other financial intermediary. Certain of these services are available only to U.S. investors.
Investment Account
If your account is maintained at the Transfer Agent (an Investment Account) you will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as
confirmations for automatic investment purchases and the reinvestment of dividends. The statements also will show any other activity in your Investment Account since the last statement. You also will receive separate confirmations for each purchase
or sale transaction other than automatic investment purchases and the reinvestment of dividends. If your Investment Account is held at the Transfer Agent you may make additions to it at any time by mailing a check directly to the Transfer Agent. You
may also maintain an account through a selected securities dealer or other financial intermediary. If you transfer shares out of an account maintained with a selected securities dealer or other financial intermediary, an Investment Account in your
name may be opened automatically at the Transfer Agent.
You may
transfer Fund shares from a selected securities dealer or other financial intermediary to another securities dealer or other financial intermediary that has entered into an agreement with the Distributor. Certain shareholder services may not be
available for the transferred shares. All future trading of these assets must be coordinated by the new firm. If you wish to transfer your shares to a securities dealer or other financial intermediary that has not entered into an agreement with the
Distributor, you must either (i) redeem your shares, paying any applicable CDSC or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. You also may request that the new securities dealer or other
financial intermediary maintain the shares in an account at the Transfer Agent registered in the name of the securities dealer or other financial intermediary for your benefit whether the securities dealer or other financial intermediary has entered
into a selected dealer agreement or not. In the interest of economy and convenience and because of the operating procedures of each Fund, share certificates will not be issued physically. Shares are maintained by each Fund on its register maintained
by the Transfer Agent and the holders thereof will have the same rights and ownership with respect to such shares as if certificates had been issued.
If you are considering transferring a tax-deferred retirement account, such as an individual retirement account, from one selected securities dealer to
another securities dealer or other financial intermediary, you should be aware that if the new firm will not take delivery of shares of the Fund, you must either redeem the shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm, or you must continue to maintain a retirement account at the original selected securities dealer for those shares.
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Exchange Privilege
U.S. shareholders of Investor A, Investor A1, Investor B, Investor B1,
Investor B3, Investor C, Investor C1, Investor C2, Investor C3, Institutional and Institutional Daily Shares of each Fund have an exchange privilege with certain other Funds. The minimum amount for exchanges of Investor class shares is $1,000,
although you may exchange less than $1,000 if you already have an account in the Fund into which you are exchanging. You may only exchange into a share class and a Fund that are open to new investors or in which you have a current account if the
class or fund is closed to new investors. If you held the shares used in the exchange for 30 days or less, you may be charged a redemption fee at the time of the exchange. Before effecting an exchange, you should obtain a currently effective
prospectus of the fund into which you wish to make the exchange. Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes.
Exchanges of Investor A, Investor A1, Institutional and Institutional
Daily Shares
. Institutional and Institutional Daily Shares are exchangeable with Institutional or Institutional Daily Shares of other Funds. Investor A and Investor A1 Shares are exchangeable for Investor A Shares of other Funds.
Exchanges of Institutional or Institutional Daily Shares outstanding for
Institutional or Institutional Daily Shares of a second fund or for shares of a money market fund are effected on the basis of relative net asset value per Institutional or Institutional Daily Share, as applicable. Exchanges of Investor A or
Investor A1 Shares outstanding (outstanding Investor A Shares) for Investor A Shares of a second fund, or for shares of a money market fund (new Investor A Shares) are effected on the basis of relative net asset value per
share.
Exchanges of Investor B, Investor B1, Investor B3,
Investor C, Investor C1, Investor C2 and Investor C3 Shares.
Shareholders of certain Funds with Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares outstanding (outstanding Investor B or
Investor C Shares) may exchange their shares for Investor B or Investor C Shares, respectively, of a second fund or for shares of a money market fund (new Investor B or Investor C Shares) on the basis of relative net asset value
per Investor B or Investor C share, without the payment of any CDSC. Certain funds impose different CDSC schedules. If you exchange your Investor B Shares for shares of a fund with a different CDSC schedule, the CDSC schedule that applies to the
shares exchanged will continue to apply. For purposes of computing the CDSC upon redemption of new Investor B or Investor C Shares, the time you held both the exchanged Investor B or Investor C Shares and the new Investor B Shares or Investor C
Shares will count towards the holding period of the new Investor B or Investor C Shares. For example, if you exchange Investor B Shares of a Fund for those of a second Fund after having held the first Funds Investor B Shares for two-and-a-half
years, the 3.00% CDSC that generally would apply to a redemption would not apply to the exchange. Four years later if you decide to redeem the Investor B Shares of the second Fund and receive cash, there will be no CDSC due on this redemption since
by adding the two-and-a-half year holding period of the first Funds Investor B Shares to the four year holding period for the second Funds Investor B Shares, you will be deemed to have held the second Funds Investor B Shares for
more than six years.
Exchanges for Shares of a Money Market
Fund.
You may exchange any class of Investor shares for shares of an affiliated money market fund. If you exchange into BlackRock Summit Cash Reserves Fund (Summit), a series of BlackRock Financial Institutions Series Trust, you will
receive one of two classes of shares: exchanges of Investor A, Investor A1 and Institutional Shares of a Fund will receive Investor A Shares of Summit and exchanges of Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and
Investor C3 Shares of a Fund will receive Investor B Shares of Summit. You may exchange Investor A Shares of Summit back into Investor A or Institutional Shares of a Fund. You may exchange Investor B Shares of Summit back into Investor B or Investor
C Shares of a Fund and, in the event of such an exchange, the period of time that you held Investor B Shares of Summit will count toward satisfaction of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any
Conversion Period with respect to Investor B Shares. Investor B Shares of Summit are subject to a distribution fee at an annual rate of 0.75% of average daily net assets of such Investor B Shares. Exchanges of Investor B or Investor C Shares of a
money market fund other than Summit for Investor B or Investor C Shares of a Fund will be exercised at net asset value. However, a CDSC may be charged in connection with any subsequent redemption of the Investor B or Investor C Shares of the Fund
received in the exchange. In determining the holding period for calculating the CDSC payable on redemption of Investor B and Investor C Shares of the Fund received in the exchange, the holding period of the money market fund Investor B or Investor C
Shares originally held will be added to the holding period of the Investor B or Investor C Shares acquired through exchange.
Exchanges by Participants in Certain Programs.
The exchange privilege may be modified with respect to certain participants in mutual fund advisory
programs and other fee-based programs sponsored by the Manager, an affiliate of the Manager, or selected securities dealers or other financial intermediaries that have an agreement with a Distributor. See Fee-Based Programs below.
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Exercise of the Exchange Privilege
. To exercise the exchange privilege, you should contact your
financial adviser or the Transfer Agent, who will advise each Fund of the exchange. If you do not hold share certificates, you may exercise the exchange privilege by wire through your securities dealer or other financial intermediary. Each Fund
reserves the right to require a properly completed exchange application.
A shareholder who wishes to make an exchange may do so by sending a written request to the Fund c/o the Transfer Agent at the following address: P.O. Box 9819, Providence, RI 02940-8019. Shareholders are
automatically provided with telephone exchange privileges when opening an account, unless they indicate on the Application that they do not wish to use this privilege. To add this feature to an existing account that previously did not provide this
option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may simply contact the Fund by telephone at (800) 441-7762
to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own shares of the
investment portfolio whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and broker of record as the account from which shares are exchanged, unless otherwise specified in
writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as defined below. In order to participate in the Automatic Investment Program or establish a Systematic Withdrawal Plan for the new account, however, an
exchanging shareholder must file a specific written request.
Any
share exchange must satisfy the requirements relating to the minimum initial investment requirement, and must be legally available for sale in the state of the investors residence. For Federal income tax purposes, a share exchange is a taxable
event and, accordingly, a capital gain or loss may be realized. Before making an exchange request, shareholders should consult a tax or other financial adviser and should consider the investment objective, policies and restrictions of the investment
portfolio into which the shareholder is making an exchange. Brokers may charge a fee for handling exchanges.
The Funds reserve the right to suspend, modify or terminate the exchange privilege at any time. Notice will be given to shareholders of any material modification or termination except where notice is not
required. The Funds reserve the right to reject any telephone exchange request. Telephone exchanges may be subject to limitations as to amount or frequency, and to other restrictions that may be established from time to time to ensure that exchanges
do not operate to the disadvantage of any portfolio or its shareholders.
The Funds, the Administrators and BRIL will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Funds, the Administrators and BRIL will not be liable for
any loss, liability, cost or expense for acting upon telephone instructions reasonably believed to be genuine in accordance with such procedures. By use of the exchange privilege, the investor authorizes the Funds transfer agent to act on
telephonic or written exchange instructions from any person representing himself to be the investor and believed by the Funds transfer agent to be genuine. The records of the Funds transfer agent pertaining to such instructions are
binding. The exchange privilege may be modified or terminated at any time upon 60 days notice to affected shareholders. The exchange privilege is only available in states where the exchange may legally be made.
Each Fund reserves the right to limit the number of times an investor may
exercise the exchange privilege. Certain Funds may suspend the continuous offering of their shares to the general public at any time and may resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in
states where the exchange legally may be made. The exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor.
Fee-Based Programs
If you participate in certain fee-based programs offered by BlackRock or an
affiliate of BlackRock, or selected securities dealers or other financial intermediaries that have agreements with the Distributor or in certain fee-based programs in which BlackRock participates, you may be able to buy Institutional Shares,
including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances. You generally cannot transfer shares held through a fee-based program into another account. Instead,
you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to distribution and service fees. This may be a taxable event and you will pay any applicable sales charges or redemption fee.
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Shareholders that participate in a fee-based program generally have two options at termination. The program
can be terminated and the shares liquidated or the program can be terminated and the shares held in an account. In general, when a shareholder chooses to continue to hold the shares, whatever share class was held in the program can be held after
termination. Shares that have been held for less than specified periods within the program may be subject to a fee upon redemption. Shareholders that held Investor A or Institutional Shares in the program are eligible to purchase additional shares
of the respective share class of a Fund, but may be subject to upfront sales charges with respect to Investor A Shares. Additional purchases of Institutional Shares are available only if you have an existing position at the time of purchase or are
otherwise eligible to purchase Institutional Shares.
Details
about these features and the relevant charges are included in the client agreement for each fee-based program and are available from your financial professional, selected securities dealer or other financial intermediary.
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings
plans are available from your financial intermediary. Under these plans, investments may be made in a Fund (other than a Municipal Fund) and certain of the other mutual funds sponsored by the Manager or its affiliates as well as in other securities.
There may be fees associated with investing through these plans. Information with respect to these plans is available on request from your financial intermediary.
Dividends received in each of the plans referred to above are exempt from
Federal taxation until distributed from the plans and, in the case of Roth IRAs and education savings plans, may be exempt from taxation when distributed as well. Investors considering participation in any retirement or education savings plan should
review specific tax laws relating to the plan and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan.
Automatic Investment Plans
Investor Share shareholders and certain Service Share
shareholders who were shareholders of the Compass Capital Group of Funds at the time of its combination with The
PNC
®
Fund in 1996 may arrange for periodic investments in that Fund through automatic deductions from a checking
or savings account. The minimum pre-authorized investment amount is $50. If you buy shares of a Fund through certain accounts, no minimum charge to your bank account is required. Contact your financial adviser or other financial intermediary for
more information.
Automatic Dividend Reinvestment Plan
Each Fund will distribute substantially all of its net
investment income and net realized capital gains, if any, to shareholders. All distributions are reinvested at net asset value in the form of additional full and fractional shares of the same class of shares of the relevant Fund unless a shareholder
elects otherwise. Such election, or any revocation thereof, must be made in writing to the Transfer Agent, and will become effective with respect to dividends paid after its receipt by the Transfer Agent.
Systematic Withdrawal Plans
Shareholders may receive regular distributions from their accounts via a
Systematic Withdrawal Plan (SWP). Upon commencement of the SWP, the account must have a current value of $10,000 or more in a Fund. Shareholders may elect to receive automatic cash payments of $50 or more at any interval. You may choose
any day for the withdrawal. If no day is specified, the withdrawals will be processed on the 25th day of the month or, if such day is not a business day, on the prior business day and are paid promptly thereafter. An investor may utilize the SWP by
completing the Systematic Withdrawal Plan Application Form which may be obtained by visiting our website at www.blackrock.com/funds.
Shareholders should realize that if withdrawals exceed income dividends their invested principal in the account will be depleted. To participate in the
SWP, shareholders must have their dividends automatically reinvested. Shareholders may change or cancel the SWP at any time, upon written notice to the Fund, or by calling the Fund at (800) 441-7762. Purchases of additional Investor A Shares of
the Fund concurrently with withdrawals may be disadvantageous to investors because of the sales charges involved and, therefore, are discouraged. No CDSC will be assessed on redemptions of Investor B, Investor B1, Investor B3, Investor C, Investor
C1, Investor C2 or Investor C3 Shares made through the SWP that do not exceed 12% of the original investment on an annualized basis. For example, monthly, quarterly and semi-annual SWP redemptions of Investor B, Investor B1, Investor B3, Investor C,
Investor C1, Investor C2 or Investor C3 Shares will not be subject to the CDSC if they do not exceed 1%
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(monthly), 3% (quarterly) and 6% (semi-annually), respectively, of an accounts net asset value on the redemption date. SWP redemptions of Investor B, Investor B1, Investor B3, Investor C,
Investor C1, Investor C2 or Investor C3 Shares in excess of this limit are still subject to the applicable CDSC.
For this reason, a shareholder may not participate in the Automatic Investment Plan described above (see How to Buy, Sell, Transfer and Exchange Shares in the Funds Prospectus) and the
SWP at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from any Eligible Fund (which means funds so designated by the Distributor from time to time) automatically invested at net asset value in one other such Eligible Fund designated by the shareholder, provided the
account into which the dividends and distributions are directed is initially funded with the requisite minimum amount.
P
RICING
OF
S
HARES
Determination of Net Asset Value
Valuation of Shares.
The net asset value for each class of
shares of each Fund is generally calculated as of the close of regular trading hours on the NYSE (currently 4:00 p.m. Eastern Time) on each business day the NYSE is open.
Valuation of securities held by each Fund is as follows:
Equity Investments.
Equity securities traded on a recognized
securities exchange (
e.g.
, NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an Exchange) are valued via independent pricing services
generally at the Exchange closing price or if an Exchange closing price is not available, the last traded price on that Exchange prior to the time as of which the assets or liabilities are valued, however, under certain circumstances other means of
determining current market value may be used. If an equity security is traded on more than one Exchange, the current market value of the security where it is primarily traded generally will be used. In the event that there are no sales involving an
equity security held by a Fund on a day on which the Fund values such security, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such security. If a Fund holds both long and short positions in
the same security, the last bid price will be applied to securities held long and the last ask price will be applied to securities sold short. If no bid or ask price is available on a day on which a Fund values such security, the prior days
price will be used, unless BlackRock determines that such prior days price no longer reflects the fair value of the security, in which case such asset would be treated as a fair value asset.
Fixed Income Investments.
Fixed income securities for which
market quotations are readily available are generally valued using such securities most recent bid prices provided directly from one or more broker-dealers, market makers, or independent third-party pricing services which may use matrix
pricing and valuation models to derive values, each in accordance with valuation procedures approved by the Funds Board. The amortized cost method of valuation may be used with respect to debt obligations with sixty days or less remaining to
maturity unless the Manager and/or Sub-Adviser determine such method does not represent fair value. Loan participation notes are generally valued at the mean of the last available bid prices from one or more brokers or dealers as obtained from
independent third-party pricing services. Certain fixed income investments including asset-backed and mortgage-related securities may be valued based on valuation models that consider the estimated cash flows of each tranche of the entity, establish
a benchmark yield and develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche. Fixed income securities for which market quotations are not readily available may be valued by third-party
pricing services that make a valuation determination by securing transaction data (
e.g.
, recent representative bids), credit quality information, perceived market movements, news, and other relevant information and by other methods, which may
include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions.
Options, Futures, Swaps and Other Derivatives.
Exchange-traded
equity options for which market quotations are readily available are valued at the mean of the last bid and ask prices as quoted on the Exchange or the board of trade on which such options are traded. In the event that there is no mean price
available for an exchange traded equity option held by a Fund on a day on which the Fund values such option, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such option. If no bid or ask price
is available on a day on which a Fund values such option, the prior days price will be used, unless BlackRock determines that such prior days price no longer reflects the fair value of the option in which case such option will be treated
as a fair value
II-87
asset. OTC derivatives may be valued using a mathematical model which may incorporate a number of market data factors. Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their last sale price or settle price as of the close of such exchanges. Swap agreements and other derivatives are generally valued daily based upon quotations from market makers or by a pricing service in accordance with
the valuation procedures approved by the Board.
Underlying
Funds.
Shares of underlying open-end funds are valued at net asset value. Shares of underlying exchange-traded closed-end funds or other exchange-traded funds will be valued at their most recent closing price.
General Valuation Information
In determining the market value of portfolio investments, the Fund may employ
independent third party pricing services, which may use, without limitation, a matrix or formula method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the securities being
valued at a price different from the price that would have been determined had the matrix or formula method not been used. All cash, receivables and current payables are carried on each Funds books at their face value.
Prices obtained from independent third party pricing services,
broker-dealers or market makers to value each Funds securities and other assets and liabilities are based on information available at the time the Fund values its assets and liabilities. In the event that a pricing service quotation is revised
or updated subsequent to the day on which the Fund valued such security, the revised pricing service quotation generally will be applied prospectively. Such determination shall be made considering pertinent facts and circumstances surrounding such
revision.
In the event that application of the methods of
valuation discussed above result in a price for a security which is deemed not to be representative of the fair market value of such security, the security will be valued by, under the direction of or in accordance with a method specified by the
Funds Board as reflecting fair value. All other assets and liabilities (including securities for which market quotations are not readily available) held by a Fund (including restricted securities) are valued at fair value as determined in good
faith by the Funds Board or by BlackRock (its delegate). Any assets and liabilities which are denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange.
Certain of the securities acquired by the Funds may be traded on foreign
exchanges or over-the-counter markets on days on which a Funds net asset value is not calculated. In such cases, the net asset value of a Funds shares may be significantly affected on days when investors can neither purchase nor redeem
shares of the Fund.
Fair Value.
When market
quotations are not readily available or are believed by BlackRock to be unreliable, a Funds investments are valued at fair value (Fair Value Assets). Fair Value Assets are valued by BlackRock in accordance with procedures approved
by the Funds Board. BlackRock may conclude that a market quotation is not readily available or is unreliable if a security or other asset or liability does not have a price source due to its complete lack of trading, if BlackRock believes a
market quotation from a broker-dealer or other source is unreliable (
e.g.
, where it varies significantly from a recent trade, or no longer reflects the fair value of the security or other asset or liability subsequent to the most recent
market quotation), where the security or other asset or liability is only thinly traded or due to the occurrence of a significant event subsequent to the most recent market quotation. For this purpose, a significant event is deemed to
occur if BlackRock determines, in its business judgment prior to or at the time of pricing a Funds assets or liabilities, that it is likely that the event will cause a material change to the last exchange closing price or closing market price
of one or more assets or liabilities held by the Fund. On any date the NYSE is open and the primary exchange on which a foreign asset or liability is traded is closed, such asset or liability will be valued using the prior days price, provided
that BlackRock is not aware of any significant event or other information that would cause such price to no longer reflect the fair value of the asset or liability, in which case such asset or liability would be treated as a Fair Value Asset. For
certain foreign securities, a third-party vendor supplies evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair value pricing
methodology is designed to correlate the prices of foreign securities following the close of the local markets to the price that might have prevailed as of a Funds pricing time.
BlackRock, with input from the BlackRock Portfolio Management Group, will submit its recommendations regarding the valuation
and/or valuation methodologies for Fair Value Assets to BlackRocks Valuation Committee. The Valuation Committee may accept, modify or reject any recommendations. In addition, the Funds accounting agent periodically endeavors to confirm
the prices it receives from all third party pricing services, index providers and broker-dealers, and, with the assistance of BlackRock, to regularly evaluate the values assigned to the securities and
II-88
other assets and liabilities held by the Funds. The pricing of all Fair Value Assets is subsequently reported to and ratified by the Board or a Committee thereof.
When determining the price for a Fair Value Asset, the BlackRock Valuation
Committee (or the Pricing Group) shall seek to determine the price that a Fund might reasonably expect to receive from the current sale of that asset or liability in an arms-length transaction. The price generally may not be determined based
on what a Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset or liability to maturity. Fair value determinations shall be based upon all available factors that the Valuation Committee
(or Pricing Group) deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using proprietary or third party valuation models.
Fair value represents a good faith approximation of the value of an asset or liability. The fair value of one or more assets or
liabilities may not, in retrospect, be the price at which those assets or liabilities could have been sold during the period in which the particular fair values were used in determining a Funds net asset value. As a result, a Funds sale
or redemption of its shares at net asset value, at a time when a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.
Each Funds annual audited financial statements, which are prepared in
accordance with accounting principles generally accepted in the United States of America (US GAAP), follow the requirements for valuation set forth in Financial Accounting Standards Board Accounting Standards Codification Topic 820,
Fair Value Measurements and Disclosures (ASC 820), which defines and establishes a framework for measuring fair value under US GAAP and expands financial statement disclosure requirements relating to fair value
measurements.
Generally, ASC 820 and other accounting rules
applicable to mutual funds and various assets in which they invest are evolving. Such changes may adversely affect a Fund. For example, the evolution of rules governing the determination of the fair market value of assets or liabilities to the
extent such rules become more stringent would tend to increase the cost and/or reduce the availability of third-party determinations of fair market value. This may in turn increase the costs associated with selling assets or affect their liquidity
due to the Funds inability to obtain a third-party determination of fair market value.
P
ORTFOLIO
T
RANSACTIONS
AND
B
ROKERAGE
Transactions in Portfolio Securities
Subject to policies established by the Board of Directors, BlackRock is
primarily responsible for the execution of a Funds portfolio transactions and the allocation of brokerage. BlackRock does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the Fund,
taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firms risk and skill in positioning blocks of
securities. While BlackRock generally seeks reasonable trade execution costs, a Fund does not necessarily pay the lowest spread or commission available, and payment of the lowest commission or spread is not necessarily consistent with obtaining the
best price and execution in particular transactions. Subject to applicable legal requirements, BlackRock may select a broker based partly upon brokerage or research services provided to BlackRock and its clients, including a Fund. In return for such
services, BlackRock may cause a Fund to pay a higher commission than other brokers would charge if BlackRock determines in good faith that the commission is reasonable in relation to the services provided.
In the case of Feeder Funds, because each Feeder Fund generally invests
exclusively in beneficial interests of a Master Portfolio, it is expected that all transactions in portfolio securities will be entered into by the Master Portfolio.
In selecting brokers or dealers to execute portfolio transactions, the
Manager and sub-advisers seek to obtain the best price and most favorable execution for a Fund, taking into account a variety of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in
which it is purchased or sold; (ii) the desired timing of the transaction; (iii) BlackRocks knowledge of the expected commission rates and spreads currently available; (iv) the activity existing and expected in the market for
the particular security or instrument, including any anticipated execution difficulties; (v) the full range of brokerage services provided; (vi) the brokers or dealers capital (vii) the quality of research and research
services provided; (viii) the reasonableness of the commission, dealer spread or its equivalent for the specific transaction; and (ix) BlackRocks knowledge of any actual or apparent operational problems of a broker or dealer.
Section 28(e) of the Exchange Act (Section
28(e)) permits an investment adviser, under certain circumstances, to cause an account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the
same transaction in recognition of the value of
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brokerage and research services provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services
include: (1) furnishing advice as to the value of securities, including pricing and appraisal advice, credit analysis, risk measurement analysis, performance and other analysis, as well as the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of
accounts; and (3) effecting securities transactions and performing functions incidental to securities transactions (such as clearance, settlement, and custody). BlackRock believes that access to independent investment research is beneficial to
its investment decision-making processes and, therefore, to the Funds.
BlackRock may participate in client commission arrangements under which BlackRock may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions
or commission credits to another firm that provides research to BlackRock. BlackRock believes that research services obtained through soft dollar or commission sharing arrangements enhance its investment decision-making capabilities, thereby
increasing the prospects for higher investment returns. BlackRock will engage only in soft dollar or commission sharing transactions that comply with the requirements of Section 28(e). BlackRock regularly evaluates the soft dollar products and
services utilized, as well as the overall soft dollar and commission sharing arrangements to ensure that trades are executed by firms that are regarded as best able to execute trades for client accounts, while at the same time providing access to
the research and other services BlackRock views as impactful to its trading results.
BlackRock may utilize soft dollars and related services, including research (whether prepared by the broker-dealer or prepared by a third-party and provided to BlackRock by the broker-dealer) and
execution or brokerage services within applicable rules and BlackRocks policies to the extent that such permitted services do not compromise BlackRocks ability to seek to obtain best execution. In this regard, the portfolio management
investment and/or trading teams may consider a variety of factors, including the degree to which the broker-dealer: (a) provides access to company management; (b) provides access to their analysts; (c) provides meaningful/insightful
research notes on companies or other potential investments; (d) facilitates calls on which meaningful or insightful ideas about companies or potential investments are discussed; (e) facilitates conferences at which meaningful or insightful
ideas about companies or potential investments are discussed; or (f) provides research tools such as market data, financial analysis, and other third party related research and brokerage tools that aid in the investment process.
Research-oriented services for which BlackRock might pay with Fund
commissions may be in written form or through direct contact with individuals and may include information as to particular companies or industries and securities or groups of securities, as well as market, economic, or institutional advice and
statistical information, political developments and technical market information that assists in the valuation of investments. Except as noted immediately below, research services furnished by brokers may be used in servicing some or all client
accounts and not all services may be used in connection with the Fund or account that paid commissions to the broker providing such services. In some cases, research information received from brokers by mutual fund management personnel, or personnel
principally responsible for BlackRocks individually managed portfolios, is not necessarily shared by and between such personnel. Any investment advisory or other fees paid by a Fund to BlackRock are not reduced as a result of BlackRocks
receipt of research services. In some cases, BlackRock may receive a service from a broker that has both a research and a non-research use. When this occurs BlackRock makes a good faith allocation, under all the
circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while BlackRock will use its own funds to pay for the percentage of
the service that is used for non-research purposes. In making this good faith allocation, BlackRock faces a potential conflict of interest, but BlackRock believes that its allocation procedures are reasonably designed to ensure that it appropriately
allocates the anticipated use of such services to their research and non-research uses.
Payments of commissions to brokers who are affiliated persons of the Fund, or the Master Portfolio with respect to the Feeder Fund (or affiliated persons of such persons), will be made in accordance with
Rule 17e-1 under the Investment Company Act. Subject to policies established by the Board of Directors of the Master Portfolio, BlackRock is primarily responsible for the execution of the Master Portfolios portfolio transactions and the
allocation of brokerage.
From time to time, a Fund may purchase
new issues of securities in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition to selling securities, provide BlackRock with research services. FINRA has adopted rules expressly
permitting these types of arrangements under certain
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circumstances. Generally, the broker will provide research credits in these situations at a rate that is higher than that available for typical secondary market transactions. These
arrangements may not fall within the safe harbor of Section 28(e).
BlackRock does not consider sales of shares of the mutual funds it advises as a factor in the selection of brokers or dealers to execute portfolio transactions for a Fund; however, whether or not a
particular broker or dealer sells shares of the mutual funds advised by BlackRock neither qualifies nor disqualifies such broker or dealer to execute transactions for those mutual funds.
Each Fund anticipates that its brokerage transactions involving foreign securities generally will be conducted primarily on the
principal stock exchanges of the applicable country. Foreign equity securities may be held by a Fund in the form of depositary receipts, or other securities convertible into foreign equity securities. Depositary receipts may be listed on stock
exchanges, or traded in over-the-counter markets in the United States or Europe, as the case may be. American Depositary Receipts, like other securities traded in the United States, will be subject to negotiated commission rates. Because the shares
of each Fund are redeemable on a daily basis in U.S. dollars, each Fund intends to manage its portfolio so as to give reasonable assurance that it will be able to obtain U.S. dollars to the extent necessary to meet anticipated redemptions. Under
present conditions, it is not believed that these considerations will have a significant effect on a Funds portfolio strategies.
See Portfolio Transactions and Brokerage in the Statement of Additional Information for information about the brokerage commissions paid by
your Fund, including commissions paid to affiliates, if any, for the periods indicated.
Each Fund may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in the particular securities, except in those circumstances in which
better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with a Fund and persons who are affiliated with such affiliated persons are prohibited from dealing with the Fund as principal in the purchase
and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since transactions in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Funds
will not deal with affiliated persons, including PNC and its affiliates, in connection with such transactions. However, an affiliated person of a Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. In addition, a Fund may not purchase
securities during the existence of any underwriting syndicate for such securities of which PNC is a member or in a private placement in which PNC serves as placement agent except pursuant to procedures approved by the Board of Directors that either
comply with rules adopted by the Commission or with interpretations of the Commission staff.
Over-the-counter issues, including most fixed income securities such as corporate debt and U.S. Government securities, are normally traded on a net basis without a stated commission, through
dealers acting for their own account and not as brokers. The Funds will primarily engage in transactions with these dealers or deal directly with the issuer unless a better price or execution could be obtained by using a broker. Prices paid to a
dealer with respect to both foreign and domestic securities will generally include a spread, which is the difference between the prices at which the dealer is willing to purchase and sell the specific security at the time, and includes
the dealers normal profit.
Purchases of money market
instruments by a Fund are made from dealers, underwriters and issuers. The Funds do not currently expect to incur any brokerage commission expense on such transactions because money market instruments are generally traded on a net basis
with dealers acting as principal for their own accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer. Each Money Market Fund intends to purchase only securities with remaining maturities of
13 months or less as determined in accordance with the rules of the Commission. As a result, the portfolio turnover rates of a Money Market Fund will be relatively high. However, because brokerage commissions will not normally be paid with respect
to investments made by a Money Market Fund, the turnover rates should not adversely affect the Funds net asset values or net income.
Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriters
concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Manager or sub-advisers may seek to obtain an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from a Fund prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if it believes that a Funds anticipated need for liquidity makes such
action desirable. Any such repurchase prior to maturity reduces the
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possibility that a Fund would incur a capital loss in liquidating commercial paper, especially if interest rates have risen since acquisition of such commercial paper.
Investment decisions for each Fund and for other investment accounts managed
by the Manager or sub-advisers are made independently of each other in light of differing conditions. BlackRock allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in making such
allocations. These factors include: (i) investment objectives or strategies for particular accounts, including sector, industry, country or region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or
investment concentration parameters for an account, (iv) supply or demand for a security at a given price level, (v) size of available investment, (vi) cash availability and liquidity requirements for accounts, (vii) regulatory
restrictions, (viii) minimum investment size of an account, (ix) relative size of account, and (x) such other factors as may be approved by BlackRocks general counsel. Moreover, investments may not be allocated to one client
account over another based on any of the following considerations: (i) to favor one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce greater performance
compensation to BlackRock, (iii) to develop or enhance a relationship with a client or prospective client, (iv) to compensate a client for past services or benefits rendered to BlackRock or to induce future services or benefits to be
rendered to BlackRock, or (v) to manage or equalize investment performance among different client accounts.
Equity securities will generally be allocated among client accounts within the same investment mandate on a pro rata basis. This pro-rata allocation may result in a Fund receiving less of a particular
security than if pro-ration had not occurred. All allocations of equity securities will be subject, where relevant, to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be over-subscribed and subsequently trade at a premium in the secondary market. When
BlackRock is given an opportunity to invest in such an initial offering or new or hot issue, the supply of securities available for client accounts is often less than the amount of securities the accounts would otherwise
take. In order to allocate these investments fairly and equitably among client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate to BlackRocks trading desk their level of interest in
a particular offering with respect to eligible clients accounts for which that team is responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular client accounts that are managed by portfolio teams
who have indicated interest in the offering based on market capitalization of the issuer of the security and the investment mandate of the client account and in the case of international equity securities, the country where the offering is taking
place and the investment mandate of the client account. Generally, shares received during the initial public offering will be allocated among participating client accounts within each investment mandate on a pro rata basis. In situations where
supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate such investment opportunities among one or more accounts so long as the rotation system provides for fair access for all
client accounts over time. Other allocation methodologies that are considered by BlackRock to be fair and equitable to clients may be used as well.
Because different accounts may have differing investment objectives and policies, BlackRock may buy and sell the same securities at the same time for
different clients based on the particular investment objective, guidelines and strategies of those accounts. For example, BlackRock may decide that it may be entirely appropriate for a growth fund to sell a security at the same time a value fund is
buying that security. To the extent that transactions on behalf of more than one client of BlackRock or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be
an adverse effect on price. For example, sales of a security by BlackRock on behalf of one or more of its clients may decrease the market price of such security, adversely impacting other BlackRock clients that still hold the security. If purchases
or sales of securities arise for consideration at or about the same time that would involve a Fund or other clients or funds for which BlackRock or an affiliate act as investment manager, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain instances, BlackRock may find it efficient for purposes of seeking to obtain best execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory
accounts. In general, all contemporaneous trades for client accounts under management by the same portfolio manager or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client with an
opportunity to achieve a more favorable execution at a potentially lower execution cost. The costs associated with a bunched order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio
manager or management team is filled at several different prices through multiple trades, all accounts participating in the order will receive the average price except in the case of certain international markets where average pricing is not
permitted. While in some cases this practice could have a detrimental effect upon the price or
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value of the security as far as a Fund is concerned, in other cases it could be beneficial to the Fund. Transactions effected by BlackRock on behalf of more than one of its clients during the
same period may increase the demand for securities being purchased or the supply of securities being sold, causing an adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able
to provide the best execution of the order. Orders for purchase or sale of securities will be placed within a reasonable amount of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
A Fund will not purchase securities during the existence of any underwriting
or selling group relating to such securities of which BlackRock, PNC, BRIL or any affiliated person (as defined in the Investment Company Act) thereof is a member except pursuant to procedures adopted by the Board of Directors in accordance with
Rule 10f-3 under the Investment Company Act. In no instance will portfolio securities be purchased from or sold to BlackRock, PNC, BRIL or any affiliated person of the foregoing entities except as permitted by Commission exemptive order or by
applicable law.
Portfolio Turnover
While a Fund generally does not expect to engage in trading for short term
gains, it will effect portfolio transactions without regard to any holding period if, in Fund managements judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry
or in general market, economic or financial conditions. The portfolio turnover rate is calculated by dividing the lesser of a Funds annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. government
securities and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax
consequences, such as increased capital gain dividends and/or ordinary income dividends, and in correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by a Fund.
D
IVIDENDS
AND
T
AXES
Dividends
Each Fund intends to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid as set forth in each Funds prospectus. Each Fund will also distribute all net realized capital gains, if any, as set forth in such Funds prospectus. From time
to time, a Fund may declare a special distribution at or about the end of the calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year. If in any
fiscal year, a Fund has net income from certain foreign currency transactions, such income will be distributed at least annually.
For information concerning the manner in which dividends may be reinvested automatically in shares of each Fund, see Shareholder Services
Automatic Dividend Reinvestment Plan. Shareholders may also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders, as discussed below, whether they are reinvested in shares of the Fund or received in
cash. The per share dividends on front-end load shares, CDSC shares and Service Shares will be lower than the per share dividends on Institutional Shares as a result of the service, distribution and higher transfer agency fees applicable to CDSC
shares, the service fees applicable to front-end load shares and Service Shares, and the service and distribution fees applicable to Class R Shares. Similarly, the per share dividends on CDSC shares and Class R Shares will be lower than the per
share dividends on front-end load shares and Service Shares as a result of the distribution fees and higher transfer agency fees applicable to CDSC shares and the distribution fees applicable to Class R Shares, and the per share dividends on CDSC
shares will be lower than the per share dividends on Class R Shares as a result of the higher distribution fees and higher transfer agency fees applicable to CDSC shares.
Taxes
Each Fund intends to continue to qualify for the special tax treatment afforded to regulated investment companies
(RICs) under the Code. As long as a Fund so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its investment company taxable income and net realized capital gains that it distributes
to its shareholders in years in which it distributes at least 90% of its investment company taxable income and 90% of its net tax-exempt interest income, if any, for the year. To qualify as a RIC, a Fund must meet certain requirements regarding the
source of its income and the composition and diversification of its assets. See Part II, Investment Risks and Considerations Investment Restrictions (All Funds) for a discussion of the asset diversification requirements. In the
case of a Feeder Fund, such Fund may look to the underlying assets of the Master
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Portfolio in which it has invested for purposes of satisfying the asset diversification requirement and various other requirements of the Code applicable to RICs.
Each Fund intends to distribute substantially all of such income and gains.
If, in any taxable year, a Fund fails to qualify as a RIC under the Code, notwithstanding the availability of certain relief provisions, such Fund would be taxed in the same manner as an ordinary corporation and all distributions from earnings and
profits (as determined under Federal income tax principles) to its shareholders would be taxable as ordinary dividend income eligible for taxation at a reduced tax rate for non-corporate shareholders and the dividends-received deduction for
corporate shareholders. However, a Municipal Funds distributions derived from income on tax-exempt obligations, as defined herein, would no longer qualify for treatment as exempt interest. Each Fund that is a series of a RIC that consists of
multiple series is treated as a separate corporation for Federal income tax purposes, and therefore is considered to be a separate entity in determining its treatment under the rules for RICs. Losses in one series of a RIC do not offset gains in
another, and the requirements (other than certain organizational requirements) for qualifying for RIC status will be determined at the level of the individual series. In the following discussion, the term Fund means each individual
series, if applicable.
The Code requires a RIC to pay a
nondeductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98.2% of its capital gain net income, determined, in general, as if the RICs
taxable year ended on October 31, plus certain undistributed amounts from the previous years. While each Fund intends to distribute its income and capital gains in the manner necessary to avoid imposition of the 4% excise tax, there can be no
assurance that a sufficient amount of the Funds taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, a Fund will be liable for the tax only on the amount by which it does not meet the
foregoing distribution requirements.
Dividends paid by a Fund
from its ordinary income or from an excess of net short-term capital gain over net long-term capital loss (together referred to as ordinary income dividends) are taxable to shareholders as ordinary income. Distributions made from an
excess of net long-term capital gain over net short-term capital loss (including gains or losses from certain transactions in futures and options) (capital gain dividends) are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Distributions paid by a Fund that are reported as exempt-interest dividends will not be subject to regular Federal income tax. Certain dividend income and long-term capital
gains are eligible for taxation at a reduced rate that applies to non-corporate shareholders. Under these rules, the portion of ordinary income dividends constituting qualified dividend income when paid by a RIC to non-corporate
shareholders may be taxable to such shareholders at long-term capital gain rates. However, to the extent a Funds distributions are derived from income on debt securities, certain types of preferred stock treated as debt for Federal income tax
purposes and short-term capital gains, such distributions will not constitute qualified dividend income.
Beginning in 2013, a 3.8% Medicare contribution tax is imposed on net investment income, including interest, dividends, and net gain, of U.S. individuals
with income exceeding $200,000 (or $250,000 if married filing jointly), and of estates and trusts.
A Funds net capital gain (the excess of net long-term capital gains over net short-term capital losses) is not subject to the 90% distribution requirement for taxation as a RIC, described above. If
a Fund retains net capital gain, it is subject to tax on that gain, and may designate the retained amount as undistributed capital gain in a notice to its shareholders, who will be required to include in income, as long-term capital gain, their
proportionate shares of such undistributed net capital gain, will be deemed to have paid and may claim as a credit against their Federal income tax liability (and as a refund to the extent it exceeds that liability) their proportionate shares of the
tax paid by the Fund on that gain, and may increase the basis of their shares in the Fund by the excess of the amount included in income over the amount allowed as a credit against their taxes.
Distributions in excess of a Funds current and accumulated earnings
and profits will first constitute nontaxable returns of capital and will reduce the adjusted tax basis of a holders shares and after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares
are held as a capital asset). Distributions in excess of a Funds minimum distribution requirements but not in excess of a Funds earnings and profits will be taxable to shareholders and will not constitute nontaxable returns of capital. A
Funds capital loss carryovers, if any, carried from taxable years beginning before 2011 do not reduce current earnings and profits, even if such carryforwards offset current year realized gains. Any loss upon the sale or exchange of Fund
shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder.
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Ordinary income and capital gain dividends are taxable to shareholders even if they are reinvested in
additional shares of a Fund. Distributions by a Fund, whether from ordinary income or capital gains, generally will not be eligible for the dividends received deduction allowed to corporations under the Code. If a Fund pays a dividend in January
that was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which the dividend was declared.
No gain or loss will be recognized by Investor B or Investor B1 shareholders on the conversion of their Investor B Shares into Investor A Shares or
Investor B1 Shares into Investor A1 Shares. A shareholders tax basis in the Investor A or Investor A1 Shares acquired upon conversion will be the same as the shareholders tax basis in the converted Investor B or Investor B1 Shares, and
the holding period of the acquired Investor A or Investor A1 Shares will include the holding period for the converted Investor B or Investor B1 Shares.
If a shareholder of a Fund exercises an exchange privilege within 90 days of acquiring the shares of a Fund, prior to January 31 of the following
year, then the loss that the shareholder recognizes on the exchange will be reduced (or the gain increased) to the extent any sales charge paid on the exchanged shares reduces any sales charge the shareholder would have owed upon the purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of a Fund will be disallowed if other substantially identical shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date on which the shares are sold or exchanged. In such case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Certain Funds may invest in derivative
contracts such as options, futures contracts, forward contracts and swap agreements. The federal income tax treatment of a derivative contract may not be as favorable as a direct investment in the underlying security and may adversely affect the
timing, character and amount of income the Fund realizes from its investments. As a result, a larger portion of the Funds distributions may be treated as ordinary income rather than capital gains. In addition, section 1256
contracts held by a Fund at the end of each taxable year (and, for purposes of the 4% excise tax, certain other dates as prescribed under the Code) are generally marked-to-market, and unrealized gains or losses are treated as
though they were realized, which may increase the amount that must be distributed to meet distribution requirements and avoid the excise tax. In addition, the tax treatment of derivative contracts, such as swap agreements, is unsettled and may be
subject to future legislation, regulation or administrative pronouncements issued by the IRS. If such future guidance limits the Funds ability to use derivatives, the Fund may have to find other ways of achieving its investment objectives.
A provision added to the Code by the Dodd-Frank Wall Street
Reform and Consumer Protection Act clarifies that certain swap agreements, including exchange-traded swap agreements, are treated as notional principal contracts rather than as section 1256 contracts. This can affect the type of income earned by
such swap agreements. Although all of the income on a notional principal contract is ordinary income, only some of the income on a section 1256 contract is short-term capital gain, which is generally taxable at ordinary income rates. The rest is
long-term capital gain, which may be taxable at more favorable rates than ordinary income. Recently proposed regulations interpret what types of swap agreements are to be treated as notional principal contracts rather than as section 1256 contracts.
When finalized, these regulations could result in the Fund having to treat more of its income on swap agreements and more of the distributions made to shareholders as ordinary income and less as long-term capital gains.
Certain Funds may invest in zero coupon U.S. Treasury bonds and other debt
securities that are issued at a discount or provide for deferred interest. Even though a Fund receives no actual interest payments on these securities, it will be deemed to receive income equal, generally, to a portion of the excess of the face
value of the securities over their issue price (original issue discount) each year that the securities are held. Since the original issue discount income earned by a Fund in a taxable year may not be represented by cash income, the Fund
may have to dispose of securities, which it might otherwise have continued to hold, or borrow to generate cash in order to satisfy its distribution requirements. In addition, a Funds investment in foreign currencies or foreign currency
denominated or referenced debt securities, certain asset-backed securities and contingent payment and inflation-indexed debt instruments also may increase or accelerate the Funds recognition of income, including the recognition of taxable
income in excess of cash generated by such investments.
Ordinary
income dividends paid to shareholders who are nonresident aliens or foreign entities generally will be subject to a 30% U.S. withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty law.
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A 30% withholding tax will be imposed on dividends paid after June 30, 2014 and redemption proceeds
paid after December 31, 2016, to (i) foreign financial institutions including non-U.S. investment funds unless they agree to collect and disclose to the IRS information regarding their direct and indirect U.S. account holders and
(ii) certain other foreign entities unless they certify certain information regarding their direct and indirect U.S. owners. To avoid withholding, a foreign financial institution will need to enter into agreements with the IRS regarding
providing the IRS information including the name, address and taxpayer identification number of direct and indirect U.S. account holders, to comply with due diligence procedures with respect to the identification of U.S. accounts, to report to the
IRS certain information with respect to U.S. accounts maintained, to agree to withhold tax on certain payments made to non-compliant foreign financial institutions or to account holders who fail to provide the required information, and to determine
certain other information as to their account holders. Other foreign entities will need to provide the name, address, and TIN of each substantial U.S. owner or certifications of no substantial U.S. ownership unless certain exceptions apply.
Foreign shareholders of a Fund must generally treat a
distribution attributable to gain from a Funds sale of an interest in a REIT as real property gain if 50% or more of the value of a Funds assets is invested in REITs. The Fund is required to withhold a 35% tax on a distribution to a
foreign shareholder attributable to real property gain, and such a distribution may subject a foreign shareholder to a U.S. tax filing obligation and create a branch profits tax liability for foreign corporate shareholders. Under a de minimis
exception to this rule, if the foreign shareholder has not held more than 5% of a class of stock at any time during the one-year period ending on the date of the distribution, the foreign shareholder is not treated as receiving real property gain.
There are also certain additional restrictions regarding the use of wash sales and substitute payments.
Shareholders that are nonresident aliens or foreign entities are urged to consult their own tax advisers concerning the particular tax consequences to them of an investment in a Fund.
Under certain provisions of the Code, some shareholders may be subject to a
28% withholding tax on ordinary income dividends, capital gain dividends and redemption payments (backup withholding). Generally, shareholders subject to backup withholding will be non-corporate shareholders for whom no certified
taxpayer identification number is on file with the Fund or who, to the Funds knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that
such investor is not otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amount withheld generally may be allowed as a refund or a credit against a shareholders Federal income tax liability, provided that
the required information is timely forwarded to the IRS.
If a
shareholder recognizes a loss with respect to a Funds shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder in any single taxable year (or a greater amount in any combination of taxable
years), the shareholder must file a disclosure statement on Form 8886 with the IRS. Direct shareholders of portfolio securities are in many cases exempted. That a loss is reportable under these regulations does not affect the legal determination of
whether the taxpayers treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Dividends and interest received by a Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain foreign countries and the United States may reduce or eliminate such taxes. Shareholders of a Fund more than 50% by value of the assets of which at the close of a taxable year
are foreign securities may be able to claim U.S. foreign tax credits with respect to such foreign taxes paid by the Fund, subject to certain requirements and limitations contained in the Code. For example, certain retirement accounts and certain
tax-exempt organizations cannot claim foreign tax credits on investments in foreign securities held in a Fund. In addition, a foreign tax credit may be claimed with respect to withholding tax on payments with respect to a security only if the holder
of the security meets certain holding period requirements. Both the shareholder and the Fund must meet these holding period requirements, and if a Fund fails to do so, it will not be able to pass through to shareholders the ability to
claim a credit or a deduction for the related foreign taxes paid by the Fund. Further, to the extent that a Fund engages in securities lending with respect to a security paying income subject to foreign taxes, it may not be able to pass through to
its shareholders the ability to take a foreign tax credit for those taxes. If a Fund satisfies the applicable requirements, such Fund will be eligible to file an election with the IRS pursuant to which shareholders of the Fund will be required to
include their proportionate shares of such foreign taxes in their U.S. income tax returns as gross income, treat such proportionate shares as taxes paid by them, and deduct such proportionate shares in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their U.S. income taxes. No deductions for foreign taxes, however, may be claimed by noncorporate shareholders who do not itemize deductions. A shareholder that is a nonresident alien individual
or a foreign corporation may be subject
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to U.S. withholding tax on the income resulting from a Funds election described in this paragraph but may not be able to claim a credit or deduction against such U.S. tax for the foreign
taxes treated as having been paid by such shareholder. A Fund will report annually to its shareholders the amount per share of such foreign taxes and other information needed to claim the foreign tax credit.
Certain transactions entered into by the Funds are subject to special tax
rules of the Code that may, among other things, (a) affect the character of gains and losses realized, (b) disallow, suspend or otherwise limit the allowance of certain losses or deductions, and (c) accelerate the recognition of
income without a corresponding receipt of cash (with which to make the necessary distributions to satisfy distribution requirements applicable to RICs). Operation of these rules could, therefore, affect the character, amount and timing of
distributions to shareholders. Special tax rules also may require a Fund to mark to market certain types of positions in its portfolio (
i.e.
, treat them as sold on the last day of the taxable year), and may result in the recognition of income
without a corresponding receipt of cash. Funds engaging in transactions affected by these provisions intend to monitor their transactions, make appropriate tax elections and make appropriate entries in their books and records to lessen the effect of
these tax rules and avoid any possible disqualification from the special treatment afforded RICs under the Code.
A Fund that invests in commodities-linked instruments may take certain positions through a wholly-owned (or majority-owned), foreign subsidiary (the Subsidiary). Based on the anticipated
structure and activities of the Subsidiary, it is expected that the Subsidiary will be a controlled foreign corporation and that all of its net income will be subpart F income for U.S. federal income tax purposes. If that is
the case, the Fund will be required to report all of the Subsidiarys net income as ordinary income regardless of whether that income would be treated differently (for example, as capital gain) at the Subsidiary level and regardless of whether
that income is distributed to the Fund. (Previously taxed income will not, however, be taxable again when distributed). If a net loss is realized by the Subsidiary in any taxable year, the loss will generally not be available to offset the
Funds other income for that year. It is not expected that the Subsidiary will be subject to an entity level tax.
If a Fund purchases shares of an investment company (or similar investment entity) organized under foreign law, the Fund will generally be treated as
owning shares in a passive foreign investment company (PFIC) for Federal income tax purposes. A Fund may be subject to Federal income tax, and interest charges (at the rate applicable to tax underpayments) on tax liability treated as
having been deferred with respect to certain distributions from such a company and on gain from the disposition of the shares of such a company (collectively referred to as excess distributions), even if such excess distributions are
paid by the Fund as a dividend to its shareholders. However, a Fund may elect to mark to market at the end of each taxable year shares that it holds in PFICs. The election is made separately for each PFIC held and, once made, would be
effective for all subsequent taxable years, unless revoked with consent from the IRS. Under this election, a Fund would recognize as ordinary income any increase in the value of its shares as of the close of the taxable year over their adjusted tax
basis and as ordinary loss any decrease in such value, but only to the extent of previously recognized mark-to-market gains. By making the mark-to-market election, a Fund could avoid imposition of the interest charge with respect to
excess distributions from PFICs, but in any particular year might be required to recognize income in excess of the distributions it received from PFICs.
If the Fund were to invest in a PFIC and elect to treat the PFIC as a qualified electing fund under the Code, in lieu of the foregoing
requirements, the Fund would be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the Fund, and such amounts would be subject to the 90% and
excise tax distribution requirements described above. In order to make this election, the Fund would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to obtain.
Municipal Funds
Each Municipal Fund intends to qualify to pay exempt-interest
dividends as defined in Section 852(b)(5) of the Code. Under such section if, at the close of each quarter of a Funds taxable year, at least 50% of the value of the Funds total assets consists of obligations exempt from
Federal income tax (tax-exempt obligations) under Section 103(a) of the Code (relating generally to obligations of a state or local governmental unit), the Fund shall be qualified to pay exempt-interest dividends to holders of all
outstanding classes of its shares (together the shareholders). Exempt-interest dividends are dividends or any part thereof paid by a Fund that are attributable to interest on tax-exempt obligations and reported by the Fund as
exempt-interest dividends. A Fund will allocate interest from tax-exempt obligations (as well as ordinary income, capital gains and tax preference items discussed below) among the Funds shareholders according to a method (that it believes is
consistent with the Commission rule permitting the
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issuance and sale of multiple classes of shares) that is based upon the gross income that is allocable to each class of shareholders during the taxable year, or such other method as the IRS may
prescribe.
Exempt-interest dividends will be excludable from a
shareholders gross income for Federal income tax purposes. Exempt-interest dividends are included, however, in determining the portion, if any, of a persons social security and railroad retirement benefits subject to Federal income
taxes. Interest on indebtedness incurred or continued to purchase or carry shares of a RIC paying exempt-interest dividends, such as the Fund, will not be deductible by the investor for Federal income tax purposes to the extent attributable to
exempt-interest dividends. Shareholders are advised to consult their tax advisers with respect to whether exempt-interest dividends retain the exclusion under Code Section 103(a) if a shareholder would be treated as a substantial
user or related person under Code Section 147(a) with respect to property financed with the proceeds of an issue of PABs, if any, held by a Fund.
All or a portion of a Funds gains from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as ordinary income rather than capital gain. This rule may increase the amount of ordinary income dividends received by shareholders. Distributions in excess of a Funds
earnings and profits will first reduce the adjusted tax basis of a holders shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Any loss
upon the sale or exchange of Fund shares held for six months or less will be disallowed to the extent of any exempt-interest dividends received by the shareholder. In addition, any such loss that is not disallowed under the rule stated above will be
treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder.
The Code subjects interest received on certain otherwise tax-exempt securities to a Federal alternative minimum tax. The alternative minimum tax applies to interest received on certain PABs
issued after August 7, 1986. PABs are bonds that, although tax-exempt, are used for purposes other than those generally performed by governmental units and that benefit non-governmental entities (
e.g.
, bonds used for industrial
development or housing purposes). Income received on such bonds is classified as an item of tax preference, which could subject certain investors in such bonds, including shareholders of a Fund, to a Federal alternative minimum tax. A
Fund will purchase such PABs and will report to shareholders after the close of the calendar year-end the portion of the Funds dividends declared during the year that constitute an item of tax preference for alternative minimum tax
purposes. The Code further provides that corporations are subject to a Federal alternative minimum tax based, in part, on certain differences between taxable income as adjusted for other tax preferences and the corporations adjusted
current earnings, which more closely reflect a corporations economic income. Because an exempt-interest dividend paid by a Fund will be included in adjusted current earnings, a corporate shareholder may be required to pay alternative
minimum tax on exempt-interest dividends paid by the Fund.
Each
Municipal Fund may engage in interest rate swap transactions. The Federal income tax rules governing the taxation of interest rate swaps are not entirely clear and may require a Fund to treat payments received under such arrangements as ordinary
income and to amortize payments made under certain circumstances. Because payments received by a Fund in connection with swap transactions will be taxable rather than tax-exempt, they may result in increased taxable distributions to shareholders.
Please see Part I of your Funds Statement of Additional
Information for certain state tax information relevant to an investment in BlackRock California Municipal Bond Fund, BlackRock New Jersey Municipal Bond Fund, BlackRock New York Municipal Bond Fund and BlackRock Pennsylvania Municipal Bond Fund, as
well as information on economic conditions within each applicable state.
Ordinary income and capital gain dividends may also be subject to state and local taxes. Certain states exempt from state income taxation dividends paid by RICs that are derived from interest on U.S.
government obligations. State law varies as to whether dividend income attributable to U.S. government obligations is exempt from state income tax.
Shareholders of each Fund are urged to consult their tax advisers regarding specific questions as to Federal, foreign, state or local taxes with respect
to their Fund. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in a Fund.
In the case of a Feeder Fund, such Fund is entitled to look to the underlying assets of the Master Portfolio in which it has invested for purposes of
satisfying various qualification requirements of the Code applicable to RICs. Each Master Portfolio is classified either as a partnership or a separate disregarded entity (depending on the particular Master Portfolio) for U.S. Federal income tax
purposes. If applicable tax provisions were to change, then the Board of Directors of a Feeder Fund will determine, in its discretion, the appropriate course of action for the Feeder Fund. One possible course of action would be to withdraw the
Feeder Funds investments from the Master
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Portfolio and to retain an investment manager to manage the Feeder Funds assets in accordance with the investment policies applicable to the Feeder Fund.
The foregoing general discussion of Federal income tax consequences is based
on the Code and the regulations issued thereunder as in effect on the date of this Statement of Additional Information. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed in this
discussion, and any such changes or decisions may have a retroactive effect.
An investment in a Fund may have consequences under state, local or foreign tax law, about which investors should consult their tax advisors.
P
ERFORMANCE
D
ATA
From time to time a Fund may include its average annual total return and
other total return data, and, if applicable, yield and tax-equivalent yield in advertisements or information furnished to present or prospective shareholders. Total return, yield and tax-equivalent yield each is based on a Funds historical
performance and is not intended to indicate future performance. Average annual total return is determined separately for each class of shares in accordance with a formula specified by the Commission.
Quotations of average annual total return, before tax, for the specified
periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period. Average annual total return before taxes is computed assuming all dividends are reinvested and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge, in the case of front-end load shares, and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of CDSC shares, but does not take into account
taxes payable on dividends or on redemption.
Quotations of
average annual total return, after taxes, on dividends for the specified periods are computed by finding the average annual compounded rates of return that would equate the initial amount invested to the ending value of such investment at the end of
each period assuming payment of taxes on dividends received during such period. Average annual total return after taxes on dividends is computed assuming all dividends, less the taxes due on such dividends, are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum sales charge, in the case of front-end load shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case
of CDSC shares. The taxes due on dividends are calculated by applying to each dividend the highest applicable marginal Federal individual income tax rates in effect on the reinvestment date for that dividend. The rates used correspond to the tax
character (including eligibility for the maximum 20% tax rate applicable to qualified dividend income) of each dividend. The taxable amount and tax character of each dividend are specified by each Fund on the dividend declaration date, but may be
adjusted to reflect subsequent recharacterizations of distributions. The applicable tax rates may vary over the measurement period. The effects of state and local taxes are not reflected. Applicable tax credits, such as foreign credits, are taken
into account according to Federal law. The ending value is determined assuming complete redemption at the end of the applicable periods with no tax consequences associated with such redemption.
Quotations of average annual total return, after taxes, on both dividends
and redemption for the specified periods are computed by finding the average annual compounded rates of return that would equate the initial amount invested to the ending value of such investment at the end of each period assuming payment of taxes
on dividends received during such period as well as on complete redemption. Average annual total return after taxes on distributions and redemption is computed assuming all dividends, less the taxes due on such dividends, are reinvested and taking
into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of front-end load shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified
period in the case of CDSC shares and assuming, for all classes of shares, complete redemption and payment of taxes due on such redemption. The ending value is determined assuming complete redemption at the end of the applicable periods, subtracting
capital gains taxes resulting from the redemption and adding the presumed tax benefit from capital losses resulting from redemption. The taxes due on dividends and on the deemed redemption are calculated by applying the highest applicable marginal
Federal individual income tax rates in effect on the reinvestment and/or the redemption date. The rates used correspond to the tax character (including eligibility for the maximum 20% tax rate applicable to qualified dividend income) of each
component of each dividend and/or the redemption payment. The applicable tax rates may vary over the measurement period. The effects of state and local taxes are not reflected.
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A Fund also may quote annual, average annual and annualized total return and aggregate total return
performance data, both as a percentage and as a dollar amount based on a hypothetical investment of $1,000 or some other amount, for various periods other than those noted in Part I of each Funds Statement of Additional Information. Such data
will be computed as described above, except that (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges
will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total
return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate
rates of return reflect compounding over a longer period of time.
Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield of each security earned during the
period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the maximum offering price per share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of a Funds yield that is tax-exempt by (b) one minus a stated tax rate and adding the result to that part, if any, of the Funds yield that is not tax-exempt.
A Funds total return will vary depending on market conditions, the
securities comprising a Funds portfolio, a Funds operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in a Fund will fluctuate and an investors
shares, when redeemed, may be worth more or less than their original cost.
In order to reflect the reduced sales charges in the case of front-end load shares or the waiver of the CDSC in the case of CDSC shares applicable to certain investors, as described under Purchase
of Shares and Redemption of Shares, respectively, the total return data quoted by a Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may take into account the
CDSC waiver and, therefore, may reflect greater total return since, due to the reduced sales charges or the waiver of sales charges, a lower amount of expenses is deducted.
On occasion, a Fund may compare its performance to, among other things, the
Funds benchmark index indicated in the Prospectus, the Value Line Composite Index, the Dow Jones Industrial Average, or to other published indices, or to performance data published by Lipper Inc., Morningstar, Inc. (Morningstar),
Money Magazine, U.S. News & World Report, BusinessWeek, Forbes Magazine, Fortune Magazine
or other industry publications. When comparing its performance to a market index, a Fund may refer to various statistical measures derived from
the historical performance of a Fund and the index, such as standard deviation and beta. As with other performance data, performance comparisons should not be considered indicative of a Funds relative performance for any future period. In
addition, from time to time a Fund may include the Funds Morningstar risk-adjusted performance ratings assigned by Morningstar in advertising or supplemental sales literature. From time to time a Fund may quote in advertisements or other
materials other applicable measures of Fund performance and may also make reference to awards that may be given to the Manager. Certain Funds may also compare their performance to composite indices developed by Fund management.
A Fund may provide information designed to help investors understand how the
Fund is seeking to achieve its investment objectives. This may include information about past, current or possible economic, market, political or other conditions, descriptive information or general principles of investing such as asset allocation,
diversification and risk tolerance, discussion of a Funds portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Funds performance or portfolio composition to that of other funds or types of
investments, indices relevant to the comparison being made, or to a hypothetical or model portfolio. A Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to
those of other funds or types of investments.
P
ROXY
V
OTING
P
OLICIES
AND
P
ROCEDURES
With respect to each of the Funds
except MFS Research International FDP Fund, Marsico Growth FDP Fund, Invesco Value FDP Fund and Franklin Templeton Total Return FDP Fund, each a series of FDP Series, Inc. (the FDP Series Funds), the Board of Directors of the Funds has
delegated the voting of proxies for the Funds securities to the Manager pursuant to the Managers proxy voting guidelines. Under these guidelines, the Manager will vote proxies related to Fund securities in the best interests of the Fund
and its stockholders. From time to time, a vote may present a conflict between the interests of the Funds stockholders, on the one hand, and those of the Manager, or any affiliated person of the Fund or the Manager, on the other. The Manager
maintains policies and procedures
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that are designed to prevent undue influence on the Managers proxy voting activity that might stem from any relationship between the issuer of a proxy (or any dissident shareholder) and the
Manager, the Managers affiliates, a Fund or a Funds affiliates. Most conflicts are managed through a structural separation of the Managers Corporate Governance Group from the Managers employees with sales and client
responsibilities. In addition, the Manager maintains procedures to ensure that all engagements with corporate issuers or dissident shareholders are managed consistently and without regard to the Managers relationship with the issuer of the
proxy or dissident shareholder. In certain instances, BlackRock may determine to engage an independent fiduciary to vote proxies as a further safeguard to avoid potential conflicts of interest or as otherwise required by applicable law. A copy of
the Funds Proxy Voting Policies is attached as Appendix B.
With respect to the FDP Series Funds, the FDP Series Funds Board of Directors has delegated to each Sub-Adviser authority to vote all proxies
relating to the applicable Funds portfolio securities pursuant to the policies and procedures of the respective Sub-Adviser as part of its general management of the applicable Fund, subject to the Board of Directors continuing oversight.
The proxy voting procedures of the Sub-Advisers are included in Appendices B, C, D and E to this Statement of Additional Information.
Information on how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without
charge, (i) at www.blackrock.com and (ii) on the Commissions website at http://www.sec.gov.
G
ENERAL
I
NFORMATION
Description of Shares
Shareholders of a Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors and generally on other matters submitted to the vote of shareholders of the Fund. Shareholders of a class that bears distribution and/or service expenses have exclusive voting
rights with respect to matters relating to such distribution and service expenditures (except that Investor B and Investor B1 shareholders may vote upon any material changes to such expenses charged under the Investor A Distribution Plan). Voting
rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of Directors can, if they choose to do so, elect all the Directors of a Fund, in which event the holders of the remaining shares would be unable to
elect any person as a Director.
No Fund intends to hold annual
meetings of shareholders in any year in which the Investment Company Act does not require shareholders to act upon any of the following matters: (i) election of Directors; (ii) approval of a management agreement; (iii) approval of a
distribution agreement; and (iv) ratification of selection of independent accountants. Shares issued are fully paid and non-assessable and have no preemptive rights. Redemption and conversion rights are discussed elsewhere herein and in each
Funds Prospectus. Each share of each class of Common Stock is entitled to participate equally in dividends and distributions declared by a Fund and in the net assets of the Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities.
For Funds organized as Maryland corporations, the
by-laws of the Fund require that a special meeting of shareholders be held upon the written request of a minimum percentage of the outstanding shares of the Fund entitled to vote at such meeting, if they comply with applicable Maryland law.
Certain of the Funds are organized as Massachusetts
business trusts. Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust establishing a trust, a copy of which for
each applicable Fund, together with all amendments thereto (the Declaration of Trust), is on file in the office of the Secretary of the Commonwealth of Massachusetts, contains an express disclaimer of shareholder liability for acts or
obligations of the trust and provides for indemnification and reimbursement of expenses out of the trust property for any shareholder held personally liable for the obligations of the trust. The Declaration of Trust also provides that a trust may
maintain appropriate insurance (for example, fidelity bond and errors and omissions insurance) for the protection of the trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the trust itself was unable to meet its obligations. Certain Funds are organized as Delaware
statutory trusts.
See Additional Information
Description of Shares in Part I of each Funds Statement of Additional Information for additional capital stock information for your Fund.
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Additional Information
Under a separate agreement, BlackRock has granted certain Funds the right to
use the BlackRock name and has reserved the right to (i) withdraw its consent to the use of such name by a Fund if the Fund ceases to retain BlackRock Advisors, LLC as investment adviser and (ii) to grant the use of such name
to any other company.
See Additional Information
Principal Shareholders in Part I of each Funds Statement of Additional Information for information on the holders of 5% or more of any class of shares of your Fund.
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