THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
STATEMENT OF ADDITIONAL INFORMATION
MARCH 28, 2014
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FUND
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CLASS A
SHARES
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CLASS C
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CLASS R
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CLASS IR
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INSTITUTIONAL
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GOLDMAN SACHS MLP ENERGY INFRASTRUCTURE FUND
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GLPAX
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GLPCX
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GLPRX
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GLPIX
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GMLPX
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(a series of Goldman Sachs Trust)
71 South Wacker Drive
Chicago, Illinois 60606
This Statement of Additional Information (the SAI) is not a prospectus. This SAI should be read in conjunction with the
prospectus for the Goldman Sachs MLP Energy Infrastructure Fund (the Fund), dated March 28, 2014, as it may be further amended and/or supplemented from time to time (the Prospectus), which may be obtained without charge
from Goldman, Sachs & Co. by calling the telephone numbers or writing to one of the addresses listed below or from institutions (Authorized Institutions) acting on behalf of their customers.
The Funds Annual Report (when available) may be obtained upon request and without charge by calling Goldman, Sachs & Co.
toll free at 1-800-526-7384 (for Class A, Class C, Class R and Class IR Shareholders) or 1-800-621-2550 (for Institutional Shareholders).
GSAM® is a registered service mark of Goldman, Sachs & Co.
TABLE OF CONTENTS
The date of this SAI is March 28, 2014.
GOLDMAN SACHS ASSET MANAGEMENT, L.P.
Investment Adviser
200 West Street
New York, NY 10282
GOLDMAN, SACHS & CO.
Distributor
200 West Street
New York, NY 10282
GOLDMAN,
SACHS & CO.
Transfer Agent
71 South Wacker Drive
Chicago,IL 60606
Toll free (in U.S.): 800-621-2550 (for Institutional Shareholders) or 800-526-7384 (for Class A, Class C, Class R and Class IR Shareholders)
B-1
INTRODUCTION
Goldman Sachs Trust (the Trust) is an open-end management investment company. The Trust is organized as a Delaware statutory
trust and was established by a Declaration of Trust dated January 28, 1997. The Trust is a successor to a Massachusetts business trust that was combined with the Trust on April 30, 1997. The following series of the Trust are described in
this SAI: Goldman Sachs MLP Energy Infrastructure Fund (the Fund).
The Trustees of the Trust have authority
under the Declaration of Trust to create and classify shares into separate series and to classify and reclassify any series or portfolio of shares into one or more classes without further action by shareholders. Pursuant thereto, the Trustees have
created the Fund and other series. Additional series may be added in the future from time to time. The Fund currently offers five classes of shares: Class A, Class C, Class R, Class IR and Institutional Shares. See SHARES OF THE
TRUST.
Goldman Sachs Asset Management, L.P. (GSAM or the Investment Adviser), an affiliate of
Goldman, Sachs & Co. (Goldman Sachs), serves as the investment adviser to the Fund. In addition, Goldman Sachs serves as the Funds distributor and transfer agent. The Funds custodian is State Street Bank and Trust
Company (State Street).
The following information relates to and supplements the description of the Funds
investment objective and policies contained in the Prospectus. See the Prospectus for a more complete description of the Funds investment objectives and policies. Investing in the Fund entails certain risks, and there is no assurance that the
Fund will achieve its objective. Capitalized terms used but not defined herein have the same meaning as in the Prospectus.
Effective April 27, 2013, the Fund changed its fiscal year end from October 31 to November 30.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has a distinct investment objective and policies. The Fund is a non-diversified, open-end management company as defined in the
Investment Company Act of 1940, as amended (the Act). The investment objective and policies of the Fund, and the associated risks of the Fund, are discussed in the Funds Prospectus, which should be read carefully before an
investment is made. All investment objectives and investment policies not specifically designated as fundamental may be changed without shareholder approval. However, to the extent required by U.S. Securities and Exchange Commission
(SEC) regulations, shareholders will be provided with sixty (60) days notice in the manner prescribed by the SEC before any change in the Funds policy to invest at least 80% of its net assets plus any borrowings for
investment purposes (measured at the time of purchase) (Net Assets) in the particular type of investment suggested by its name. Additional information about the Fund, its policies, and the investment instruments it may hold is provided
below.
The Funds share price will fluctuate with market, economic and, to the extent applicable, foreign exchange
conditions, so that an investment in the Fund may be worth more or less when redeemed than when purchased. The Fund should not be relied upon as a complete investment program.
The Investment Adviser utilizes first-hand fundamental research, including visiting company facilities to assess operations and to meet decision-makers, in choosing the Funds securities. The
Investment Adviser may also use macro analysis of numerous economic and valuation variables to anticipate changes in company earnings and the overall investment climate. The Investment Adviser is able to draw on the research and market expertise of
the Goldman Sachs Global Investment Research Department and other affiliates of the Investment Adviser, as well as information provided by other securities dealers. Equity investments in the Funds portfolio will generally be sold when the
Investment Adviser believes that the market price fully reflects or exceeds the investments fundamental valuation or when other more attractive investments are identified.
The Trust, on behalf of the Fund, has filed a notice of eligibility claiming an exclusion from the definition of the term commodity
pool operator (CPO) under the Commodity Exchange Act (CEA) and therefore is not subject to registration or regulation as a CPO under the CEA.
B-2
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES
Master Limited Partnerships
A Master Limited Partnership (MLP) is an entity receiving partnership taxation treatment under the Internal Revenue Code of 1986, as amended (the Code), and whose interests or
units are traded on securities exchanges like shares of corporate stock. A typical MLP consists of a general partner and limited partners; however, some entities receiving partnership taxation treatment under the Code are established as
limited liability companies. The general partner manages the partnership; has an ownership stake in the partnership; and is typically eligible to receive an incentive distribution. The limited partners provide capital to the partnership, have a
limited (if any) role in the operation and management of the partnership, and receive cash distributions. Due to their partnership structure, MLPs generally do not pay income taxes.
Holders of MLP units could potentially become subject to liability for all of the obligations of an MLP, if a court determines that the
rights of the unitholders to take certain action under the limited partnership agreement would constitute control of the business of that MLP, or if a court or governmental agency determines that the MLP is conducting business in a state
without complying with the limited partnership statute of that state.
To be treated as a partnership for U.S. federal income
tax purposes, an MLP must derive at least 90% of its gross income for each taxable year from qualifying sources, including activities such as the exploration, development, mining, production, processing, refining, transportation, storage and certain
marketing of mineral or natural resources. Many of the MLPs in which the Fund invests operate oil, gas or petroleum facilities, or other facilities within the energy sector. The Fund intends to concentrate its investments in the energy sector, with
a focus on midstream energy infrastructure MLPs. The Fund may, however, invest in MLP entities in any sector of the economy.
Midstream MLPs are generally engaged in the treatment, gathering, compression, processing, transportation, transmission, fractionation, storage and terminalling of natural gas, natural gas liquids, crude
oil, refined products or coal. Midstream MLPs may also operate ancillary businesses including marketing of energy products and logistical services. The Fund may also invest in upstream and downstream MLPs. Upstream MLPs are
primarily engaged in the exploration, recovery, development and production of crude oil, natural gas and natural gas liquids. Downstream MLPs are primarily engaged in the processing, treatment, and refining of natural gas liquids and crude oil. The
MLPs in which the Fund invests may also engage in owning, managing and transporting alternative energy assets, including alternative fuels such as ethanol, hydrogen and biodiesel.
MLP Equity Securities.
Equity securities issued by MLPs generally consist of common units, subordinated units and preferred units,
as described more fully below.
MLP Common Units.
The common units of many MLPs are listed and traded on U.S.
securities exchanges, including the New York Stock Exchange, Inc. (NYSE) and the National Association of Securities Dealers Automated Quotations System (NASDAQ). The Fund will purchase such common units through open market
transactions and underwritten offerings, but may also acquire common units through direct placements and privately negotiated transactions. Holders of MLP common units typically have very limited control and voting rights. Holders of such common
units are typically entitled to receive a minimum quarterly distribution (MQD) from the issuer, and typically have a right, to the extent that an MLP fails to make a previous MQD, to recover in future distributions the amount by which
the MQD was short (arrearage rights). Generally, an MLP must pay (or set aside for payment) the MQD to holders of common units before any distributions may be paid to subordinated unit holders. In addition, incentive distributions are
typically not paid to the general partner or managing member unless the quarterly distributions on the common units exceed specified threshold levels above the MQD. In the event of a liquidation, common unit holders are intended to have a preference
with respect to the remaining assets of the issuer over holders of subordinated units. MLPs issue different classes of common units that may have different voting, trading, and distribution rights. The Fund may invest in different classes of common
units.
MLP Subordinated Units.
Subordinated units, which, like common units, represent limited partner or member
interests, are not typically listed or traded on an exchange. The Fund may purchase outstanding subordinated units through negotiated transactions directly with holders of such units or newly issued subordinated units directly from the issuer.
Holders of such subordinated units are generally entitled to receive a distribution only after the MQD and any arrearages from prior quarters have been paid to holders of common units. Holders of subordinated units typically have the right to
receive distributions before any incentive distributions are payable to the general partner or managing member. Subordinated units generally do not provide arrearage rights. Most MLP subordinated units are convertible into common units after the
passage of a specified period of time or upon the achievement by the issuer of specified financial goals. MLPs issue different classes of subordinated units that may have different voting, trading, and distribution rights. The Fund may invest in
different classes of subordinated units.
B-3
MLP Convertible Subordinated Units.
MLP convertible subordinated units are typically
issued by MLPs to founders, corporate general partners of MLPs, entities that sell assets to MLPs, and institutional investors. Convertible subordinated units increase the likelihood that, during the subordination period, there will be available
cash to be distributed to common unitholders. MLP convertible subordinated units generally are not entitled to distributions until holders of common units have received their specified MQD, plus any arrearages, and may receive less than common
unitholders in distributions upon liquidation. Convertible subordinated unitholders generally are entitled to MQD prior to the payment of incentive distributions to the general partner, but are not entitled to arrearage rights. Therefore, MLP
convertible subordinated units generally entail greater risk than MLP common units. Convertible subordinated units are generally convertible automatically into senior common units of the same issuer at a one-to-one ratio upon the passage of time or
the satisfaction of certain financial tests. Convertible subordinated units do not trade on a national exchange or over-the-counter (OTC), and there is no active market for them. The value of a convertible subordinated unit is a function
of its worth if converted into the underlying common units. Convertible subordinated units generally have similar voting rights as do MLP common units. Distributions may be paid in cash or in-kind.
MLP Preferred Units.
MLP preferred units are not typically listed or traded on an exchange. The Fund may purchase MLP preferred
units through negotiated transactions directly with MLPs, affiliates of MLPs and institutional holders of such units. Holders of MLP preferred units can be entitled to a wide range of voting and other rights, depending on the structure of each
separate security.
MLP General Partner or Managing Member Interests.
The general partner or managing member interest
in an MLP is typically retained by the original sponsors of an MLP, such as its founders, corporate partners and entities that sell assets to the MLP. The holder of the general partner or managing member interest can be liable in certain
circumstances for amounts greater than the amount of the holders investment in the general partner or managing member. General partner or managing member interests often confer direct board participation rights in, and in many cases control
over the operations of, the MLP. General partner or managing member interests can be privately held or owned by publicly traded entities. General partner or managing member interests receive cash distributions, typically in an amount of up to 2% of
available cash, which is contractually defined in the partnership or limited liability company agreement. In addition, holders of general partner or managing member interests typically receive incentive distribution rights (IDRs), which
provide them with an increasing share of the entitys aggregate cash distributions upon the payment of per common unit distributions that exceed specified threshold levels above the MQD. Incentive distributions to a general partner are designed
to encourage the general partner, who controls and operates the partnership, to maximize the partnerships cash flow and increase distributions to the limited partners. Due to the IDRs, general partners of MLPs have higher distribution growth
prospects than their underlying MLPs, but quarterly incentive distribution payments would also decline at a greater rate than the decline rate in quarterly distributions to common and subordinated unit holders in the event of a reduction in the
MLPs quarterly distribution. The ability of the limited partners or members to remove the general partner or managing member without cause is typically very limited. In addition, some MLPs permit the holder of IDRs to reset, under specified
circumstances, the incentive distribution levels and receive compensation in exchange for the distribution rights given up in the reset.
MLP Debt Securities.
Debt securities issued by MLPs may include those rated below investment grade. The Fund may invest in MLP debt securities without regard to credit quality or maturity.
Investments in such securities may not offer the tax characteristics of equity securities of MLPs.
Limited Liability Company Common Units
Some energy companies in which the Fund may invest have been organized as limited liability companies (MLP
LLCs). Such MLP LLCs are treated in the same manner as MLPs for federal income tax purposes. Consistent with its investment objective and policies, the Fund may invest in common units or other securities of such MLP LLCs. MLP LLC common units
represent an equity ownership interest in an MLP LLC, entitling the holders to a share of the MLP LLCs success through distributions and/or capital appreciation. Similar to MLPs, MLP LLCs typically do not pay federal income tax at the entity
level and are required by their operating agreements to distribute a large percentage of their current operating earnings. MLP LLC common unitholders generally have first right to an MQD prior to distributions to subordinated unitholders and
typically have arrearage rights if the MQD is not met. In the event of liquidation, MLP LLC common unitholders have first right to the MLP LLCs remaining assets after bondholders, other debt holders and preferred unitholders, if any, have been
paid in full. MLP LLC common units trade on a national securities exchange or OTC. In contrast to MLPs, MLP LLCs have no general partner and there are generally no incentives that entitle management or other unitholders to increased percentages of
cash distributions as distributions reach higher target levels. In addition, MLP LLC common unitholders typically have voting rights with respect to the MLP LLC, whereas MLP common units have limited voting rights.
B-4
MLP Affiliates and I-Units
Other MLP Equity and Debt Securities.
The Fund may invest in equity and debt securities issued by affiliates of MLPs, including the general partners or managing members of MLPs and companies that
own MLP general partner interests and are energy companies. Such issuers may be organized and/or taxed as corporations and therefore may not offer the advantageous tax characteristics of MLP units. The Fund may purchase such other MLP equity
securities through market transactions, but may also do so through direct placements.
I-Units.
I-Units represent an
indirect ownership interest in an MLP and are issued by an MLP affiliate. The MLP affiliate uses the proceeds from the sale of I-Units to purchase limited partnership interests in its affiliated MLP. Thus, I-Units represent an indirect interest in
an MLP. I-Units have limited voting rights and are similar in that respect to MLP common units. I-Units differ from MLP common units primarily in that instead of receiving cash distributions, holders of I-Units will receive distributions of
additional I-Units in an amount equal to the cash distributions received by common unit holders. I-Units are traded on the NYSE. Issuers of MLP I-Units are treated as corporations and not partnerships for tax purposes.
Private Investment in Public Equities (PIPEs)
The Investment Adviser may elect to invest in PIPEs and other unregistered or otherwise restricted securities issued by public MLPs and similar entities, including unregistered MLP preferred units. The
Investment Adviser expects most such private securities to be liquid within six to nine months of funding, but may also invest in other private securities with significantly longer or shorter restricted periods. PIPEs involve the direct placement of
equity securities to a purchaser such as the Fund. Equity issued in this manner is often unregistered and therefore less liquid than equity issued through a public offering. Such private equity offerings provide issuers greater flexibility in
structure and timing as compared to public offerings. The following highlights some of the reasons MLPs choose to issue equity through private placements:
Effective Acquisition Funding Vehicle
. MLPs typically distribute all of their available cash at the end of each quarter, and therefore generally finance acquisitions through the issuance of
additional equity and debt securities. PIPEs allow MLPs to structure the equity funding to close concurrently with an acquisition, thereby eliminating or reducing the equity funding risk. This avoids equity overhang issues (discussed below) and can
ease rating agency concerns over interim excessive leverage associated with an acquisition.
Eliminates or Reduces Equity
Overhang Issues
. Generally an MLP unit price declines when investors know the MLP will be issuing public equity in the near term. An example of this is when an MLP closes a sizeable acquisition funded under its credit facility or with another
form of debt financing. In this situation, equity investors will typically wait for the public offering to provide additional liquidity, and therefore the demand for units is reduced, and the unit price falls. Issuing units through a PIPE in
conjunction with the acquisition eliminates this equity overhang.
Broadens Investor Base
. Public equity offerings for
MLPs are typically allocated primarily to retail investors. Private placements allow issuers to access new pools of equity capital. In addition, institutional investors, such as the Fund, that participate in PIPEs are potential investors for future
equity financings.
Greater Structural Flexibility
. Certain acquisitions and organic development projects require a
more structured form of equity. For example, organic projects that require significant capital expenditures that do not generate near-term cash flow may require a class of equity that does not pay a distribution for a certain period. The public
equity market is generally not an efficient venue to raise this type of specialized equity. Given the significant number of organic projects that have been announced by MLPs, the private placement of PIPEs are believed by the Investment Adviser to
be likely to remain an important funding component in the MLP sector.
Avoided Cost and Uncertainty of Public Equity
Issuance
. Some issuers prefer the certainty of a private placement at a specified fixed discount, compared to the uncertainty of a public offering. The underwriting costs of a public equity issuance in the MLP space can significantly reduce
gross equity proceeds, and the unit price of the issuance can decline during the marketing of a public deal, resulting in increased cost to an issuer. The cost of a PIPE can be competitive with that of a public issuance while providing greater
certainty of funding.
B-5
More Expedient Process with Limited Marketing Requirements
. Unlike public equity
offerings, private placements are typically more time efficient for management teams, with negotiations, due diligence and marketing required only for a small targeted group of sophisticated institutional investors.
Monetizations
. Financial sponsors, founding partners and/or parent companies typically own significant stakes in MLPs in the form
of subordinated units. As these units are not registered, monetization alternatives are limited. PIPEs provide liquidity in these situations.
Many MLPs rely on the private placement market as a source of equity capital. Given the limitations in raising equity from a predominantly retail
investor base and the tax and administrative constraints to significant institutional participation, PIPEs have been a popular financing alternative with many MLPs.
Greenfield Projects
Greenfield projects are energy-related projects built
by private joint ventures formed by energy companies. Greenfield projects may include the creation of a new pipeline, processing plant or storage facility or other energy infrastructure asset that is integrated with the companys existing
assets. The Fund may invest in the equity of greenfield projects and also may invest in the secured debt of greenfield projects. However, an investment also may be structured as pay-in-kind securities with minimal or no cash interest or dividends
until construction is completed, at which time interest payments or dividends would be paid in cash. The Investment Adviser believes that this niche leverages the organizational and operating expertise of large, publicly traded companies and
provides the Fund with the opportunity to earn higher returns. Greenfield projects involve less investment risk than typical private equity financing arrangements. The primary risk involved with greenfield projects is execution risk or construction
risk. Changing project requirements, elevated costs for labor and materials, and unexpected construction hurdles all can increase construction costs. Financing risk exists should changes in construction costs or financial markets occur. Regulatory
risk exists should changes in regulation occur during construction or the necessary permits are not secured prior to beginning construction.
Income Trusts
The Fund may invest in income trusts, including
business trusts and oil royalty trusts. Income trusts are operating businesses that have been put into a trust. They pay out the bulk of their free cash flow to unit holders. The businesses that are sold into these trusts are usually mature and
stable income-producing companies that lend themselves to fixed (monthly or quarterly) distributions. These trusts are regarded as equity investments with fixed-income attributes or high-yield debt with no fixed maturity date. These trusts typically
offer regular income payments and a significant premium yield compared to other types of fixed income investments.
Business Trusts.
A business trust is an income trust where the principal business of the underlying corporation or other entity is
in the manufacturing, service or general industrial sectors. It is anticipated that the number of businesses constituted or reorganized as income trusts will increase significantly in the future. Conversion to the income trust structure is
attractive to many existing mature businesses with relatively high, stable cash flows and low capital expenditure requirements, due to tax efficiency and investor demand for high-yielding equity securities. One of the primary attractions of business
trusts, in addition to their relatively high yield, is their ability to enhance diversification in the portfolio as they cover a broad range of industries and geographies, including public refrigerated warehousing, mining, coal distribution, sugar
distribution, forest products, retail sales, food sales and processing, chemical recovery and processing, data processing, gas marketing and check printing. Each business represented is typically characterized by long life assets or businesses that
have exhibited a high degree of stability. Investments in business trusts are subject to various risks, including risks related to the underlying operating companies controlled by such trusts. These risks may include lack of or limited operating
histories and increased susceptibility to interest rate risks.
Oil Royalty Trusts.
A royalty trust typically controls
an operating company which purchases oil and gas properties using the trusts capital. The royalty trust then receives royalties and/or interest payments from its operating company, and distributes them as income to its unit holders. Units of
the royalty trust represent an economic interest in the underlying assets of the trust.
The Fund may invest in oil royalty
trusts that are traded on stock exchanges. Oil royalty trusts are income trusts that own or control oil and gas operating companies. Oil royalty trusts pay out substantially all of the cash flow they receive from the production and sale of
underlying crude oil and natural gas reserves to shareholders (unitholders) in the form of monthly dividends (distributions). As a result of distributing the bulk of their cash flow to unitholders, royalty trusts are effectively precluded from
internally originating new oil and gas prospects. Therefore, these royalty trusts typically grow through acquisition of producing
B-6
companies or those with proven reserves of oil and gas, funded through the issuance of additional equity or, where the trust is able, additional debt. Consequently, oil royalty trusts are
considered less exposed to the uncertainties faced by a traditional exploration and production corporation. However, they are still exposed to commodity risk and reserve risk, as well as operating risk.
The operations and financial condition of oil royalty trusts, and the amount of distributions or dividends paid on their securities is
dependent on oil prices. Prices for commodities vary and are determined by supply and demand factors, including weather, and general economic and political conditions. A decline in oil prices could have a substantial adverse effect on the operations
and financial conditions of the trusts. Such trusts are also subject to the risk of an adverse change in the regulations of the natural resource industry and other operational risks relating to the energy sector. In addition, the underlying
operating companies held or controlled by the trusts are usually involved in oil exploration; however, such companies may not be successful in holding, discovering, or exploiting adequate commercial quantities of oil, the failure of which will
adversely affect their values. Even if successful, oil and gas prices have fluctuated widely during the most recent years and may continue to do so in the future. The Investment Adviser expects that the combination of global demand growth and
depleting reserves, together with current geopolitical instability, will continue to support strong crude oil prices over the long term. However, there is no guarantee that these prices will not decline. Declining crude oil prices may cause the Fund
to incur losses on its investments. In addition, the demand in and supply to the developing markets could be affected by other factors such as restrictions on imports, increased taxation, and creation of government monopolies, as well as social,
economic and political uncertainty and instability. Furthermore, there is no guarantee that non-conventional sources of natural gas will not be discovered which would adversely affect the oil industry.
Moreover, as the underlying oil and gas reserves are produced the remaining reserves attributable to the royalty trust are depleted. The
ability of a royalty trust to replace reserves is therefore fundamental to its ability to maintain distribution levels and unit prices over time. Certain royalty trusts have demonstrated consistent positive reserve growth year-over-year and, as
such, certain royalty trusts have been successful to date in this respect and are thus currently trading at unit prices significantly higher than those of five or ten years ago. Oil royalty trusts manage reserve depletion through reserve additions
resulting from internal capital development activities and through acquisitions. When the Fund invests in foreign oil royalty trusts, it will also be subject to foreign securities risks, which are described below under Foreign
Securities.
Corporate Debt Obligations
The Fund may, under normal market conditions, invest in corporate debt obligations, including obligations of industrial, utility and financial issuers. Corporate debt obligations include bonds, notes,
debentures and other obligations of corporations to pay interest and repay principal. Corporate debt obligations are subject to the risk of an issuers inability to meet principal and interest payments on the obligations and may also be subject
to price volatility due to such factors as market interest rates, market perception of the creditworthiness of the issuer and general market liquidity.
Corporate debt obligations rated BBB or Baa are considered medium grade obligations with speculative characteristics, and adverse economic conditions or changing circumstances may weaken their
issuers capacity to pay interest and repay principal. Medium to lower rated and comparable non-rated securities tend to offer higher yields than higher rated securities with the same maturities because the historical financial condition of the
issuers of such securities may not have been as strong as that of other issuers. The price of corporate debt obligations will generally fluctuate in response to fluctuations in supply and demand for similarly rated securities. In addition, the price
of corporate debt obligations will generally fluctuate in response to interest rate levels. Fluctuations in the prices of portfolio securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in
the Funds net asset value (NAV).
Because medium to lower rated securities generally involve greater risks
of loss of income and principal than higher rated securities, investors should consider carefully the relative risks associated with investment in securities which carry medium to lower ratings and in comparable unrated securities. In addition to
the risk of default, there are the related costs of recovery on defaulted issues. The Investment Adviser will attempt to reduce these risks through portfolio diversification and by analysis of each issuer and its ability to make timely payments of
income and principal, as well as broad economic trends and corporate developments.
The Investment Adviser employs its own
credit research and analysis, which includes a study of an issuers existing debt, capital structure, ability to service debt and pay dividends, sensitivity to economic conditions, operating history and current earnings trend. The Investment
Adviser continually monitors the investments in the Funds portfolio and evaluates whether to dispose of or to retain corporate debt obligations whose credit ratings or credit quality may have changed. If after its purchase, a portfolio
security is assigned a lower rating or ceases to be rated, the Fund may continue to hold the security if the Investment Adviser believes it is in the best interest of the Fund and its shareholders.
B-7
Commercial Paper and Other Short-Term Corporate Obligations
The Fund may invest in commercial paper and other short-term obligations issued or guaranteed by U.S. corporations, non-U.S. corporations
or other entities. Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies.
U.S. Government Securities
The Fund may invest in U.S. government
securities, which are obligations issued or guaranteed by the U.S. government, its agencies, instrumentalities or sponsored enterprises (U.S. Government Securities). Some U.S. Government Securities (such as Treasury bills, notes and
bonds, which differ only in their interest rates, maturities and times of issuance) are supported by the full faith and credit of the United States. Others, such as obligations issued or guaranteed by U.S. Government agencies, instrumentalities or
sponsored enterprises, are supported either by (i) the right of the issuer to borrow from the U.S. Treasury, (ii) the discretionary authority of the U.S. Government to purchase certain obligations of the issuer or (iii) only the
credit of the issuer. The U.S. government is under no legal obligation, in general, to purchase the obligations of its agencies, instrumentalities or sponsored enterprises. No assurance can be given that the U.S. government will provide financial
support to U.S. Government agencies, instrumentalities or sponsored enterprises in the future, and the U.S. government may be unable to pay debts when due.
U.S. Government Securities include (to the extent consistent with the Act) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S.
Government, or its agencies, instrumentalities or sponsored enterprises. U.S. Government Securities may also include (to the extent consistent with the Act) participations in loans made to foreign governments or their agencies that are guaranteed as
to principal and interest by the U.S. Government or its agencies, instrumentalities or sponsored enterprises. The secondary market for certain of these participations is extremely limited. In the absence of a suitable secondary market, such
participations are regarded as illiquid.
The Fund may also purchase U.S. Government Securities in private placements and may
also invest in separately traded principal and interest components of securities guaranteed or issued by the U.S. Treasury that are traded independently under the separate trading of registered interest and principal of securities program
(STRIPS). The Fund may also invest in zero coupon U.S. Treasury securities and in zero coupon securities issued by financial institutions which represent a proportionate interest in underlying U.S. Treasury securities.
Bank Obligations
The
Fund may invest in obligations issued or guaranteed by U.S. or foreign banks. Bank obligations, including without limitation, time deposits, bankers acceptances and certificates of deposit, may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by government regulation. Banks are subject to extensive but different governmental regulations which may limit both the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the banking industry is largely dependent upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions.
General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operation of this industry.
Certificates of deposit are certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of
time at a specified rate. Certificates of deposit are negotiable instruments and are similar to saving deposits but have a definite maturity and are evidenced by a certificate instead of a passbook entry. Banks are required to keep reserves against
all certificates of deposit. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal
penalties which vary depending upon market conditions and the remaining maturity of the obligation. The Fund may invest in deposits in U.S. and European banks satisfying the standards set forth above.
Variable and Floating Rate Securities
The interest rates payable on certain debt securities in which the Fund may invest are not fixed and may fluctuate based upon changes in market rates. Variable and floating rate obligations are debt
instruments issued by companies or other entities with interest rates that reset periodically (typically, daily, monthly, quarterly, or semi-annually) in response to changes in the market rate of interest on which the interest rate is based.
Moreover, such obligations may fluctuate in value in response to interest rate changes if there is a
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delay between changes in market interest rates and the interest reset date for the obligation, or for other reasons. The value of these obligations is generally more stable than that of a fixed
rate obligation in response to changes in interest rate levels, but they may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally increase
in value if interest rates decline.
Custodial Receipts and Trust Certificates
The Fund may invest in custodial receipts and trust certificates, which may be underwritten by securities dealers or banks, representing
interests in securities held by a custodian or trustee. The securities so held may include U.S. Government Securities, municipal securities or other types of securities in which the Fund may invest. The custodial receipts or trust certificates are
underwritten by securities dealers or banks and may evidence ownership of future interest payments, principal payments or both on the underlying securities, or, in some cases, the payment obligation of a third party that has entered into an interest
rate swap or other arrangement with the custodian or trustee. For certain securities laws purposes, custodial receipts and trust certificates may not be considered obligations of the U.S. Government or other issuer of the securities held by the
custodian or trustee. As a holder of custodial receipts and trust certificates, the Fund will bear its proportionate share of the fees and expenses charged to the custodial account or trust. The Fund may also invest in separately issued interests in
custodial receipts and trust certificates.
Although under the terms of a custodial receipt or trust certificate the Fund
would typically be authorized to assert its rights directly against the issuer of the underlying obligation, the Fund could be required to assert through the custodian bank or trustee those rights as may exist against the underlying issuers. Thus,
in the event an underlying issuer fails to pay principal and/or interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of the
issuer. In addition, in the event that the trust or custodial account in which the underlying securities have been deposited is determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying
securities would be reduced in recognition of any taxes paid.
Certain custodial receipts and trust certificates may be
synthetic or derivative instruments that have interest rates that reset inversely to changing short-term rates and/or have embedded interest rate floors and caps that require the issuer to pay an adjusted interest rate if market rates fall below or
rise above a specified rate. Because some of these instruments represent relatively recent innovations, and the trading market for these instruments is less developed than the markets for traditional types of instruments, it is uncertain how these
instruments will perform under different economic and interest-rate scenarios. Also, because these instruments may be leveraged, their market values may be more volatile than other types of fixed income instruments and may present greater potential
for capital gain or loss. The possibility of default by an issuer or the issuers credit provider may be greater for these derivative instruments than for other types of instruments. In some cases, it may be difficult to determine the fair
value of a derivative instrument because of a lack of reliable objective information and an established secondary market for some instruments may not exist. In many cases, the Internal Revenue Service (the IRS) has not ruled on the tax
treatment of the interest or payments received on the derivative instruments and, accordingly, purchases of such instruments are based on the opinion of counsel to the sponsors of the instruments.
High Yield Securities
The Fund may invest in bonds rated BB+ or below by Standard & Poors Ratings Services (Standard &
Poors) or Ba1 or below by Moodys Investors Service, Inc. (Moodys) or comparable rated and unrated securities. These bonds are commonly known as junk bonds and are considered speculative. The ability of
issuers of high yield securities to make principal and interest payments may be questionable because such issuers are often less creditworthy or are highly leveraged and generally less able than more established or less leveraged entities to make
scheduled payments of principal and interest. High yield securities are also issued by governmental issuers that may have difficulty in making all scheduled interest and principal payments. In some cases, high yield securities may be highly
speculative, have poor prospects for reaching investment grade standing and be in default. As a result, investment in such bonds will entail greater risks than those associated with investment in investment grade bonds (
i.e.
, bonds rated AAA,
AA, A or BBB by Standard & Poors or Aaa, Aa, A or Baa by Moodys). Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher quality debt securities, and the ability of
the Fund to achieve its investment objective may, to the extent of its investments in high yield securities, be more dependent upon such creditworthiness analysis than would be the case if the Fund were investing in higher quality securities. See
Appendix A for a description of the corporate bond and preferred stock ratings by Standard & Poors, Moodys, Fitch, Inc. (Fitch) and Dominion Bond Rating Service Limited (DBRS).
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The market values of high yield securities tend to reflect individual corporate or
municipal developments to a greater extent than do those of higher rated securities, which react primarily to fluctuations in the general level of interest rates. Issuers of high yield securities that are highly leveraged may not be able to make use
of more traditional methods of financing. Their ability to service debt obligations may be more adversely affected by economic downturns or their inability to meet specific projected business forecasts than would be the case for issuers of
higher-rated securities. Negative publicity about the junk bond market and investor perceptions regarding lower-rated securities, whether or not based on fundamental analysis, may depress the prices for high yield securities. In the lower quality
segments of the fixed income securities market, changes in perceptions of issuers creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in higher quality segments of the fixed income securities market,
resulting in greater yield and price volatility. Another factor which causes fluctuations in the prices of high yield securities is the supply and demand for similarly rated securities. In addition, the prices of investments fluctuate in response to
the general level of interest rates. Fluctuations in the prices of portfolio securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in the Funds NAV.
The risk of loss from default for the holders of high yield securities is significantly greater than is the case for holders of other
debt securities because high yield securities are generally unsecured and are often subordinated to the rights of other creditors of the issuers of such securities. Investment by the Fund in already defaulted securities poses an additional risk of
loss should nonpayment of principal and interest continue in respect of such securities. Even if such securities are held to maturity, recovery by the Fund of its initial investment and any anticipated income or appreciation is uncertain. In
addition, the Fund may incur additional expenses to the extent that it is required to seek recovery relating to the default in the payment of principal or interest on such securities or otherwise protect its interests. The Fund may be required to
liquidate other portfolio securities to satisfy annual distribution obligations of the Fund in respect of accrued interest income on securities which are subsequently written off, even though the Fund has not received any cash payments of such
interest.
The secondary market for high yield securities is concentrated in relatively few markets and is dominated by
institutional investors, including mutual funds, insurance companies and other financial institutions. Accordingly, the secondary market for such securities may not be as liquid as and may be more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high yield securities is generally lower than that of higher rated securities and the secondary market for high yield securities could contract under adverse market or economic conditions independent
of any specific adverse changes in the condition of a particular issuer. These factors may have an adverse effect on the ability of the Fund to dispose of particular portfolio investments when needed to meet redemption requests or other liquidity
needs. The Investment Adviser could find it difficult to sell these investments or may be able to sell the investments only at prices lower than if such investments were widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in calculating the NAV of the Fund. A less liquid secondary market also may make it more difficult for the Fund to obtain precise valuations of the high yield securities in its
portfolio.
The adoption of new legislation could adversely affect the secondary market for high yield securities and the
financial condition of issuers of these securities. The form of any future legislation, and the probability of such legislation being enacted, is uncertain.
Non-investment grade securities also present risks based on payment expectations. High yield securities frequently contain call or buy-back features which permit the issuer to call or
repurchase the security from its holder. If an issuer exercises such a call option and redeems the security, the Fund may have to replace such security with a lower-yielding security, resulting in a decreased return for investors. In
addition, if the Fund experiences net redemptions of its shares, it may be forced to sell its higher-rated securities, resulting in a decline in the overall credit quality of its portfolio and increasing its exposure to the risks of high yield
securities.
Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest
payments of rated securities. They do not, however, evaluate the market value risk of high yield securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes
in a rating to reflect changes in the economy or in the conditions of the issuer that affect the market value of the security. Consequently, credit ratings are used only as a preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Investment Advisers credit analysis than would be the case with investments in investment-grade debt obligations. The Investment Adviser employs its own credit research and
analysis, which includes a study of an issuers existing debt, capital structure, ability to service debt and to pay dividends, sensitivity to economic conditions, operating history and current earnings trend. The Investment Adviser continually
monitors the investments in the Funds portfolio and evaluates whether to dispose of or to retain non-investment grade and comparable unrated securities whose credit ratings or credit quality may have changed. If after its purchase, a portfolio
security is assigned a lower rating or ceases to be rated, the Fund may continue to hold the security if the Investment Adviser believes it is in the best interest of the Fund and its shareholders.
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An economic downturn could severely affect the ability of highly leveraged issuers of junk
bond investments to service their debt obligations or to repay their obligations upon maturity. Factors having an adverse impact on the market value of junk bonds will have an adverse effect on the Funds NAV to the extent it invests in such
investments. In addition, the Fund may incur additional expenses to the extent it is required to seek recovery upon a default in payment of principal or interest on its portfolio holdings.
Futures Contracts and Options on Futures Contracts
The Fund may purchase
and sell futures contracts and may also purchase and write call and put options on futures contracts. The futures contracts may be based on various securities, securities indices, foreign currencies and other financial instruments and indices. The
Fund may engage in futures and related options transactions in order to seek to increase total return or to hedge against changes in interest rates or securities prices, or to otherwise manage its term structure, sector selection and duration of its
fixed income securities holdings in accordance with its investment objective and policies. The Fund may also enter into closing purchase and sale transactions with respect to such contracts and options.
Futures contracts utilized by mutual funds have historically been traded on U.S. exchanges or boards of trade that are licensed and
regulated by the Commodity Futures Trading Commission (the CFTC) or on foreign exchanges. More recently, certain futures may also be traded either over-the-counter or on trading facilities such as derivatives transaction execution
facilities, exempt boards of trade or electronic trading facilities that are licensed and/or regulated to varying degrees by the CFTC. Also, certain single stock futures and narrow based security index futures may be traded either over-the-counter
or on trading facilities such as contract markets, derivatives transaction execution facilities and electronic trading facilities that are licensed and/or regulated to varying degrees by both the CFTC and the SEC, or on foreign exchanges.
Neither the CFTC, National Futures Association (NFA), SEC nor any domestic exchange regulates activities of any
foreign exchange or boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign exchange or board of trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures
or foreign options transaction occurs. For these reasons, the Funds investments in foreign futures or foreign options transactions may not be provided the same protections in respect of transactions on United States exchanges. In particular,
persons who trade foreign futures or foreign options contracts may not be afforded certain of the protective measures provided by the CEA, the CFTCs regulations and the rules of the NFA and any domestic exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by the NFA or any domestic futures exchange. Similarly, those persons may not have the protection of the U.S. securities laws.
Futures Contracts.
A futures contract may generally be described as an agreement between two parties to buy and sell particular
financial instruments for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the Fund can seek through the sale of futures contracts to
offset a decline in the value of its current portfolio securities. When interest rates are falling or securities prices are rising, the Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases.
Positions taken in the futures market are not normally held to
maturity, but are instead liquidated through offsetting transactions which may result in a profit or a loss. While the Fund will usually liquidate futures contracts on securities in this manner, the Fund may instead make or take delivery of the
underlying securities whenever it appears economically advantageous for the Fund to do so. A clearing corporation associated with the exchange on which futures are traded guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging Strategies Using Futures Contracts.
When the Fund uses futures for hedging purposes, the Fund
often seeks to establish with more certainty than would otherwise be possible the effective price or rate of return on portfolio securities (or securities that the Fund proposes to acquire) or the exchange rate of currencies in which portfolio
securities are quoted or denominated. The Fund may, for example, take a short position in the futures market by selling futures contracts to seek to hedge against an anticipated rise in interest rates or a decline in market prices that
would adversely affect the dollar value of the Funds portfolio
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securities. Such futures contracts may include contracts for the future delivery of securities held by the Fund or securities with characteristics similar to those of the Funds portfolio
securities. If, in the opinion of the Investment Adviser, there is a sufficient degree of correlation between price trends for the Funds portfolio securities and futures contracts based on other financial instruments, securities indices or
other indices, the Fund may also enter into such futures contracts as part of a hedging strategy. Although under some circumstances prices of securities in the Funds portfolio may be more or less volatile than prices of such futures contracts,
the Investment Adviser will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any such differential by having the Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting the Funds portfolio securities. When hedging of this character is successful, any depreciation in the value of portfolio securities will be substantially offset by
appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of the Funds portfolio securities would be substantially offset by a decline in the value of the futures position.
On other occasions, the Fund may take a long position by purchasing such futures contracts. This may be done, for example,
when the Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices then available in the applicable market to be less favorable than prices that are currently available.
Options on Futures Contracts.
The acquisition of put and call options on futures contracts will give the Fund the right (but not
the obligation), for a specified price, to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, the Fund obtains the benefit of the futures
position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the Funds assets. By writing a call option, the Fund becomes obligated, in
exchange for the premium, to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. The writing of a put option on a futures contract generates a premium, which may partially offset an increase in
the price of securities that the Fund intends to purchase. However, the Fund becomes obligated (upon the exercise of the option) to purchase a futures contract if the option is exercised, which may have a value lower than the exercise price. Thus,
the loss incurred by the Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The Fund will incur transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option on the
same financial instrument. There is no guarantee that such closing transactions can be effected. The Funds ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market.
Other Considerations.
The Fund may engage in transactions in futures contracts and related options transactions.
Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in certain cases, require the Fund to identify on its books cash or liquid assets. The Fund may cover its transactions in futures
contracts and related options by indentifying on its books cash or liquid assets or by other means, in any manner permitted by applicable law.
While transactions in futures contracts and options on futures may reduce certain risks, such transactions themselves entail certain other risks. Thus, unanticipated changes in interest rates or
securities prices may result in a poorer overall performance for the Fund than if it had not entered into any futures contracts or options transactions. When futures contracts and options are used for hedging purposes, perfect correlation between
the Funds futures positions and portfolio positions may be impossible to achieve, particularly where futures contracts based on individual equity or corporate fixed income securities are currently not available. In the event of an imperfect
correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may be exposed to risk of loss. The profitability of the Funds trading in futures
depends upon the ability of the Investment Adviser to analyze correctly the futures markets.
Options on Securities and Securities Indices
Writing Covered Options.
The Fund may write (sell) covered call and put options on any securities in which it may
invest or any securities index consisting of securities in which it may invest. The Fund may write such options on securities that are listed on national domestic securities exchanges or foreign securities exchanges or traded in the over-the-counter
market. A call option written by the Fund obligates that Fund to sell specified securities to the holder of the option at a specified price if the option is exercised on or before the expiration date. Depending upon the type of call option, the
purchaser of a call option either (i) has the right to any appreciation in the value of the security over a fixed price (the exercise price) on a certain date in the future (the expiration date)
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or (ii) has the right to any appreciation in the value of the security over the exercise price at any time prior to the expiration of the option. If the purchaser exercises the option, the
Fund pays the purchaser the difference between the price of the security and the exercise price of the option. The premium, the exercise price and the market value of the security determine the gain or loss realized by the Fund as the seller of the
call option. The Fund can also repurchase the call option prior to the expiration date, ending its obligation. In this case, the cost of entering into closing purchase transactions will determine the gain or loss realized by the Fund. All call
options written by the Fund are covered, which means that the Fund will own the securities subject to the option as long as the option is outstanding or the Fund will use the other methods described below. The Funds purpose in writing covered
call options is to realize greater income than would be realized on portfolio securities transactions alone. However, the Fund may forego the opportunity to profit from an increase in the market price of the underlying security.
A put option written by the Fund would obligate the Fund to purchase specified securities from the option holder at a specified price if,
depending upon the type of put option, either (i) the option is exercised at any time on or before the expiration date or (ii) the option is exercised on the expiration date. All put options written by the Fund would be covered, which
means that the Fund will identify on its books cash or liquid assets with a value at least equal to the exercise price of the put option (less any margin on deposit) or will use the other methods described below. The purpose of writing such options
is to generate additional income for the Fund. However, in return for the option premium, the Fund accepts the risk that it may be required to purchase the underlying securities at a price in excess of the securities market value at the time
of purchase.
In the case of a call option, the option is covered if the Fund owns the instrument underlying
the call or has an absolute and immediate right to acquire that instrument without additional cash consideration (or, if additional cash consideration is required, liquid assets in such amount are identified on the Funds books) upon conversion
or exchange of other instruments held by it. A call option is also covered if the Fund holds a call on the same instrument as the option written where the exercise price of the option held is (i) equal to or less than the exercise price of the
option written, or (ii) greater than the exercise price of the option written provided the Fund identifies liquid assets in the amount of the difference. A put option is also covered if the Fund holds a put on the same instrument as the option
written where the exercise price of the option held is (i) equal to or higher than the exercise price of the option written, or (ii) less than the exercise price of the option written provided the Fund identifies on its books liquid assets
in the amount of the difference. The Fund may also cover options on securities by identifying cash or liquid assets, as permitted by applicable law, with a value, when added to any margin on deposit that is equal to the market value of the
securities in the case of a call option. Identified cash or liquid assets may be quoted or denominated in any currency.
Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash
payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in
a single security.
The Fund may cover call options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an absolute and immediate right to acquire such securities without additional cash consideration (or for additional consideration which has been identified by the Fund on its
books) upon conversion or exchange of other securities in its portfolio. The Fund may also cover call and put options on a securities index by identifying cash or liquid assets, as permitted by applicable law, with a value, when added to any margin
on deposit, that is equal to the market value of the underlying securities in the case of a call option, or the exercise price in the case of a put option, or by owning offsetting options as described above.
The Fund may terminate its obligations under an exchange traded call or put option by purchasing an option identical to the one it has
written. Obligations under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as closing purchase transactions.
Purchasing Options.
The Fund may purchase put and call options on any securities in which it may invest or any securities index
comprised of securities in which it may invest. The Fund may also enter into closing sale transactions in order to realize gains or minimize losses on options it had purchased.
The Fund may purchase call options in anticipation of an increase, or put options in anticipation of a decrease, in the market value of
securities or other instruments of the type in which it may invest (protective puts). The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified securities or other instruments at a
specified price during the option period. The Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such securities exceeded the sum of the exercise price, the premium paid and transaction
costs; otherwise the Fund would realize either no gain or a loss on the purchase of the call option.
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The purchase of a put option would entitle the Fund, in exchange for the premium paid,
to sell specified securities or other instruments at a specified price during the option period. The purchase of protective puts is designed to offset or hedge against a decline in the market value of the Funds securities or other instruments.
Put options may also be purchased by the Fund for the purpose of affirmatively benefiting from a decline in the price of securities or other instruments which it does not own. The Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities or other instruments decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option.
Gains and losses on the purchase of put options may be offset by countervailing changes in the value of the underlying portfolio securities or other instruments.
The Fund would purchase put and call options on securities indices for the same purposes as it would purchase options on individual securities. For a description of options on securities indices, see
Writing Covered Options above.
Risks Associated with Options Transactions.
There is no assurance that a
liquid secondary market on an options exchange will exist for any particular exchange-traded option or at any particular time. If the Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund
will not be able to sell the underlying securities or dispose of the assets identified on its books to cover the position until the options expire or are exercised. Similarly, if the Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it will have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange on opening or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or
(vi) 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 on that exchange 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.
There can be no assurance that higher trading activity, order flow or other unforeseen events
will not, at times, render certain of the facilities of the Options Clearing Corporation or various exchanges inadequate. Such events have, in the past, resulted in the institution by an exchange of special procedures, such as trading rotations,
restrictions on certain types of order or trading halts or suspensions with respect to one or more options. These special procedures may limit liquidity.
The Fund may purchase and sell both options that are traded on U.S. and foreign exchanges and options traded over-the-counter with broker-dealers who make markets in these options. The ability to
terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations.
Transactions by the Fund in options will be subject to limitations established by each of the exchanges, boards of trade or other trading
facilities on which such options are traded governing the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading facility or are held in one or more accounts or through one or more brokers. Thus, the number of options which the Fund may write or purchase may be affected by options
written or purchased by other investment advisory clients of the Investment Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may impose certain other
sanctions.
The writing and purchase of options is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities transactions. The use of options to seek to increase total return involves the risk of loss if the Investment Adviser is incorrect in its expectation of fluctuations in
securities prices or interest rates. The successful use of options for hedging purposes also depends in part on the ability of the Investment Adviser to manage future price fluctuations and the degree of correlation between the options and
securities markets. If the Investment Adviser is incorrect in its expectation of changes in securities prices or determination of the correlation between the securities or securities indices on which options are written and purchased and the
securities in the Funds investment portfolio, the Fund may incur losses that it would not otherwise incur. The writing of options could increase the Funds portfolio turnover rate and, therefore, associated brokerage commissions or
spreads.
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Real Estate Investment Trusts
The Fund may invest in shares of real estate investment trusts (REITs). REITs are pooled investment vehicles which invest
primarily in real estate or real estate related loans. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the Code. The Fund will indirectly bear its proportionate share of any expenses paid by REITs in
which it invests in addition to the expenses paid by the Fund.
Investing in REITs involves certain unique risks. Equity REITs
may be affected by changes in the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent
the Code requires), and are subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self-liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed
income under the Code and failing to maintain their exemptions from the Act. REITs (especially mortgage REITs) are also subject to interest rate risks.
Preferred Stock, Warrants and Stock Purchase Rights
The Fund may invest in
preferred stock, warrants and stock purchase rights (or rights). Preferred stocks are securities that represent an ownership interest providing the holder with claims on the issuers earnings and assets before common stock owners
but after bond owners. Unlike debt securities, the obligations of an issuer of preferred stock, including dividend and other payment obligations, may not typically be accelerated by the holders of such preferred stock on the occurrence of an event
of default (such as a covenant default or filing of a bankruptcy petition) or other non-compliance by the issuer with the terms of the preferred stock. Often, however, on the occurrence of any such event of default or non-compliance by the issuer,
preferred stockholders will be entitled to gain representation on the issuers board of directors or increase their existing board representation. In addition, preferred stockholders may be granted voting rights with respect to certain issues
on the occurrence of any event of default.
Warrants and other rights are options that entitle the holder to buy equity
securities at a specific price for a specific period of time. The Fund will invest in warrants and rights only if such equity securities are deemed appropriate by the Investment Adviser for investment by the Fund. Warrants and rights have no voting
rights, receive no dividends and have no rights with respect to the assets of the issuer.
Foreign Securities
The Fund may invest in securities of foreign issuers, including securities quoted or denominated in a currency other than U.S. dollars.
Investments in foreign securities may offer potential benefits not available from investments solely in U.S. dollar-denominated or quoted securities of domestic issuers. Such benefits may include the opportunity to invest in foreign issuers that
appear, in the opinion of the Investment Adviser, to offer the potential for better long term growth of capital and income than investments in U.S. securities, the opportunity to invest in foreign countries with economic policies or business cycles
different from those of the United States and the opportunity to reduce fluctuations in portfolio value by taking advantage of foreign securities markets that do not necessarily move in a manner parallel to U.S. markets. Investing in the securities
of foreign issuers also involves, however, certain special risks, including those discussed in the Funds Prospectus and those set forth below, which are not typically associated with investing in U.S. dollar-denominated securities or quoted
securities of U.S. issuers. Many of these risks are more pronounced for investments in emerging economies.
With respect to
investments in certain foreign countries, there exist certain economic, political and social risks, including the risk of adverse political developments, nationalization, military unrest, social instability, war and terrorism, confiscation without
fair compensation, expropriation or confiscatory taxation, limitations on the movement of funds and other assets between different countries, or diplomatic developments, any of which could adversely affect the Funds investments in those
countries. Governments in certain foreign countries continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could have a significant effect on market
prices of securities and dividend payments.
Many countries throughout the world are dependent on a healthy U.S. economy and
are adversely affected when the U.S. economy weakens or its markets decline. Additionally, many foreign country economies are heavily dependent on international trade
B-15
and are adversely affected by protective trade barriers and economic conditions of their trading partners. Protectionist trade legislation enacted by those trading partners could have a
significant adverse affect on the securities markets of those countries. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in foreign securities often involve
currencies of foreign countries. Accordingly, the Fund may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations and may incur costs in connection with conversions between various currencies. The Fund
may be subject to currency exposure independent of its securities positions. To the extent that the Fund is fully invested in foreign securities while also maintaining net currency positions, it may be exposed to greater combined risk. Currency
exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or
anticipated changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments or
central banks or by currency controls or political developments in the United States or abroad.
Because foreign issuers
generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies, there may be less publicly available information about a foreign company than
about a U.S. company. Volume and liquidity in most foreign securities markets are less than in the United States and securities of many foreign companies are less liquid and more volatile than securities of comparable U.S. companies. The securities
of foreign issuers may be listed on foreign securities exchanges or traded in foreign over-the-counter markets. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Fund
endeavors to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of foreign securities exchanges, brokers, dealers and listed and unlisted companies than in the United
States, and the legal remedies for investors may be more limited than the remedies available in the United States. For example, there may be no comparable provisions under certain foreign laws to insider trading and similar investor protections that
apply with respect to securities transactions consummated in the United States. Mail service between the United States and foreign countries may be slower or less reliable than within the United States, thus increasing the risk of delayed settlement
of portfolio transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when some of the Funds assets are uninvested and no return is earned on such assets. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio securities or, if the Fund has entered into a contract
to sell the securities, in possible liability to the purchaser.
The Fund may invest in foreign securities which take the form
of sponsored and unsponsored American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) or other similar instruments representing securities of foreign issuers
(together, Depositary Receipts). ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs are traded on domestic exchanges or in the U.S. over-the-counter market and,
generally, are in registered form. EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security. To the extent the Fund acquires Depositary Receipts through banks which do not have a contractual relationship with the foreign issuer of the security underlying the Depositary Receipts to issue and service such
unsponsored Depositary Receipts, there is an increased possibility that the Fund will not become aware of and be able to respond to corporate actions such as stock splits or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation of such instruments. Investment in Depositary Receipts does not eliminate all the risks inherent in investing in securities of non-U.S. issuers. The market value of
Depositary Receipts is dependent upon the market value of the underlying securities and fluctuations in the relative value of the currencies in which the Depositary Receipts and the underlying securities are quoted. However, by investing in
Depositary Receipts, such as ADRs, which are quoted in U.S. dollars, the Fund may avoid currency risks during the settlement period for purchases and sales.
As described more fully below, the Fund may invest in countries with emerging economies or securities markets. Political and economic structures in many of such countries may be undergoing significant
evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Certain of such countries have in the
B-16
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. See Investing in Emerging Countries, below.
Investing in Europe.
The Fund may operate in euros and/ or may hold euros and/or euro-denominated bonds and other obligations. The
euro requires participation of multiple sovereign states forming the Euro zone and is therefore sensitive to the credit, general economic and political position of each such state, including each states actual and intended ongoing engagement
with and/or support for the other sovereign states then forming the European Union (EU), in particular those within the Euro zone. Changes in these factors might materially adversely impact the value of securities that the Fund has
invested in.
European countries can be significantly affected by the tight fiscal and monetary controls that the
European Economic and Monetary Union (EMU) imposes for membership. Europes economies are diverse, its governments are decentralized, and its cultures vary widely. Several EU countries, including Greece, Ireland, Italy, Spain and
Portugal have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the euro and the accompanying coordination
of fiscal and wage policy among EMU member countries. Member countries are required to maintain tight control over inflation, public debt, and budget deficit to qualify for membership in the EMU. These requirements can severely limit the ability of
EMU member countries to implement monetary policy to address regional economic conditions.
Investing in Canada.
The
Fund may invest in issuers located in Canada or that have significant exposure to the Canadian economy. The Canadian market is relatively concentrated in issuers involved in the production and distribution of natural resources, and therefore the
Canadian economy is very dependent on the supply and demand for natural resources. There is a risk that any changes in these sectors could have an adverse impact on the Canadian economy. The Canadian economy is dependent on the economy of the United
States as the United States is Canadas largest trading partner and foreign investor. Reduction in spending on Canadian products and services or changes in the U.S. economy may cause an impact in the Canadian economy. Past periodic demands by
the Province of Quebec for sovereignty have also significantly affected equity valuations and foreign currency movements in the Canadian market.
Investing in Emerging Countries.
The securities markets of emerging countries are less liquid and subject to greater price volatility, and have a smaller market capitalization, than the U.S.
securities markets. In certain countries, there may be fewer publicly traded securities and the market may be dominated by a few issues or sectors. Issuers and securities markets in such countries are not subject to as extensive and frequent
accounting, financial and other reporting requirements or as comprehensive government regulations as are issuers and securities markets in the U.S. In particular, the assets and profits appearing on the financial statements of emerging country
issuers may not reflect their financial position or results of operations in the same manner as financial statements for U.S. issuers. Substantially less information may be publicly available about emerging country issuers than is available about
issuers in the United States.
Emerging country securities markets are typically marked by 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 ownership of such securities by a limited number of investors. The markets for securities in certain
emerging countries are in the earliest stages of their development. Even the markets for relatively widely traded securities in emerging countries may not be able to absorb, without price disruptions, a significant increase in trading volume or
trades of a size customarily undertaken by institutional investors in the securities markets of developed countries. The limited size of many of these securities markets can cause prices to be erratic for reasons apart from factors that affect the
soundness and competitiveness of the securities issuers. For example, prices may be unduly influenced by traders who control large positions in these markets. Additionally, market making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity of such markets. The limited liquidity of emerging country securities may also affect the Funds ability to accurately value its portfolio securities or to acquire or
dispose of securities at the price and time it wishes to do so or in order to meet redemption requests.
With respect to
investments in certain emerging market countries, antiquated legal systems 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 countries. Similarly, the rights of investors in emerging market companies may be more limited than those of
shareholders of U.S. corporations.
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Transaction costs, including brokerage commissions or dealer mark-ups, in emerging countries
may be higher than in the United States and other developed securities markets. In addition, existing laws and regulations are often inconsistently applied. As legal systems in emerging countries develop, foreign investors may be adversely affected
by new or amended laws and regulations. In circumstances where adequate laws exist, it may not be possible to obtain swift and equitable enforcement of the law.
Custodial and/or settlement systems in emerging markets countries may not be fully developed. To the extent the Fund invests in emerging markets, Fund assets that are traded in such markets and which have
been entrusted to such sub-custodians in those markets may be exposed to risks for which the sub-custodian will have no liability.
Foreign investment in the securities markets of certain emerging countries is restricted or controlled to varying degrees. These restrictions may limit the Funds investment in certain emerging
countries and may increase the expenses of the Fund. Certain emerging countries require governmental approval prior to investments by foreign persons or limit investment by foreign persons to only a specified percentage of an issuers
outstanding securities or a specific class of securities which may have less advantageous terms (including price) than securities of the company available for purchase by nationals. In addition, the repatriation of both investment income and capital
from emerging countries may be subject to restrictions which require governmental consents or prohibit repatriation entirely for a period of time. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation
may affect certain aspects of the operation of the Fund. The Fund may be required to establish special custodial or other arrangements before investing in certain emerging countries.
Emerging countries may be subject to a substantially greater degree of economic, political and social instability and disruption than is
the case in the United States, Japan and most Western European countries. This instability may result from, among other things, the following: (i) authoritarian governments or military involvement in political and economic decision making,
including changes or attempted changes in governments through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic or social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; (v) ethnic, religious and racial disaffection or conflict; and (vi) the absence of developed legal structures governing foreign private investments and private property. Such economic, political and
social instability could disrupt the principal financial markets in which the Fund may invest and adversely affect the value of the Funds assets. The Funds investments can also be adversely affected by any increase in taxes or by
political, economic or diplomatic developments.
The Fund may seek investment opportunities within former Eastern
bloc countries. Most of these countries had a centrally planned, socialist economy for a substantial period of time. The governments of many of these countries have more recently been implementing reforms directed at political and economic
liberalization, including efforts to decentralize the economic decision-making process and move towards a market economy. However, business entities in many of these countries do not have an extended history of operating in a market-oriented
economy, and the ultimate impact of these countries attempts to move toward more market-oriented economies is currently unclear. In addition, any change in the leadership or policies of these countries may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities.
The
economies of emerging countries may differ unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments. Many emerging countries
have experienced in the past, and continue to experience, high rates of inflation. In certain countries inflation has at times accelerated rapidly to hyperinflationary levels, creating a negative interest rate environment and sharply eroding the
value of outstanding financial assets in those countries. Other emerging countries, on the other hand, have recently experienced deflationary pressures and are in economic recessions. The economies of many emerging countries are heavily dependent
upon international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners. In addition, the economies of some emerging countries are vulnerable to weakness in world prices for their
commodity exports.
The Funds income and, in some cases, capital gains from foreign stocks and securities will be
subject to applicable taxation in certain of the countries in which it invests, and treaties between the U.S. and such countries may not be available in some cases to reduce the otherwise applicable tax rates.
From time to time, certain of the companies in which the Fund may invest may operate in, or have dealings with, countries subject to
sanctions or embargos imposed by the U.S. Government and the United Nations and/or countries identified by the U.S. Government as state sponsors of terrorism. A company may suffer damage to its reputation if it is identified as a company which
operates in, or has dealings with, countries subject to sanctions or embargoes imposed by the U.S. Government as state sponsors of terrorism. As an investor in such companies, the Fund would be indirectly subject to those risks.
B-18
Index Swaps, Interest Rate Swaps, Credit Swaps, Total Return Swaps, Options on Swaps and Interest Rate
Caps, Floors and Collars
The Fund may enter into index, interest rate, credit and total return swaps for both hedging
purposes and to seek to increase total return. As examples, the Fund may enter into swap transactions for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through
purchases and/or sales of instruments in other market, as a duration management technique, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date, or to gain exposure to certain markets in an
economical way. The Fund may also enter into interest rate caps, floors and collars. The Fund may also purchase and write (sell) options contracts on swaps, commonly referred to as swaptions.
In a standard swap transaction, two parties agree to exchange the returns, differentials in rates of return or some other
amount earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or swapped between the parties are generally calculated with respect to a
notional amount,
i.e.
, the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular security, or in a basket of securities representing a particular index.
Bilateral swap agreements are two party contracts entered into primarily by institutional investors. Cleared swaps are transacted through futures commission merchants (FCMs) that are members of central clearinghouses with the
clearinghouse serving as a central counterparty similar to transactions in futures contracts. Funds post initial and variation margin by making payments to their clearing member FCMs.
Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive payments for
floating rate payments based on interest rates at specified intervals in the future. Two types of interest rate swaps include fixed-for-floating rate swaps and basis swaps. Fixed-for-floating rate swaps involve the exchange
of payments based on a fixed interest rate for payments based on a floating interest rate index. By contrast, basis swaps involve the exchange of payments based on two different floating interest rate indices. Index swaps involve the exchange by the
Fund with another party of payments based on a notional principal amount of a specified index or indices. Credit swaps involve the exchange of a floating or fixed rate payment in return for assuming potential credit losses of an underlying security,
or pool of securities. Total return swaps are contracts that obligate a party to pay or receive interest in exchange for the payment by the other party of the total return generated by a security, a basket of securities, an index or an index
component.
A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays
a non-refundable premium for the option and obtains the right, but not the obligation, to enter into or modify an underlying swap or to modify the terms of an existing swap on agreed-upon terms. The seller of a swaption, in exchange for the premium,
becomes obligated (if the option is exercised) to enter into or modify an underlying swap on agreed-upon terms, which generally entails a greater risk of loss than incurred in buying a swaption. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payment of interest on a notional principal amount from the party selling such interest rate cap. 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 the interest rate floor. An interest rate collar is the combination of a
cap and a floor that preserves a certain return within a predetermined range of interest rates.
A great deal of flexibility
may be possible in the way swap transactions are structured. However, generally the Fund will enter into interest rate, total return, credit and index swaps on a net basis, which means that 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. Interest rate, total return, credit and index swaps do not normally involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate, total return, credit and index swaps is normally limited to the net amount of interest payments that the Fund is contractually obligated to make. If the other party to a interest rate, total return, credit, index
and mortgage swap defaults, the Funds risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to receive, if any. However, certain swap transactions are currently subject to central clearing.
Although central clearing is expected to decrease the counterparty risk involved in bi-laterally negotiated contracts because central clearing interposes the central clearinghouse as the counterparty to each participants swap, central clearing
would not make swap transactions risk-free.
As a result of new rules adopted in 2012, certain standardized swaps are
currently subject to mandatory central clearing. Central clearing is expected to decrease counterparty risk and increase liquidity compared to bilateral swaps because central clearing interposes the central clearinghouse as the counterparty to each
participants swap. However, central clearing does not eliminate counterparty risk or illiquidity risk entirely. In addition, depending on the size of the Fund and other factors, the margin required under the rules of a clearinghouse and by a
clearing member may be in excess of the collateral required to be posted by the Fund to support its obligations under a similar bilateral swap. However, regulators are expected to adopt rules imposing certain margin requirements, including minimums,
on uncleared swaps in the near future, which could change this comparison.
B-19
A credit swap may have as reference obligations one or more securities that may, or may not,
be currently held by the Fund. The protection buyer in a credit swap is generally obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the swap provided that no credit event,
such as a default, 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. The Fund may be either the protection buyer or seller in the transaction. If the Fund is a buyer and no
credit event occurs, the Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally 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 whose value may have significantly decreased. As a seller, the Fund generally receives an upfront payment or a rate of income throughout the term of the swap provided that there is no credit event.
As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap. If a credit event occurs, the value of any
deliverable obligation received by the Fund as seller, coupled with the upfront 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.
To the extent that the Funds exposure in a transaction involving a swap, a swaption or an interest rate floor, cap or collar is
covered by identifying cash or liquid assets on the Funds books or is covered by other means in accordance with SEC guidance, the Fund and the Investment Adviser believe that the transactions do not constitute senior securities under the Act
and, accordingly, will not treat them as being subject to the Funds borrowing restrictions.
The Fund will not enter
into bilateral transactions involving swaps, caps, floors or collars unless the unsecured commercial paper, senior debt or claims paying ability of the other party thereto (with respect to bilateral swap transactions) is considered to be investment
grade by the Investment Adviser.
The use of swaps, swaptions and interest rate caps, floors and collars is a highly
specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The use of a swap requires an understanding not only of the referenced asset, reference rate, or
index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. If the Investment Adviser is incorrect in its forecasts of market values, credit quality and interest rates, the
investment performance of the Fund would be less favorable than it would have been if this investment technique were not used.
In addition, these transactions can involve greater risks than if the Fund had invested in the reference obligation directly because, in
addition to general market risks, swaps may be subject to illiquidity risk, counterparty risk, credit risk and pricing risk. Regulators also may impose limits on an entitys or group of entities positions in certain swaps. However,
certain risks are reduced (but not eliminated) if the Fund invests in cleared swaps. Because bilateral swap agreements are two party contracts and because they may have terms of greater than seven days, these swaps may be considered to be illiquid.
Moreover, the 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 counterparty (with respect to bilateral swap transactions). Many swaps are complex and often
valued subjectively. Swaps and other derivatives may also be subject to pricing or basis risk, which exists when the price of a particular derivative diverges from the price of corresponding cash market instruments. Under certain market
conditions it may not be economically feasible to imitate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. If a swap transaction is particularly large or if the relevant market is illiquid, it may
not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses.
Regulators are in the process of developing rules that would require trading and execution of most liquid swaps on trading facilities. Moving trading to an exchange-type system may increase market
transparency and liquidity but may require the Fund to incur increased expenses to access the same types of swaps.
Rules
adopted in 2012 also require centralized reporting of detailed information about many types of cleared and uncleared swaps. This information is available to regulators and, to a more limited extent and on an anonymous basis, to the public. Reporting
of swap data may result in greater market transparency, which may be beneficial to funds that use swaps to implement trading strategies. However, these rules place potential additional administrative obligations on these funds, and the safeguards
established to protect anonymity may not function as expected.
B-20
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 utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in
the interbank market. The Investment Adviser, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of the Funds transactions in swaps, swaptions, caps, floors and collars.
Convertible Securities
The Fund may invest in convertible securities. Convertible securities are bonds, debentures, notes, preferred stocks or other securities
that may be converted into or exchanged for a specified amount of common stock (or other securities) of the same or different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest that is generally paid or accrued on debt or a dividend that is paid or accrued on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Convertible securities have unique investment
characteristics, in that they generally (i) have higher yields than common stocks, but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying common stock due to their
fixed income characteristics and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its investment value (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege) and its conversion value (the securitys worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest
rates, with investment value normally declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors may also have an effect on the convertible securitys investment value. The
conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its
investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible securitys
governing instrument. If a convertible security held by the Fund is called for redemption, the Fund will be required to convert it into the underlying common stock, sell it to a third party or permit the issuer to redeem the security. Any of these
actions could have an adverse effect on the Funds ability to achieve its investment objective, which, in turn, could result in losses to the Fund.
In evaluating a convertible security, the Investment Adviser will give primary emphasis to the attractiveness of the underlying common stock. Convertible debt securities are equity investments for
purposes of the Funds investment policies.
Equity Swaps
The Fund may enter into equity swap contracts to invest in a market without owning or taking physical custody of securities in various
circumstances, including circumstances where direct investment in the securities is restricted for legal reasons or is otherwise impracticable. Equity swaps may also be used for hedging purposes or to seek to increase total return. Equity swap
contracts may be structured in different ways. For example, a counterparty may agree to pay the Fund the amount, if any, by which the notional amount of the equity swap contract would have increased in value had it been invested in particular stocks
(or a group of stocks), plus the dividends that would have been received on those stocks. In these cases, the Fund may agree to pay to the counterparty a floating rate of interest on the notional amount of the equity swap contract plus the amount,
if any, by which that notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Fund on the equity swap contract should be the gain or loss on the notional amount plus dividends on the stocks
less the interest paid by the Fund on the notional amount. In other cases, the counterparty and the Fund may each agree to pay the other the difference between the relative investment performances that would have been achieved if the notional amount
of the equity swap contract had been invested in different stocks (or a group of stocks).
The Fund will generally enter
into equity swaps on a net basis, which means that 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. Payments may be made at the conclusion of an equity swap
contract or periodically during its term. Equity swaps normally do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to equity swaps is normally limited to the net amount of payments that
the
B-21
Fund is contractually obligated to make. If the other party to an equity swap defaults, the Funds risk of loss consists of the net amount of payments that the Fund is contractually entitled
to receive, if any. Inasmuch as these transactions are entered into for hedging purposes or are offset by the cash or liquid assets identified on the Funds books to cover the Funds exposure, the Fund and the Investment Adviser believe
that such transactions do not constitute senior securities under the Act and, accordingly, will not treat them as being subject to the Funds borrowing restrictions.
The Fund will not enter into bilateral swap transactions unless the unsecured commercial paper, senior debt or claims paying ability of the other party thereto is considered to be investment grade by the
Investment Adviser. The Funds ability to enter into certain swap transactions may be limited by tax considerations.
When-Issued
Securities and Forward Commitments
The Fund may purchase securities on a when-issued basis or purchase or sell securities
on a forward commitment basis beyond the customary settlement time. These transactions involve a commitment by the Fund to purchase or sell securities at a future date. The price of the underlying securities (usually expressed in terms of yield) and
the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases and forward commitment transactions are negotiated directly with the other party, and such
commitments are not traded on exchanges. The Fund will generally purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or
selling the securities. If deemed advisable as a matter of investment strategy, however, the Fund may dispose of or negotiate a commitment after entering into it. The Fund may also sell securities it has committed to purchase before those securities
are delivered to the Fund on the settlement date. The Fund may realize a capital gain or loss in connection with these transactions. For purposes of determining the Funds duration, the maturity of when-issued or forward commitment securities
will be calculated from the commitment date. The Fund is generally required to identify on its books, until three days prior to the settlement date, cash and liquid assets in an amount sufficient to meet the purchase price unless the Funds
obligations are otherwise covered. Alternatively, the Fund may enter into offsetting contracts for the forward sale of other securities that it owns. Securities purchased or sold on a when-issued or forward commitment basis involve a risk of loss if
the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date.
Investment in Unseasoned Companies
The Fund may invest in companies
(including predecessors) which have operated less than three years. The securities of such companies may have limited liquidity, which can result in their being priced higher or lower than might otherwise be the case. In addition, investments in
unseasoned companies are more speculative and entail greater risk than do investments in companies with an established operating record.
Pooled Investment Vehicles
The Fund may invest in securities of pooled investment vehicles, including other investment companies and exchange traded funds (ETFs). The Fund will indirectly bear its proportionate share of
any management fees and other expenses paid by pooled investment vehicles in which it invests, in addition to the management fees (and other expenses) paid by the Fund. The Funds investments in pooled investment vehicles are subject to
statutory limitations prescribed by the Act, including in certain circumstances a prohibition on the Fund acquiring more than 3% of the voting shares of any other investment company, and a prohibition on investing more than 5% of the Funds
total assets in securities of any one investment company or more than 10% of its total assets in the securities of all investment companies. Many ETFs, however, have obtained exemptive relief from the SEC to permit unaffiliated funds (such as the
Fund) to invest in their shares beyond these statutory limits, subject to certain conditions and pursuant to contractual arrangements between the ETFs and the investing funds. The Fund may rely on these exemptive orders in investing in ETFs.
Moreover, pursuant to an exemptive order obtained from the SEC or under an exemptive rule adopted by the SEC, the Fund may invest in investment companies and money market funds for which the Investment Adviser, or any of its affiliates, serves as
investment adviser, administrator and/or distributor. However, to the extent that the Fund invests in a money market fund for which the Investment Adviser or any of its affiliates acts as investment adviser, the management fees payable by the Fund
to the Investment Adviser will, to the extent required by the SEC, be reduced by an amount equal to the Funds proportionate share of the management fees paid by such money market fund to its investment adviser. Although the Fund does not
expect to do so in the foreseeable future, the Fund is authorized to invest substantially all of its assets in a single open-end investment company or series thereof that has substantially the same investment policies and fundamental restrictions as
the Fund. Additionally, to the extent that the Fund serves as an underlying Fund to another Goldman Sachs Fund, the Fund may invest a percentage of its assets in other investment companies only if those instruments are consistent with
applicable law and/or exemptive relief obtained from the SEC.
B-22
The Fund may purchase shares of investment companies investing primarily in foreign
securities, including country funds. Country funds have portfolios consisting primarily of securities of issuers located in specified foreign countries or regions.
ETFs are pooled investment vehicles issuing shares which are traded like traditional equity securities on a stock exchange. An ETF
represents a portfolio of securities or other assets, which is often designed to track a particular market segment or index. An investment in an ETF, like one in any pooled investment vehicle, carries risks of its underlying securities or other
assets. An ETF may fail to accurately track the returns of the market segment or index that it is designed to track, and the price of an ETFs shares may fluctuate or lose money. In addition, because they, unlike other pooled investment
vehicles, are traded on an exchange, ETFs are subject to the following risks: (i) the market price of the ETFs shares may trade at a premium or discount to the ETFs NAV; (ii) an active trading market for an ETF may not develop
or be maintained; and (iii) there is no assurance that the requirements of the exchange necessary to maintain the listing of the ETF will continue to be met or remain unchanged. In the event substantial market or other disruptions affecting
ETFs should occur in the future, the liquidity and value of the Funds shares could also be substantially and adversely affected.
Repurchase Agreements
The Fund may enter into repurchase agreements with eligible counterparties which furnish collateral at least equal in value or market
price to the amount of its repurchase obligations. Repurchase agreements involving obligations other than U.S. Government securities (such as foreign government securities, commercial paper, corporate bonds, mortgage loans and equities) may be
subject to special risks and may not have the benefit for certain protections in the event of the counterpartys insolvency. A repurchase agreement is an arrangement under which the Fund purchases securities and the seller agrees to repurchase
the securities within a particular time and at a specified price. Custody of the securities is maintained by the Funds custodian (or subcustodian). The repurchase price may be higher than the purchase price, the difference being income to the
Fund, or the purchase and repurchase prices may be the same, with interest at a stated rate due to the Fund together with the repurchase price on repurchase. In either case, the income to the Fund is unrelated to the interest rate on the security
subject to the repurchase agreement.
For purposes of the Act and generally for tax purposes, a repurchase agreement is
deemed to be a loan from the Fund to the seller of the security. For other purposes, it is not always clear whether a court would consider the security purchased by the Fund subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of commencement of bankruptcy or insolvency proceedings with respect to the seller of the security before repurchase of the security under a repurchase agreement, the Fund may encounter
delay and incur costs before being able to sell the security. Such a delay may involve loss of interest or a decline in value of the security. If the court characterizes the transaction as a loan and the Fund has not perfected a security interest in
the security, the Fund may be required to return the security to the sellers estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, the Fund would be at risk of losing some or all of the principal and interest
involved in the transaction.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the risk that the
seller may fail to repurchase the security. However, if the market value of the security subject to the repurchase agreement becomes less than the repurchase price (including accrued interest), the Fund will direct the seller of the security to
deliver additional securities so that the market value of all securities subject to the repurchase agreement equals or exceeds the repurchase price. Certain repurchase agreements which provide for settlement in more than seven days can be liquidated
before the nominal fixed term on seven days or less notice. Such repurchase agreements will be regarded as liquid instruments.
The Fund, together with other registered investment companies having advisory agreements with the Investment Adviser or its affiliates,
may transfer uninvested cash balances into a single joint account, the daily aggregate balance of which will be invested in one or more repurchase agreements.
Short Sales Against the Box
The Fund may engage in short sales against the
box. In a short sale, the seller sells a borrowed security and has a corresponding obligation to the lender to return the identical security. The seller does not immediately deliver the securities sold and is said to have a short position in those
securities until delivery occurs. While a short sale is made by selling a security the seller does not own, a short sale is against the box to the extent that the seller contemporaneously owns or has the right to obtain, at no added
cost, securities identical to those sold short. It may be entered into by the Fund, for example, to lock in a sales price for a security the Fund does not wish to sell immediately. If the Fund sells securities short against the box, it may protect
itself from loss if the price of the securities declines in the future, but will lose the opportunity to profit on such securities if the price rises.
B-23
If the Fund effects a short sale of securities at a time when it has an unrealized gain on
the securities, it may be required to recognize that gain as if it had actually sold the securities (as a constructive sale) on the date it effects the short sale. However, such constructive sale treatment may not apply if the Fund
closes out the short sale with securities other than the appreciated securities held at the time of the short sale and if certain other conditions are satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the
extent to which the Fund may effect short sales.
Mortgage Dollar Rolls
The Fund may enter into mortgage dollar rolls, in which the Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar, but not identical securities on a specified future date. During the roll period, the Fund loses the right to receive principal and interest paid on the securities sold. However, the Fund
would benefit to the extent of any difference between the price received for the securities sold and the lower forward price for the future purchase or fee income plus the interest earned on the cash proceeds of the securities sold until the
settlement date of the forward purchase. All cash proceeds will be invested in instruments that are permissible investments for the Fund. The Fund will, until the settlement date, identify cash or liquid assets on its books, as permitted by
applicable law, in an amount equal to its forward purchase price.
For financial reporting and tax purposes, the Fund
treats mortgage dollar rolls as two separate transactions; one involving the purchase of a security and a separate transaction involving a sale. The Fund does not currently intend to enter into mortgage dollar rolls for financing and does not treat
them as borrowings.
Mortgage dollar rolls involve certain risks including the following: if the broker-dealer to whom
the Fund sells the security becomes insolvent, the Funds right to purchase or repurchase the mortgage-related securities subject to the mortgage dollar roll may be restricted. Also, the instrument which the Fund is required to repurchase may
be worth less than an instrument which the Fund originally held. Successful use of mortgage dollar rolls will depend upon the Investment Advisers ability to manage the Funds interest rate and mortgage prepayments exposure. For these
reasons, there is no assurance that mortgage dollar rolls can be successfully employed. The use of this technique may diminish the investment performance of the Fund compared with what such performance would have been without the use of mortgage
dollar rolls.
Restricted and Illiquid Securities
The Fund may purchase securities and other financial instruments that are not registered or that are offered in an exempt non-public offering (Restricted Securities) under the 1933 Act,
including securities eligible for resale to qualified institutional buyers pursuant to Rule 144A under the 1933 Act. However, the Fund will not invest more than 15% of its net assets in illiquid investments, which include repurchase
agreements with a notice or demand period of more than seven days, certain over-the-counter options, securities and other financial instruments that are not readily marketable, bank obligations, non-investment grade securities and other credit
instruments and Restricted Securities unless, based upon a review of the trading markets for specific investments, those investments are determined to be liquid. Those investment practices could have the effect of increasing the level of illiquidity
in the Fund to the extent that market demand for securities held by the Fund decreases such that previously liquid securities become illiquid. The Trustees have adopted guidelines and delegated to the Investment Adviser the function of determining
and monitoring the liquidity of the Funds portfolio securities.
The purchase price and subsequent valuation of
Restricted Securities may reflect a discount from the price at which such securities trade when they are not restricted, because the restriction makes them less liquid. The amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who will bear the expenses of registering the Restricted Securities and prevailing supply and demand conditions.
Non-Diversified Status
The Fund is non-diversified, meaning that it is
permitted to invest a larger percentage of its assets in fewer issuers than diversified mutual funds. Thus, the Fund may be more susceptible to adverse developments affecting any single issuer held in its portfolio, and may be more susceptible to
greater losses because of these developments. Because the Fund does not intend to be taxed as a regulated investment company under Subchapter M of the Code, the Fund will not be subject to the diversification requirements applicable to regulated
investment companies.
B-24
Temporary Investments
The Fund may, for temporary defensive purposes, invest up to 100% of its total assets in: U.S. Government Securities; commercial paper rated at least A-2 by Standard & Poors, P-2 by
Moodys or having a comparable rating by another nationally recognized statistical rating organization (NRSRO) (or, if unrated, determined by the Investment Adviser to be of comparable credit quality); certificates of deposit;
bankers acceptances; repurchase agreements; non-convertible preferred stocks and non-convertible corporate bonds with a remaining maturity of less than one year; ETFs and other investment companies; and cash items. When the Funds assets
are invested in such instruments, the Fund may not be achieving its investment objective.
Portfolio Turnover
The Fund may engage in active short-term trading to benefit from price disparities among different issues of securities or among the
markets for equity securities, or for other reasons. As a result of active management, it is anticipated that the portfolio turnover rate may vary greatly from year to year as well as within a particular year, and may be affected by changes in the
holdings of specific issuers, changes in country and currency weightings and cash requirements for redemption of shares. High portfolio turnover may result in the Funds recognition of gains (losses) that will increase (decrease) the
Funds tax liability and thereby impact the amount of the Funds after-tax distributions. In addition, high portfolio turnover may increase the Funds current and accumulated earnings and profits, resulting in a greater portion of the
Funds distributions being treated as taxable dividends for federal income tax purposes. The Fund is not restricted by policy with regard to portfolio turnover and will make changes in its investment portfolio from time to time as business and
economic conditions as well as market prices may dictate.
Special Note Regarding Market Events
Events in the financial sector over the past several years have resulted in reduced liquidity in credit and fixed income markets and in an
unusually high degree of volatility in the financial markets, both domestically and internationally. While entire markets have been impacted, issuers that have exposure to the real estate, mortgage and credit markets have been particularly affected.
These events and the potential for continuing market turbulence may have an adverse effect on the Funds investments. It is uncertain how long these conditions will continue.
The instability in the financial markets led the U.S. Government to take a number of unprecedented actions designed to support certain
financial institutions and certain segments of the financial markets. Federal, state, and foreign governments, regulatory agencies, and self -regulatory organizations may take actions that affect the regulation of the instruments in which the Fund
invests, or the issuers of such instruments, in ways that are unforeseeable. Such legislation or regulation could limit or preclude the Funds ability to achieve its investment objective.
Governments or their agencies may also acquire distressed assets from financial institutions and acquire ownership interests in those
institutions. The implications of government ownership and disposition of these assets are unclear, and such ownership or disposition may have positive or negative effects on the liquidity, valuation and performance of the Funds portfolio
holdings.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the Trust as fundamental policies that cannot be changed with respect to
the Fund without the affirmative vote of the holders of a majority of the outstanding voting securities (as defined in the Act) of the Fund. The investment objective of the Fund and all other investment policies or practices of the Fund are
considered by the Trust not to be fundamental and accordingly may be changed without shareholder approval. For purposes of the Act, majority of the outstanding voting securities means the lesser of the vote of (i) 67% or more of the
shares of the Trust or the Fund present at a meeting, if the holders of more than 50% of the outstanding shares of the Trust or the Fund are present or represented by proxy, or (ii) more than 50% of the shares of the Trust or the Fund.
For purposes of the following limitations (except for the asset coverage requirement with respect to borrowings, which is
subject to different requirements under the Act), any limitation which involves a maximum percentage shall not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, the Fund. In applying fundamental investment restriction number (1) below to derivative transactions or instruments, including, without limitation, futures, swaps, forwards, options and structured
notes, the Fund will look to the industry of the reference asset(s) and not to the counterparty or issuer. With respect to the Funds fundamental investment restriction number (2) below, asset coverage of at least 300% (as defined in the
Act), inclusive of any amounts borrowed, must be maintained at all times.
B-25
Fundamental Investment Restrictions
As a matter of fundamental policy, the Fund may not:
(1)
|
Invest more than 25% of its total assets in the securities of one or more issuers conducting their principal business activities in the same industry (excluding the
U.S. government or any of its agencies or instrumentalities); except that the Fund will invest more than 25% of its total assets in companies conducting their principal business in industries within the energy sector.
|
(2)
|
Borrow money, except (a) the Fund, to the extent permitted by applicable law, may borrow from banks (as defined in the Act), other affiliated investment companies
and other persons or through reverse repurchase agreements in amounts up to 33 1/3% of its total assets (including the amount borrowed), (b) the Fund may, to the extent permitted by applicable law, borrow up to an additional 5% of its total
assets for temporary purposes, (c) the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of portfolio securities, (d) the Fund may purchase securities on margin to the extent permitted by
applicable law and (e) the Fund may engage in transactions in mortgage dollar rolls which are accounted for as financings.
|
The following interpretation applies to, but is not part of, this fundamental policy: In determining whether a particular investment in portfolio instruments or participation in portfolio transactions is
subject to this borrowing policy, the accounting treatment of such instrument or participation shall be considered, but shall not by itself be determinative. Whether a particular instrument or transaction constitutes a borrowing shall be determined
by the Board, after consideration of all of the relevant circumstances.
(3)
|
Make loans, except through (a) the purchase of debt obligations in accordance with the Funds investment objective and policies, (b) repurchase
agreements with banks, brokers, dealers and other financial institutions, (c) loans of securities as permitted by applicable law, and (d) loans to affiliates of the Fund to the extent permitted by law.
|
(4)
|
Underwrite securities issued by others, except to the extent that the sale of portfolio securities by the Fund may be deemed to be an underwriting.
|
(5)
|
Purchase, hold or deal in real estate, although the Fund may purchase and sell securities or investments that are secured by real estate or interests therein or that
reflect the return of an index of real estate values, securities of real estate investment trusts and mortgage-related securities, and may hold and sell real estate acquired by the Fund as a result of the ownership of securities.
|
(6)
|
Invest in physical commodities, except that the Fund may invest in currency and financial instruments and contracts in accordance with its investment objective and
policies, including, without limitation, structured notes, futures contracts, swaps, options on commodities, currencies, swaps and futures, ETFs, investment pools and other instruments, regardless of whether such instrument is considered to be a
commodity.
|
(7)
|
Issue senior securities to the extent such issuance would violate applicable law.
|
The Fund may, notwithstanding any other fundamental investment restriction or policy, invest some or all of its assets in a single open-end investment company or series thereof with substantially the same
fundamental investment objective, restrictions and policies as the Fund.
Non-Fundamental Investment Restrictions
In addition to the fundamental policies mentioned above, the Trustees have adopted the following non-fundamental policies
which can be changed or amended by action of the Trustees without approval of shareholders. Again, for purposes of the following limitations, any limitation which involves a maximum percentage shall not be considered violated unless an excess over
the percentage occurs immediately after, and is caused by, an acquisition of securities by the Fund.
B-26
The Fund may not:
(a)
|
Invest in companies for the purpose of exercising control or management.
|
(b)
|
Invest more than 15% of the Funds net assets in illiquid investments including illiquid repurchase agreements with a notice or demand period of more than seven
days, securities which are not readily marketable and restricted securities not eligible for resale pursuant to Rule 144A under the Securities Act of 1933 (the 1933 Act).
|
(c)
|
Purchase additional securities if the Funds borrowings (excluding covered mortgage dollar rolls and such short-term credits as may be necessary for the clearance
of purchases and sales of portfolio securities) exceed 5% of its net assets.
|
(d)
|
Make short sales of securities, except that the Fund may make short sales against the box.
|
TRUSTEES AND OFFICERS
The Trusts Leadership Structure
The business and affairs of the Fund
are managed under the direction of the Board of Trustees (the Board), subject to the laws of the State of Delaware and the Trusts Declaration of Trust. The Trustees are responsible for deciding matters of overall policy and
reviewing the actions of the Trusts service providers. The officers of the Trust conduct and supervise the Funds daily business operations. Trustees who are not deemed to be interested persons of the Trust as defined in the
Act are referred to as Independent Trustees. Trustees who are deemed to be interested persons of the Trust are referred to as Interested Trustees. The Board is currently composed of nine Independent Trustees and
two Interested Trustees. The Board has selected an Independent Trustee to act as Chairman, whose duties include presiding at meetings of the Board and acting as a focal point to address significant issues that may arise between regularly scheduled
Board and Committee meetings. In the performance of the Chairmans duties, the Chairman will consult with the other Independent Trustees and the Funds officers and legal counsel, as appropriate. The Chairman may perform other functions as
requested by the Board from time to time.
The Board meets as often as necessary to discharge its responsibilities. Currently,
the Board conducts regular, in-person meetings at least six times a year, and holds special in-person or telephonic meetings as necessary to address specific issues that require attention prior to the next regularly scheduled meeting. In addition,
the Independent Trustees meet at least annually to review, among other things, investment management agreements, distribution (Rule 12b-1) and/or service plans and related agreements, transfer agency agreements and certain other agreements providing
for the compensation of Goldman Sachs and/or its affiliates by the Fund, and to consider such other matters as they deem appropriate.
The Board has established six standing committees Audit, Governance and Nominating, Compliance, Valuation, Dividend and Contract Review Committees. The Board may establish other committees, or
nominate one or more Trustees to examine particular issues related to the Boards oversight responsibilities, from time to time. Each Committee meets periodically to perform its delegated oversight functions and reports its findings and
recommendations to the Board. For more information on the Committees, see the section STANDING BOARD COMMITTEES, below.
The Trustees have determined that the Trusts leadership structure is appropriate because it allows the Trustees to effectively perform their oversight responsibilities.
Trustees of the Trust
Information pertaining to the Trustees of the Trust as of March 28, 2014 is set forth below.
B-27
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
Name, Address
and Age
1
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office and
Length of
Time
Served
2
|
|
Principal Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee
3
|
|
Other
Directorships
Held by Trustee
4
|
Ashok N. Bakhru Age: 72
|
|
Chairman of the Board of Trustees
|
|
Since 1996 (Trustee since 1991)
|
|
Mr. Bakhru is retired. He was formerly Director, Apollo Investment Corporation (a business development company) (2008-2013); President,
ABN Associates (a management and financial consulting firm) (19941996 and 19982012); Trustee, Scholarship America (19982005); Trustee, Institute for Higher Education Policy (20032008); Director, Private Equity
InvestorsIII and IV (19982007), and Equity-Linked Investors II (April 20022007).
Chairman of the Board of TrusteesGoldman Sachs Fund Complex.
|
|
111
|
|
None
|
|
|
|
|
|
|
Donald C. Burke Age: 53
|
|
Trustee
|
|
Since 2010
|
|
Mr. Burke is retired. He is Director, Avista Corp. (2011Present); and was formerly a Director, BlackRock Luxembourg and Cayman
Funds (20062010); President and Chief Executive Officer, BlackRock U.S. Funds (20072009); Managing Director, BlackRock, Inc. (20062009).
TrusteeGoldman Sachs Fund Complex.
|
|
108
|
|
Avista Corp. (an energy company)
|
|
|
|
|
|
|
John P. Coblentz, Jr.
Age: 72
|
|
Trustee
|
|
Since 2003
|
|
Mr. Coblentz is retired. Formerly, he was Partner, Deloitte & Touche LLP (19752003); Director, Emerging Markets Group, Ltd.
(20042006); and Director, Elderhostel, Inc. (20062012).
TrusteeGoldman Sachs Fund Complex.
|
|
111
|
|
None
|
B-28
|
|
|
|
|
|
|
|
|
|
|
Name, Address
and Age
1
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office and
Length of
Time
Served
2
|
|
Principal Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee
3
|
|
Other
Directorships
Held by Trustee
4
|
Diana M. Daniels
Age:
64
|
|
Trustee
|
|
Since 2007
|
|
Ms. Daniels is retired. Formerly, she was Vice President, General Counsel and Secretary, The Washington Post Company (19912006).
Ms. Daniels serves as a Presidential Councillor of Cornell University (2013Present); Member, Advisory Board, Psychology Without Borders (international humanitarian aid organization) (2007-Present), and former Member of the Legal Advisory
Board, New York Stock Exchange (20032006) and of the Corporate Advisory Board, Standish Mellon Management Advisors (20062007).
TrusteeGoldman Sachs Fund Complex.
|
|
108
|
|
None
|
|
|
|
|
|
|
Joseph P. LoRusso
Age:
56
|
|
Trustee
|
|
Since 2010
|
|
Mr. LoRusso is retired. Formerly, he was President, Fidelity Investments Institutional Services Co. (FIIS) (20022008);
Director, FIIS (20022008); Director, Fidelity Investments Institutional Operations Company (20032007); Executive Officer, Fidelity Distributors Corporation (20072008).
TrusteeGoldman Sachs Fund Complex.
|
|
108
|
|
None
|
|
|
|
|
|
|
Herbert J. Markley
Age:
63
|
|
Trustee
|
|
Since 2013
|
|
Mr. Markley is retired. Formerly, he was Executive Vice President, Deere & Company (an agricultural and construction equipment
manufacturer) (20072009), and President, Agricultural Division, Deere & Company (20012007).
TrusteeGoldman Sachs Fund Complex.
|
|
108
|
|
None
|
|
|
|
|
|
|
Jessica Palmer
Age:
65
|
|
Trustee
|
|
Since 2007
|
|
Ms. Palmer is retired. She is Director, Emerson Center for the Arts and Culture (2011-Present); and was formerly a Consultant, Citigroup
Human Resources Department (2007-2008); Managing Director, Citigroup Corporate and Investment Banking (previously, Salomon Smith Barney/Salomon Brothers) (19842006). Ms. Palmer was a Member of the Board of Trustees of Indian Mountain School
(private elementary and secondary school) (20042009).
TrusteeGoldman Sachs Fund Complex.
|
|
108
|
|
None
|
B-29
|
|
|
|
|
|
|
|
|
|
|
Name, Address
and Age
1
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office and
Length of
Time
Served
2
|
|
Principal Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee
3
|
|
Other
Directorships
Held by Trustee
4
|
Richard P. Strubel
Age:
74
|
|
Trustee
|
|
Since 1987
|
|
Mr. Strubel is retired. Formerly, he was Director, Cardean Learning Group (provider of educational services via the internet)
(20032008); Trustee Emeritus, The University of Chicago (1987Present).
TrusteeGoldman Sachs Fund Complex.
|
|
111
|
|
The Northern Trust Mutual Fund Complex (64 Portfolios) (Chairman of the Board of Trustees); Gildan Activewear Inc. (a clothing marketing and manufacturing company)
|
|
|
|
|
|
|
Roy W. Templin
Age:
53
|
|
Trustee
|
|
Since 2013
|
|
Mr. Templin is retired. He is Director, Con-Way Incorporated (2012 Present); and was formerly Executive Vice President and Chief
Financial Officer, Whirlpool Corporation (an appliance manufacturer and marketer) (20042012).
TrusteeGoldman Sachs Fund Complex.
|
|
108
|
|
Con-Way Incorporated (a transportation, supply-chain management and logistics services company)
|
B-30
|
|
|
|
|
|
|
|
|
|
|
|
Interested Trustees
|
Name, Address
and
Age
1
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office and
Length of
Time
Served
2
|
|
Principal Occupation(s)
During Past 5
Years
|
|
Number
of
Portfolios in
Fund
Complex
Overseen by
Trustee
3
|
|
Other
Directorships
Held by Trustee
4
|
James A. McNamara*
Age:
51
|
|
President and Trustee
|
|
Since 2007
|
|
Managing Director, Goldman Sachs (December 1998Present); Director of Institutional Fund Sales, GSAM (April 1998December
2000); and Senior Vice President and Manager, Dreyfus Institutional Service Corporation (January 1993April 1998).
PresidentGoldman Sachs Fund Complex (November 2007Present); Senior Vice PresidentGoldman Sachs Fund Complex (May 2007November 2007); and Vice PresidentGoldman Sachs Fund
Complex (20012007).
TrusteeGoldman Sachs Fund Complex (since
November 2007 and December 2002May 2004).
|
|
110
|
|
None
|
|
|
|
|
|
|
Alan A. Shuch*
Age:
64
|
|
Trustee
|
|
Since 1990
|
|
Advisory DirectorGSAM (May 1999Present); Consultant to GSAM (December 1994May 1999); and Limited Partner, Goldman
Sachs (December 1994May 1999).
TrusteeGoldman Sachs Fund
Complex.
|
|
108
|
|
None
|
*
|
These persons are considered to be Interested Trustees because they hold positions with Goldman Sachs and own securities issued by The Goldman Sachs Group,
Inc. Each Interested Trustee holds comparable positions with certain other companies of which Goldman Sachs, GSAM or an affiliate thereof is the investment adviser, administrator and/or distributor.
|
1
|
Each Trustee may be contacted by writing to the Trustee, c/o Goldman Sachs, 200 West Street, New York, New York, 10282, Attn: Caroline Kraus.
|
2
|
Each Trustee holds office for an indefinite term until the earliest of: (a) the election of his or her successor; (b) the date the Trustee resigns or is
removed by the Board of Trustees or shareholders, in accordance with the Trusts Declaration of Trust; (c) the conclusion of the first Board meeting held subsequent to the day the Trustee attains the age of 74 years, subject to waiver by a
majority of the Trustees (in accordance with the current resolutions of the Board of Trustees, which may be changed by the Trustees without shareholder vote); or (d) the termination of the Trust. By resolution of the Board of Trustees
determining that an extension of service would be beneficial to the Trust, the retirement age has been extended for one year with respect to Richard P. Strubel.
|
3
|
The Goldman Sachs Fund Complex includes the Trust, Goldman Sachs Credit Strategies Fund (GSCSF) and Goldman Sachs Variable Insurance Trust
(GSVIT). As of March 28, 2014, the Trust consisted of 93 portfolios (87 of which offered shares to the public), GSVIT consisted of 14 portfolios (12 of which offered shares to the public) and GSCSF consisted of one portfolio. The Goldman
Sachs Fund Complex also includes, with respect to Messrs. Bakhru, Coblentz and Strubel, Goldman Sachs Trust II (GSTII), Goldman Sachs BDC, Inc. (GSBDC) and Goldman Sachs MLP Income Opportunities Fund (GSMLP), and
with respect to Mr. McNamara, GSTII and GSMLP. GSTII, GSBDC and GSMLP each consisted of one portfolio. GSBDC did not offer shares to the public.
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4
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This column includes only directorships of companies required to report to the SEC under the Securities Exchange Act of 1934 (i.e., public companies) or
other investment companies registered under the Act.
|
The significance or relevance of a Trustees
particular experience, qualifications, attributes and/or skills is considered by the Board on an individual basis. Experience, qualifications, attributes and/or skills common to all Trustees include the ability to critically review, evaluate and
discuss information provided to them and to interact effectively with the other Trustees and with representatives
B-31
of the Investment Adviser and its affiliates, other service providers, legal counsel and the Funds independent registered public accounting firm, the capacity to address financial and legal
issues and exercise reasonable business judgment, and a commitment to the representation of the interests of the Fund and its shareholders. The Governance and Nominating Committees charter contains certain other factors that are considered by
the Governance and Nominating Committee in identifying and evaluating potential nominees to serve as Independent Trustees. Based on each Trustees experience, qualifications, attributes and/or skills, considered individually and with respect to
the experience, qualifications, attributes and/or skills of other Trustees, the Board has concluded that each Trustee should serve as a Trustee. Below is a brief discussion of the experience, qualifications, attributes and/or skills of each
individual Trustee as of March 28, 2014 that led the Board to conclude that such individual should serve as a Trustee.
Ashok N.
Bakhru.
Mr. Bakhru has served as a Trustee since 1991 and Chairman of the Board since 1996. Previously, Mr. Bakhru served as Director, Apollo Investment Corporation (a business development company) (2008-2013), and President of ABN
Associates, a management and financial consulting firm, and was the Chief Financial Officer, Chief Administrative Officer and Director of Coty Inc., a multinational cosmetics, fragrance and personal care company. In addition, Mr. Bakhru
formerly held several senior management positions at Scott Paper Company, a major manufacturer of paper products, including Senior Vice President and Chief Financial Officer. Mr. Bakhru also serves on the Governing Council of the Independent
Directors Council and the Board of Governors of the Investment Company Institute. He also serves on the Advisory Board of BoardIQ, an investment publication. In addition, Mr. Bakhru has served as Director of Equity-Linked Investments II and
Private Equity Investors III and IV, which are private equity partnerships based in New York City. Mr. Bakhru was also a Director of Arkwright Mutual Insurance Company. Based on the foregoing, Mr. Bakhru is experienced with financial and
investment matters.
Donald C. Burke.
Mr. Burke has served as Trustee since 2010. Mr. Burke serves as a Director of Avista
Corp., an energy company. Mr. Burke was a Managing Director of BlackRock, Inc., where he was President and Chief Executive Officer of BlackRocks U.S. funds and a director and chairman of several offshore funds advised by BlackRock. As
President and Chief Executive Officer of BlackRocks U.S. funds, he was responsible for all accounting, tax and regulatory reporting requirements for over 300 open-end and closed-end BlackRock funds. Previously, he was a Managing Director,
First Vice President and Vice President of Merrill Lynch Investment Managers, L.P. (MLIM), where he worked for 16 years prior to MLIMs merger with BlackRock, and was instrumental in the integration of BlackRocks and
MLIMs operating infrastructure following the merger. While at MLIM, he was Chief Financial Officer and Treasurer of MLIMs U.S. funds and Head of Global Operations and Client Services, where he was responsible for the development and
maintenance of MLIMs operating infrastructure across the Americas, Europe and the Pacific Rim. He also developed controls for the MLIM U.S. funds financial statement certification process to comply with the Sarbanes-Oxley Act of 2002,
worked with fund auditors in connection with the funds annual audits and established the department responsible for all tax issues impacting the MLIM U.S. funds. Previously, Mr. Burke was Tax Manager at Deloitte & Touche, where
he was designated as one of the firms lead specialists in the investment company industry, and advised multinational corporations, partnerships, universities and high net worth individuals in tax matters. Mr. Burke is a certified public
accountant. Based on the foregoing, Mr. Burke is experienced with accounting, financial and investment matters.
John P. Coblentz, Jr.
Mr. Coblentz has served as Trustee since 2003. Mr. Coblentz has been designated as the Boards audit committee financial expert given his extensive accounting and finance experience. Mr. Coblentz was a partner
with Deloitte & Touche LLP for 28 years. While at Deloitte & Touche LLP, Mr. Coblentz was lead partner responsible for all auditing and accounting services to a variety of large, global companies, a significant portion of
which operated in the financial services industry. Mr. Coblentz was also the national managing partner for the firms risk management function, a member of the firms Management Committee and the first managing partner of the
firms Financial Advisory Services practice, which brought together the firms mergers and acquisition services, forensic and dispute services, corporate finance, asset valuation and reorganization businesses under one management
structure. He served as a member of the firms Board of Directors. Mr. Coblentz is a certified public accountant. Based on the foregoing, Mr. Coblentz is experienced with accounting, financial and investment matters.
Diana M. Daniels.
Ms. Daniels has served as Trustee since 2007. Ms. Daniels also serves as a Trustee Emeritus and Presidential
Councillor of Cornell University. Ms. Daniels held several senior management positions at The Washington Post Company and its subsidiaries, where she worked for 29 years. While at The Washington Post Company, Ms. Daniels served as Vice
President, General Counsel, Secretary to the Board of Directors and Secretary to the Audit Committee. Previously, Ms. Daniels served as Vice President and General Counsel of Newsweek, Inc. Ms. Daniels also serves on the Executive Committee
of the Governing Council of the Independent Directors Council of the Investment Company Institute. Ms. Daniels has also served as Vice Chair and Chairman of the Executive Committee of the Board of Trustees of Cornell University and as a member
of the Corporate Advisory Board of Standish Mellon Management Advisors and of the Legal Advisory Board of New York Stock Exchange. Ms. Daniels is also a member of the American Law Institute and of the Advisory Council of the Inter-American
Press Association. Based on the foregoing, Ms. Daniels is experienced with legal, financial and investment matters.
B-32
Joseph P. LoRusso.
Mr. LoRusso has served as Trustee since 2010. Mr. LoRusso held a number
of senior management positions at Fidelity Investments for over 15 years, where he was most recently President of Fidelity Investments Institutional Services Co. (FIIS). As President of FIIS, Mr. LoRusso oversaw the development,
distribution and servicing of Fidelitys investment and retirement products through various financial intermediaries. Previously, he served as President, Executive Vice President and Senior Vice President of Fidelity Institutional Retirement
Services Co., where he helped establish Fidelitys 401(k) business and built it into the largest in the U.S. In these positions, he oversaw sales, marketing, implementation, client services, operations and technology. Mr. LoRusso also
served on Fidelitys Executive Management Committee. Prior to his experience with Fidelity, he was Second Vice President in the Investment and Pension Group of John Hancock Mutual Life Insurance, where he had responsibility for developing and
running the companys 401(k) business. Previously, he worked at The Equitable (now a subsidiary of AXA Financial), where he was Product Manager of the companys then-nascent 401(k) business, and at Arthur Andersen & Co. (now
Accenture), as a Senior Consultant within the firms consulting practice. Based on the foregoing, Mr. LoRusso is experienced with financial and investment matters.
Herbert J. (H.J.) Markley.
Mr. Markley has served as a Trustee since 2013. Previously, Mr. Markley held several senior management positions at Deere & Company, where he worked
for 35 years, including Executive Vice President of Worldwide Parts Service, Global Supply Management and Logistics, Enterprise Information Technology and Corporate Communications. Mr. Markleys experience at Deere included managing
manufacturing and engineering facilities, including the two largest manufacturing facilities and a joint venture with Hitachi. He later served as Senior Vice President of Worldwide Human Resources where he helped to lay the foundation for a new
human resources system, and as a President of the Agricultural Division, Deeres largest business unit. In addition to his work with Deere, Mr. Markley has served on the Boards of Directors of the Dubuque Chamber of Commerce, the First
National Bank of Dubuque, the University of Dubuque and the Iowa Public Television Foundation as well as the Board of Overseers of the Amos Tuck School of Business at Dartmouth College. Based on the foregoing, Mr. Markley is experienced with
financial and investment matters.
Jessica Palmer.
Ms. Palmer has served as Trustee since 2007. Ms. Palmer serves as a
Director of Emerson Center for the Arts and Culture, a not-for-profit organization. Ms. Palmer worked at Citigroup Corporate and Investment Banking (previously, Salomon Smith Barney/Salomon Brothers) for over 20 years, where she was a Managing
Director. While at Citigroup Corporate and Investment Banking, Ms. Palmer was Head of Global Risk Management, Chair of the Global Commitment Committee, Co-Chair of International Investment Banking (New York) and Head of Fixed Income Capital
Markets. Ms. Palmer was also a member of the Management Committee and Risk Management Operating Committee of Citigroup, Inc. Prior to that, Ms. Palmer was a Vice President at Goldman Sachs in its international corporate finance department.
Ms. Palmer was also Assistant Vice President of the International Division at Wells Fargo Bank, N.A. Ms. Palmer was also a member of the Board of Trustees of a private elementary and secondary school. Based on the foregoing,
Ms. Palmer is experienced with financial and investment matters.
Richard P. Strubel.
Mr. Strubel has served as Trustee since
1987. Mr. Strubel also serves as Chairman of the Northern Funds, a family of retail and institutional mutual funds managed by The Northern Trust Company. He also serves on the board of Gildan Activewear Inc., which is listed on the New York
Stock Exchange (NYSE). Mr. Strubel was Vice-Chairman of the Board of Cardean Learning Group (formerly known as Unext), and previously served as Unexts President and Chief Operating Officer. Mr. Strubel was Managing
Director of Tandem Partners, Inc., a privately-held management services firm, and served as President and Chief Executive Officer of Microdot, Inc. Previously, Mr. Strubel served as President of Northwest Industries, then a NYSE-listed company,
a conglomerate with various operating entities located around the country. Before joining Northwest, Mr. Strubel was an associate and later managing principal of Fry Consultants, a management consulting firm based in Chicago. Mr. Strubel
is also a Trustee Emeritus of the University of Chicago and is an adjunct professor at the University of Chicago Booth School of Business. Based on the foregoing, Mr. Strubel is experienced with financial and investment matters.
Roy W. Templin.
Mr. Templin has served as a Trustee since 2013. Mr. Templin is a Director of Con-Way Incorporated, a transportation,
supply-chain management and logistics services company, and serves on its Finance and Audit Committees (he is the Chair of the Finance Committee). Mr. Templin held a number of senior management positions at Whirlpool Corporation, an appliance
manufacturer and marketer, including Executive Vice President and Chief Financial Officer, Vice President and Corporate Controller there. At Whirlpool, Mr. Templin served on the Executive Committee and was responsible for all aspects of finance
globally, including treasury, accounting, risk management, investor relations, internal auditing, tax and facilities. Prior to joining Whirlpool, Mr. Templin served in several roles at Kimball International, a furniture and electronic
assemblies manufacturer, including Vice President of Finance and Chief Accounting Officer. Mr. Templin was also a Director of Corporate Finance for Cummins, Inc., a diesel engine manufacturer, a Director of Financial Development at NCR
Corporation, a computer hardware and electronics company, and a member of the audit staff of Price Waterhouse (now PricewaterhouseCoopers LLP). Mr. Templin is a certified public accountant. Based on the foregoing, Mr. Templin is
experienced with accounting, financial and investment matters.
B-33
James A. McNamara.
Mr. McNamara has served as Trustee and President of the Trust since 2007 and
has served as an officer of the Trust since 2001. Mr. McNamara is a Managing Director at Goldman Sachs. Mr. McNamara is currently head of Global Third Party Distribution at GSAM, where he was previously head of U.S. Third Party
Distribution. Prior to that role, Mr. McNamara served as Director of Institutional Fund Sales. Prior to joining Goldman Sachs, Mr. McNamara was Vice President and Manager at Dreyfus Institutional Service Corporation. Based on the
foregoing, Mr. McNamara is experienced with financial and investment matters.
Alan A. Shuch.
Mr. Shuch has served as a
Trustee since 1990. Mr. Shuch is an Advisory Director to Goldman Sachs. Mr. Shuch serves on the Board of Trustees of a number of offshore funds managed by GSAM. He serves on GSAMs Valuation Committee. Prior to retiring as a general
partner of Goldman Sachs in 1994, Mr. Shuch was president and chief operating officer of GSAM which he founded in 1988. Mr. Shuch joined the Goldman Sachs Fixed Income Division in 1976. He was instrumental in building Goldman Sachs
Corporate Bond Department and served as co-head of the Global Fixed Income Sales and the High Yield Bond and Preferred Stock Departments. He headed the Portfolio Restructuring and Fixed Income Quantitative and Credit Research Departments.
Mr. Shuch also served on a variety of firm-wide committees including the International Executive, New Product and Strategic Planning Committees and was a member of the Stone Street/Bridge Street Private Equity Board. Mr. Shuch serves on
Whartons Graduate Executive Board. Based on the foregoing, Mr. Shuch is experienced with financial and investment matters.
B-34
Officers of the Trust
Information pertaining to the officers of the Trust as of March 28, 2014 is set forth below.
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Name, Age and
Address
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Position(s)
Held
with the Trust
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Term of
Office and
Length of
Time Served
1
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Principal Occupation(s) During Past 5
Years
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James A. McNamara
200 West
Street
New York, NY 10282
Age:
51
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Trustee and President
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Since 2007
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Managing Director, Goldman Sachs (December 1998 Present); Director of Institutional Fund Sales, GSAM (April 1998 December
2000); and Senior Vice President and Manager, Dreyfus Institutional Service Corporation (January 1993 April 1998).
President, Goldman Sachs Fund Complex (November 2007 Present); Senior Vice President, Goldman Sachs Fund Complex (May 2007 November 2007);
and Vice President, Goldman Sachs Fund Complex (2001 2007).
Trustee Goldman Sachs Fund Complex (November 2007 Present and December 2002 May 2004).
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Scott McHugh
200 West
Street
New York, NY 10282
Age:
42
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Treasurer,
Senior Vice
President and Principal Financial Officer
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Since 2009
(Principal
Financial
Officer
since 2013)
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Vice President, Goldman Sachs (February 2007 Present); Assistant Treasurer of certain mutual funds administered by DWS Scudder
(2005 2007); and Director (2005 2007), Vice President (2000 2005), and Assistant Vice President (1998 2000), Deutsche Asset Management or its predecessor (1998 2007).
Principal Financial Officer Goldman Sachs Fund Complex (November 2013
Present); Treasurer Goldman Sachs Fund Complex (October 2009 Present); Senior Vice President Goldman Sachs Fund Complex (November 2009 Present); and Assistant Treasurer Goldman Sachs Fund Complex (May 2007
October 2009).
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Philip V. Giuca, Jr. 30 Hudson Street
Jersey City, NJ 07302
Age: 52
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Assistant Treasurer
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Since 1997
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Vice President, Goldman Sachs (May 1992 Present).
Assistant Treasurer Goldman Sachs Fund Complex.
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Peter Fortner 30 Hudson Street
Jersey City, NJ 07302
Age: 56
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Assistant Treasurer
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Since 2000
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Vice President, Goldman Sachs (July 2000 Present); Principal Financial Officer, Commerce Bank Mutual Fund Complex (2008
Present); Associate, Prudential Insurance Company of America (November 1985 June 2000); and Assistant Treasurer, certain closed-end funds administered by Prudential (1999 2000).
Assistant Treasurer Goldman Sachs Fund Complex.
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Kenneth G. Curran
30 Hudson
Street
Jersey City, NJ 07302
Age:
50
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Assistant Treasurer
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Since 2001
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Vice President, Goldman Sachs (November 1998 Present); and Senior Tax Manager, KPMG Peat Marwick (accountants) (August 1995
October 1998).
Assistant Treasurer Goldman Sachs Fund
Complex.
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Sarah Walton
30 Hudson
Street
Jersey City, NJ 07302
Age:
42
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Assistant Treasurer
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Since 2012
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Vice President, Goldman Sachs (December 2002 Present); and Associate, Goldman Sachs (February 2000 December
2002).
Assistant Treasurer Goldman Sachs Fund
Complex.
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B-35
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Name, Age and
Address
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Position(s) Held
with the Trust
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Term of
Office and
Length of
Time
Served
1
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Principal Occupation(s) During Past 5
Years
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Jesse Cole
71 South Wacker
Drive
Chicago, IL 60606
Age:
50
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Vice President
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Since 1998
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Managing Director, Goldman Sachs (December 2006 Present); Vice President, GSAM (June 1998 Present); and Vice President,
AIM Management Group, Inc. (investment adviser) (April 1996 June 1998).
Vice President Goldman Sachs Fund Complex.
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Kerry K. Daniels
71 South
Wacker Drive
Chicago, IL 60606
Age:
51
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Vice President
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Since 2000
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Manager, Financial Control Shareholder Services, Goldman Sachs (1986 Present).
Vice President Goldman Sachs Fund Complex.
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Mark Hancock
71 South Wacker
Drive
Chicago, IL 60606
Age:
46
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Vice President
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Since 2007
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Managing Director, Goldman Sachs (November 2005 Present); Vice President, Goldman Sachs (August 2000 November 2005);
Senior Vice President, Dreyfus Service Corp (1999 2000); and Vice President, Dreyfus Service Corp (1996 1999).
Vice President Goldman Sachs Fund Complex.
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Carlos W. Samuels
6011
Connection Drive
Irving, TX 75039
Age: 39
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Vice President
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Since 2007
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Vice President, Goldman Sachs (December 2007 Present); Associate, Goldman Sachs (December 2005 December 2007); and
Analyst, Goldman Sachs (January 2004 December 2005).
Vice President
Goldman Sachs Fund Complex.
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Miriam Cytryn
200 West
Street
New York, NY 10282
Age:
55
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Vice President
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Since 2008
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Vice President, GSAM (2008 Present); Vice President of Divisional Management, Investment Management Division (2007 2008);
Vice President and Chief of Staff, GSAM US Distribution (2003 2007); and Vice President of Employee Relations, Goldman Sachs (1996 2003).
Vice President Goldman Sachs Fund Complex.
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Glen Casey
200 West
Street
New York, NY 10282
Age:
49
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Vice President
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Since 2008
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Managing Director, Goldman Sachs (2007 Present); and Vice President, Goldman Sachs (1997 2007).
Vice President Goldman Sachs Fund Complex.
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Mark Heaney
Christchurch Court
10-15 Newgate Street London, EC1A 7HD, UK
Age: 46
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Vice President
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Since 2010
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Executive Director, GSAM (May 2005 Present); Director of Operations (UK and Ireland), Invesco Asset Management (May 2004
March 2005); Global Head of Investment Administration, Invesco Asset Management (September 2001 May 2004); Managing Director (Ireland), Invesco Asset Management (March 2000 September 2001); and Director of Investment Administration,
Invesco Asset Management (December 1998 March 2000).
Vice President
Goldman Sachs Fund Complex.
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Michael Magee
30 Hudson
Street
Jersey City, NJ 07302
Age:
36
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Vice President
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Since 2012
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Vice President, Goldman Sachs (December 2007-Present); Associate (December 2004-December 2007); and Analyst (December 2002-December
2004).
Vice President Goldman Sachs Fund
Complex.
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Robert McCormack
30 Hudson
Street
Jersey City, NJ 07302
Age:
40
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Vice President
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Since 2012
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Vice President, Goldman Sachs (December 2008 Present); and Associate, Goldman Sachs (September 2005 December
2008).
Vice President Goldman Sachs Fund
Complex.
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B-36
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Name, Age and
Address
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|
Position(s) Held
with the Trust
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|
Term of
Office and
Length of
Time
Served
1
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Principal Occupation(s) During Past 5
Years
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Kathryn Quirk
200 West
Street
New York, NY 10282
Age:
61
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Vice President
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Since 2013
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Vice President, Goldman Sachs (September 2013 Present); Vice President and Corporate Counsel, Prudential Insurance Company of
America (September 2004 December 2012); Deputy Chief Legal Officer, Asset Management, Prudential Insurance Company of America (September 2010 December 2012); Co-Chief Legal Officer, Prudential Investment Management, Inc.
(July 2008 June 2012); Chief Legal Officer, Prudential Investments LLC (July 2005 June 2012); Chief Legal Officer, Prudential Mutual Funds (September 2004 June 2012).
Vice PresidentGoldman Sachs Fund Complex.
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Lawrence J. Restieri
200 West
Street
New York, NY 10282
Age:
45
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Vice President
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Since 2013
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Managing Director, Goldman Sachs (2006 Present).
Vice PresidentGoldman Sachs Fund Complex.
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Rachel Schnoll
200 West
Street
New York, NY 10282
Age:
44
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Vice President
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Since 2013
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Managing Director, Goldman Sachs (2014 Present); Vice President, Goldman Sachs (2003 2013); Associate,
Goldman Sachs (1999 2002).
Vice PresidentGoldman
Sachs Fund Complex.
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Greg R. Wilson
200 West
Street
New York, NY 10282
Age:
40
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Vice President
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Since 2013
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Managing Director, Goldman Sachs (January 2011 Present); Head of the North American Sub-Advisory & Platform Distribution
Group, GSAM (April 2010 Present); and Business Development and Relationship Management Sub-Advisory & Platform Distribution Group, GSAM (May 2003 April 2010).
Vice PresidentGoldman Sachs Fund Complex.
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Caroline L. Kraus
200 West
Street
New York, NY 10282
Age:
36
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Secretary
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Since 2012
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Vice President, Goldman Sachs (August 2006 Present); Associate General Counsel, Goldman Sachs (2012 Present); Assistant
General Counsel, Goldman Sachs (August 2006 December 2011); and Associate, Weil, Gotshal & Manges, LLP (2002 2006).
Secretary Goldman Sachs Fund Complex (August 2012 Present); and Assistant Secretary Goldman Sachs Fund Complex (June 2012
August 2012).
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David Fishman
200 West Street
New York, NY 10282
Age: 49
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Assistant Secretary
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Since 2001
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Managing Director, Goldman Sachs (December 2001 Present); and Vice President, Goldman Sachs (1997 December
2001).
Assistant Secretary Goldman Sachs Fund
Complex.
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Danny Burke
200 West Street
New York, NY 10282
Age: 51
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Assistant Secretary
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Since 2001
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Vice President, Goldman Sachs (1987 Present).
Assistant Secretary Goldman Sachs Fund Complex.
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Deborah Farrell
30 Hudson
Street Jersey City, NJ 07302
Age: 42
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Assistant Secretary
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Since 2007
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Vice President, Goldman Sachs (2005 Present); Associate, Goldman Sachs (2001 2005); and Analyst, Goldman Sachs (1994
2005).
Assistant Secretary Goldman Sachs Fund
Complex.
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B-37
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Name, Age and
Address
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|
Position(s)
Held
with the Trust
|
|
Term of
Office and
Length of
Time
Served
1
|
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Principal Occupation(s) During Past 5
Years
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Patrick T. OCallaghan
200 West Street
New York, NY 10282
Age: 42
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Assistant Secretary
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Since 2009
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Vice President, Goldman Sachs (2000 Present); Associate, Goldman Sachs (1998 2000); and Analyst, Goldman Sachs (1995
1998).
Assistant Secretary Goldman Sachs Fund
Complex.
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James P. McCarthy
200 West
Street New York, NY 10282
Age: 49
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Assistant Secretary
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Since 2009
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Managing Director, Goldman Sachs (2003 Present); Vice President, Goldman Sachs (1996 2003); and Portfolio Manager, Goldman
Sachs (1995 1996).
Assistant Secretary Goldman Sachs Fund
Complex.
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Andrew Murphy
200 West
Street
New York, NY 10282
Age:
41
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Assistant Secretary
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Since 2010
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Vice President, Goldman Sachs (April 2009 Present); Assistant General Counsel, Goldman Sachs (April 2009 Present);
Attorney, Axiom Legal (2007 2009); and Vice President and Counsel, AllianceBernstein, L.P. (2001 2007).
Assistant Secretary Goldman Sachs Fund Complex.
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Robert Griffith
200 West
Street
New York, NY 10282
Age:
39
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Assistant Secretary
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Since 2011
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Vice President, Goldman Sachs (August 2011 Present); Assistant General Counsel, Goldman Sachs (August 2011 Present); Vice
President and Counsel, Nomura Holding America, Inc. (2010 2011); and Associate, Simpson Thacher & Bartlett LLP (2005 2010).
Assistant Secretary Goldman Sachs Fund Complex.
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Matthew Wolfe
200 West
Street
New York, NY 10282
Age:
31
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Assistant Secretary
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Since 2012
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Vice President, Goldman Sachs (July 2012 Present); Assistant General Counsel, Goldman Sachs (July 2012 Present); and
Associate, Dechert LLP (2007 2012).
Assistant Secretary
Goldman Sachs Fund Complex.
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1
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Officers hold office at the pleasure of the Board of Trustees or until their successors are duly elected and qualified. Each officer holds comparable
positions with certain other companies of which Goldman Sachs, GSAM or an affiliate thereof is the investment adviser, administrator and/or distributor.
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Standing Board Committees
The Audit Committee oversees the audit
process and provides assistance to the Board with respect to fund accounting, tax compliance and financial statement matters. In performing its responsibilities, the Audit Committee selects and recommends annually to the Board an independent
registered public accounting firm to audit the books and records of the Trust for the ensuing year, and reviews with the firm the scope and results of each audit. All of the Independent Trustees serve on the Audit Committee. The Audit Committee held
five meetings during the fiscal year ended November 30, 2013.
The Governance and Nominating Committee has been established
to: (i) assist the Board in matters involving mutual fund governance, which includes making recommendations to the Board with respect to the effectiveness of the Board in carrying out its responsibilities in governing the Fund and overseeing
its management; (ii) select and nominate candidates for appointment or election to serve as Independent Trustees; and (iii) advise the Board on ways to improve its effectiveness. All of the Independent Trustees serve on the Governance and
Nominating Committee. The Governance and Nominating Committee held two meetings during the fiscal year ended November 30, 2013. As stated above, each Trustee holds office for an indefinite term until the occurrence of certain events. In filling
Board vacancies, the Governance and Nominating Committee will consider nominees recommended by shareholders. Nominee recommendations should be submitted to the Trust at its mailing address stated in the Funds Prospectus and should be directed
to the attention of the Goldman Sachs Trust Governance and Nominating Committee.
The Compliance Committee has been
established for the purpose of overseeing the compliance processes: (i) of the Fund; and (ii) insofar as they relate to services provided to the Fund, of the Funds investment adviser, distributor, administrator (if any), and transfer
B-38
agent, except that compliance processes relating to the accounting and financial reporting processes, and certain related matters, are overseen by the Audit Committee. In addition, the Compliance
Committee provides assistance to the full Board with respect to compliance matters. The Compliance Committee met three times during the fiscal year ended November 30, 2013. All of the Independent Trustees serve on the Compliance Committee.
The Valuation Committee is authorized to act for the Board in connection with the valuation of portfolio securities held by
the Fund in accordance with the Trusts Valuation Procedures. Messrs. McNamara and Shuch serve on the Valuation Committee, together with certain employees of GSAM who are not Trustees. The Valuation Committee met twelve times during the fiscal
year ended November 30, 2013. The Valuation Committee reports periodically to the Board.
The Dividend Committee is
authorized, subject to the ratification of Trustees who are not members of the committee, to declare dividends and capital gain distributions consistent with the Funds Prospectus. Messrs. McNamara and McHugh serve on the Dividend Committee.
The Dividend Committee met twelve times during the fiscal year ended November 30, 2013.
The Contract Review Committee
has been established for the purpose of overseeing the processes of the Board for reviewing and monitoring performance under the Funds investment management, distribution, transfer agency and certain other agreements with the Funds
Investment Adviser and its affiliates. The Contract Review Committee is also responsible for overseeing the Boards processes for considering and reviewing performance under the operation of the Funds distribution, service, shareholder
administration and other plans, and any agreements related to the plans, whether or not such plans and agreements are adopted pursuant to Rule 12b-1 under the Act. The Contract Review Committee also provides appropriate assistance to the Board in
connection with the Boards approval, oversight and review of the Funds other service providers including, without limitation, the Funds custodian/accounting agent, sub-transfer agents, professional (legal and accounting) firms and
printing firms. The Contract Review Committee met three times during the fiscal year ended November 30, 2013. All of the Independent Trustees serve on the Contract Review Committee.
Risk Oversight
The Board is responsible for the oversight of the
activities of the Fund, including oversight of risk management. Day-to-day risk management with respect to the Fund is the responsibility of GSAM or other service providers (depending on the nature of the risk), subject to supervision by GSAM. The
risks of the Fund include, but are not limited to, investment risk, compliance risk, operational risk, reputational risk, credit risk and counterparty risk. Each of GSAM and the other service providers have their own independent interest in risk
management and their policies and methods of risk management may differ from the Fund and each others in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result, the Board recognizes that it is
not possible to identify all of the risks that may affect the Fund or to develop processes and controls to eliminate or mitigate their occurrence or effects, and that some risks are simply beyond the control of the Fund or GSAM, its affiliates or
other service providers.
The Board effectuates its oversight role primarily through regular and special meetings of the Board
and Board committees. In certain cases, risk management issues are specifically addressed in presentations and discussions. For example, GSAM has an independent dedicated Market Risk Group that assists GSAM in managing investment risk.
Representatives from the Market Risk Group regularly meet with the Board to discuss their analysis and methodologies. In addition, investment risk is discussed in the context of regular presentations to the Board on Fund strategy and performance.
Other types of risk are addressed as part of presentations on related topics (e.g. compliance policies) or in the context of presentations focused specifically on one or more risks. The Board also receives reports from GSAM management on operational
risks, reputational risks and counterparty risks relating to the Fund.
Board oversight of risk management is also performed
by various Board committees. For example, the Audit Committee meets with both the Funds independent registered public accounting firm and GSAMs internal audit group to review risk controls in place that support the Fund as well as test
results, and the Compliance Committee meets with the CCO and representatives of GSAMs compliance group to review testing results of the Funds compliance policies and procedures and other compliance issues. Board oversight of risk is also
performed as needed between meetings through communications between GSAM and the Board. The Board may, at any time and in its discretion, change the manner in which it conducts risk oversight. The Boards oversight role does not make the Board
a guarantor of the Funds investments or activities.
B-39
Trustee Ownership of Fund Shares
The following table shows the dollar range of shares beneficially owned by each Trustee in the Fund and other portfolios of the Goldman
Sachs Fund Complex as of December 31, 2013, unless otherwise noted.
|
|
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of
Equity
Securities in
the Fund
1
|
|
Aggregate Dollar
Range of
Equity
Securities in All
Portfolios in Fund
Complex Overseen By
Trustee
|
|
Ashok N. Bakhru
|
|
None
|
|
|
Over $100,000
|
|
Donald C. Burke
|
|
$1 - $10,000
|
|
|
Over $100,000
|
|
John P. Coblentz, Jr.
|
|
None
|
|
|
Over $100,000
|
|
Diana M. Daniels
|
|
None
|
|
|
Over $100,000
|
|
Joseph P. LoRusso
|
|
None
|
|
|
Over $100,000
|
|
Herbert J. Markley
2
|
|
$10,001 - $50,000
|
|
|
Over $100,000
|
|
James A. McNamara
|
|
None
|
|
|
Over $100,000
|
|
Jessica Palmer
|
|
None
|
|
|
Over $100,000
|
|
Alan A. Shuch
|
|
None
|
|
|
Over $100,000
|
|
Richard P. Strubel
|
|
None
|
|
|
Over $100,000
|
|
Roy W. Templin
2
|
|
None
|
|
|
Over $100,000
|
|
1
|
Includes the value of shares beneficially owned by each Trustee in the Fund.
|
2
|
Messrs. Markley and Templin began serving as Trustees effective October 15, 2013.
|
As of February 28, 2014, the Trustees and Officers of the Trust as a group owned less than 1% of the outstanding shares of
beneficial interest of the Fund.
Board Compensation
Each Independent Trustee is compensated with a unitary annual fee for his or her services as a Trustee of the Trust and as a member of the
Governance and Nominating Committee, Compliance Committee, Contract Review Committee, and Audit Committee. The Chairman and audit committee financial expert receive additional compensation for their services. The Independent Trustees are
also reimbursed for reasonable travel expenses incurred in connection with attending meetings. The Trust may also pay the reasonable incidental costs of a Trustee to attend training or other types of conferences relating to the investment company
industry.
The following table sets forth certain information with respect to the compensation of each Trustee of the Trust
for the fiscal year ended November 30, 2013:
Trustee Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Aggregate
Compensation
from the Fund*
|
|
|
Pension or
Retirement
Benefits Accrued as Part
of the Trusts Expenses
|
|
|
Total Compensation From Fund
Complex (including the
Fund)**
|
|
Ashok N. Bakhru
1
|
|
|
$1,739
|
|
|
|
|
|
|
|
$417,500
|
|
Donald C. Burke
|
|
|
$1,125
|
|
|
|
|
|
|
|
$270,000
|
|
John P. Coblentz, Jr.
2
|
|
|
$1,309
|
|
|
|
|
|
|
|
$313,750
|
|
Diana M. Daniels
|
|
|
$1,125
|
|
|
|
|
|
|
|
$270,000
|
|
Joseph P. LoRusso
|
|
|
$1,125
|
|
|
|
|
|
|
|
$270,000
|
|
Herbert J. Markley
3
|
|
|
$750
|
|
|
|
|
|
|
|
$91,667
|
|
James A. McNamara
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Jessica Palmer
|
|
|
$1,125
|
|
|
|
|
|
|
|
$270,000
|
|
Alan A. Shuch
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard P. Strubel
|
|
|
$1,125
|
|
|
|
|
|
|
|
$270,000
|
|
Roy W. Templin
3
|
|
|
$750
|
|
|
|
|
|
|
|
$91,667
|
|
*
|
The Fund commenced operations on March 28, 2013.
|
**
|
Represents fees paid to each Trustee during the fiscal year ended November 30, 2013 from the Goldman Sachs Fund Complex.
|
B-40
1
|
Includes compensation as Board Chairman.
|
2
|
Includes compensation as audit committee financial expert, as defined in Item 3 of Form N-CSR.
|
3
|
Includes compensation Messrs. Markley and Templin received as Trustees effective October 15, 2013.
|
4
|
Messrs. McNamara and Shuch are Interested Trustees, and as such, receive no compensation from the Fund or the Goldman Sachs Fund Complex.
|
Miscellaneous
Class A Shares of the Fund may be sold at NAV without payment of any sales charge to Goldman Sachs, its affiliates and their
respective officers, partners, directors or employees (including retired employees and former partners), any partnership of which Goldman Sachs is a general partner, any Trustee or officer of the Trust and designated family members of any of the
above individuals. These and the Funds other sales load waivers are due to the nature of the investors and/or the reduced sales effort and expense that are needed to obtain such investments.
The Trust, the Investment Adviser and principal underwriter have adopted codes of ethics under Rule 17j-1 of the Act that permit
personnel subject to their particular codes of ethics to invest in securities, including securities that may be purchased or held by the Fund.
MANAGEMENT SERVICES
As stated in the
Funds Prospectus, GSAM, 200 West Street, New York, New York 10282 serves as Investment Adviser to the Fund. GSAM is a subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Goldman Sachs. See Service Providers in the
Funds Prospectus for a description of the Investment Advisers duties to the Fund.
Founded in 1869, Goldman Sachs
Group, Inc. is a financial holding company and a leading global investment banking, securities and investment management firm. Goldman Sachs is a leader in developing portfolio strategies and in many fields of investing and financing, participating
in financial markets worldwide and serving individuals, institutions, corporations and governments. Goldman Sachs is also among the principal market sources for current and thorough information on companies, industrial sectors, markets, economies
and currencies, and trades and makes markets in a wide range of equity and debt securities 24 hours a day. The firm is headquartered in New York with offices in countries throughout the world. It has trading professionals throughout the United
States, as well as in London, Frankfurt, Tokyo, Seoul, Sao Paulo and other major financial centers around the world. The active participation of Goldman Sachs in the worlds financial markets enhances its ability to identify attractive
investments. Goldman Sachs has agreed to permit the Fund to use the name Goldman Sachs or a derivative thereof as part of the Funds name for as long as the Funds Management Agreement (as described below) is in effect.
The Investment Adviser is able to draw on the substantial research and market expertise of Goldman Sachs, whose investment
research effort is one of the largest in the industry. The Global Investment Research division provides original fundamental insights and analysis for clients in the equity, fixed income and currency and commodities markets. The group covers areas
such as economics, portfolio strategy, derivatives and equity and credit securities in more than 25 stock markets and 50 economies and regions around the world. The in depth information and analyses generated by Goldman Sachs research analysts
are available to the Investment Adviser subject to Chinese Wall restrictions.
In addition, many of Goldman Sachs
economists, securities analysts, portfolio strategists and credit analysts have consistently been highly ranked in respected industry surveys conducted in the United States and abroad. Goldman Sachs is also among the leading investment firms using
quantitative analytics (now used by a growing number of investors) to structure and evaluate portfolios. For example, Goldman Sachs options evaluation model analyzes a securitys term, coupon and call option, providing an overall analysis
of the securitys value relative to its interest risk.
In managing the Fund, the Investment Adviser has access to
Goldman Sachs economics research. The Economics Research Department based in London, conducts economic, financial and currency markets research which analyzes economic trends and interest and exchange rate movements worldwide. The Economics
Research Department tracks factors such as inflation and money supply figures, balance of trade figures, economic growth, commodity prices, monetary and fiscal policies, and political events that can influence interest rates and currency trends. The
success of Goldman Sachs international research team has brought wide recognition to its members. The team has earned top rankings in various external surveys such as Pensions and Investments, Forbes and Dalbar. These rankings acknowledge the
achievements of the firms economists, strategists and equity analysts.
B-41
In allocating the Funds assets among foreign countries and currencies, the Investment
Adviser will have access to the Global Asset Allocation Model. The model is based on the observation that the prices of all financial assets, including foreign currencies, will adjust until investors globally are comfortable holding the pool of
outstanding assets. Using the model, the Investment Adviser will estimate the total returns from each currency sector which are consistent with the average investor holding a portfolio equal to the market capitalization of the financial assets among
those currency sectors. These estimated equilibrium returns are then combined with the expectations of Goldman Sachs research professionals to produce an optimal currency and asset allocation for the level of risk suitable for the Fund given
its investment objectives and criteria.
The fixed income research capabilities of Goldman Sachs available to the Investment
Adviser include the Goldman Sachs Fixed Income Research Department and the Credit Department. The Fixed Income Research Department monitors developments in U.S. and foreign fixed income markets, assesses the outlooks for various sectors of the
markets and provides relative value comparisons, as well as analyzes trading opportunities within and across market sectors. The Fixed Income Research Department is at the forefront in developing and using computer-based tools for analyzing fixed
income securities and markets, developing new fixed income products and structuring portfolio strategies for investment policy and tactical asset allocation decisions. The Credit Department tracks specific governments, regions and industries and
from time to time may review the credit quality of the Funds investments.
The Funds management agreement (the
Management Agreement) provides that GSAM, in its capacity as Investment Adviser, may render similar services to others so long as the services under the Management Agreement are not impaired thereby. The Funds Management Agreement
was most recently approved by the Trustees of the Trust, including a majority of the Trustees of the Trust who are not parties to such agreement or interested persons (as such term is defined in the Act) of any party thereto (the
non-interested Trustees), on June 13, 2013. The Management Agreement was approved by the initial sole shareholder of the Fund prior to the Funds commencement of operations. A discussion regarding the Trustees basis for
approving the Management Agreement for the Fund is available in the Funds annual report for the period ended November 30, 2013.
The Management Agreement will remain in effect until June 30, 2014 and will continue in effect with respect to the Fund from year to year thereafter provided such continuance is specifically approved
at least annually by (i) the vote of a majority of the Funds outstanding voting securities or a majority of the Trustees of the Trust, and (ii) the vote of a majority of the non-interested Trustees of the Trust, cast in person at a
meeting called for the purpose of voting on such approval.
The Management Agreement will terminate automatically if
assigned (as defined in the Act). The Management Agreement is also terminable at any time without penalty by the Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund on 60 days written notice to the
Investment Adviser or by the Investment Adviser on 60 days written notice to the Trust.
Pursuant to the Management
Agreement, the Investment Adviser is entitled to receive the fees set forth below, payable monthly based on the Funds average daily net assets for the fiscal year ended November 30, 2013:
|
|
|
|
|
|
|
Fund
|
|
Contractual Rate
|
|
Actual Rate for the Fiscal Year Ended
November 30, 2013
|
|
MLP Energy Infrastructure Fund
|
|
1.00% on the first $1 billion
0.90% over $1 billion up to $2 billion
0.86% over $2 billion up to $5 billion
0.84% over $5 billion up to $8 billion
0.82% over $8 billion
|
|
|
1.00
|
%
|
For the fiscal year ended November 30, 2013, the amount of the fees incurred by the Fund
under the Management Agreement were:
|
|
|
|
|
Fund
|
|
Fiscal Year ended
November 30, 2013
*
|
|
MLP Energy Infrastructure Fund
|
|
$
|
881,900
|
|
*
|
The Fund commenced operations on March 28, 2013.
|
B-42
The Investment Adviser also performs administrative services for the Fund under the
Management Agreement. Such administrative services include, subject to the general supervision of the Trustees of the Trust, (i) providing supervision of all aspects of the Funds non-investment operations (other than certain operations
performed by others pursuant to agreements with the Fund); (ii) providing the Fund, to the extent not provided pursuant to the agreement with the Trusts custodian, transfer and dividend disbursing agent or agreements with other
institutions, with personnel to perform such executive, administrative and clerical services as are reasonably necessary to provide effective administration of the Fund; (iii) arranging, to the extent not provided pursuant to such agreements,
for the preparation, at the Funds expense, of the Funds tax returns, reports to shareholders, periodic updating of the Funds prospectus and statement of additional information, and reports filed with the SEC and other regulatory
authorities; (iv) providing the Fund, to the extent not provided pursuant to such agreements, with adequate office space and certain related office equipment and services; and (v) maintaining all of the Funds records other than those
maintained pursuant to such agreements.
Portfolio Managers Other Accounts Managed by the Portfolio Managers
The following table discloses other accounts within each type of category listed below for which the portfolio managers are jointly and
primarily responsible for day to day portfolio management, as of November 30, 2013, unless otherwise noted.
For each
portfolio manager listed below, the total number of accounts managed is a reflection of accounts within the strategy they oversee or manage, as well as accounts which participate in the sector in which the manage. There are multiple portfolio
managers involved with each account.
B-43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Accounts Managed and Total Assets by Account Type
|
|
|
Number of Accounts and Total Assets for Which Advisory
Fee is Performance Based
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment
Vehicles
|
|
|
Other Accounts
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment Vehicles
|
|
|
Other Accounts
|
|
Name of
Portfolio
Manager
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
Kyri Loupis
|
|
|
3
|
|
|
$
|
1,082,216,295
|
|
|
|
1
|
|
|
$
|
143,916,667
|
|
|
|
3242
|
|
|
$
|
6,417,560,945
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
Ganesh V. Jois
|
|
|
3
|
|
|
$
|
1,082,216,295
|
|
|
|
1
|
|
|
$
|
143,916,667
|
|
|
|
3242
|
|
|
$
|
6,417,560,945
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
Matthew Cooper
|
|
|
3
|
|
|
$
|
1,082,216,295
|
|
|
|
1
|
|
|
$
|
143,916,667
|
|
|
|
3242
|
|
|
$
|
6,417,560,945
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
Assets are preliminary, in millions of USD, as of November 30, 2013.
B-44
Conflicts of Interest.
The Investment Advisers portfolio managers are often
responsible for managing the Fund as well as other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered hedge funds. A portfolio manager may manage a separate account or other pooled
investment vehicle which may have materially higher fee arrangements than the Fund and may also have a performance-based fee. The side-by-side management of these funds may raise potential conflicts of interest relating to cross trading, the
allocation of investment opportunities and the aggregation and allocation of trades.
The Investment Adviser has a fiduciary
responsibility to manage all client accounts in a fair and equitable manner. The Investment Adviser seeks to provide best execution of all securities transactions and aggregate and then allocate securities to client accounts in a fair and timely
manner. To this end, the Investment Adviser has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. In addition, the Investment Adviser and the Fund have
adopted policies limiting the circumstances under which cross-trades may be effected between the Fund and another client account. The Investment Adviser conducts periodic reviews of trades for consistency with these policies. For more information
about conflicts of interests that may arise in connection with the portfolio managers management of the Funds investments and the investments of other accounts, see POTENTIAL CONFLICTS OF INTEREST Potential Conflicts
Relating to the Allocation of Investment Opportunities Among the Fund and Other Goldman Sachs Accounts and Potential Conflicts Relating to Goldman Sachs and the Investment Advisers Proprietary Activities and Activities on Behalf of Other
Accounts.
Portfolio Managers Compensation
Compensation for portfolio managers of the Investment Adviser is comprised of a base salary and discretionary variable compensation. The base salary is fixed from year to year. Year-end discretionary
variable compensation is primarily a function of each portfolio managers individual performance and his or her contribution to overall team performance; the performance of the Investment Adviser and Goldman Sachs; the teams net revenues
for the past year which in part is derived from advisory fees, and for certain accounts, performance-based fees; and anticipated compensation levels among competitor firms. Portfolio managers are rewarded, in part, for their delivery of investment
performance, measured on a pre-tax basis, which is reasonably expected to meet or exceed the expectations of clients and fund shareholders in terms of: excess return over an applicable benchmark, peer group ranking, risk management and factors
specific to certain funds such as yield or regional focus. Performance is judged over 1-, 3- and 5-year time horizons.
For compensation purposes, the benchmark for the Fund is the Alerian MLP Total Return Index.
The discretionary variable compensation for portfolio managers is also significantly influenced by: (1) effective participation in
team research discussions and process; and (2) management of risk in alignment with the targeted risk parameter and investment objective of the fund. Other factors may also be considered including: (1) general client/shareholder
orientation and (2) teamwork and leadership. Portfolio managers may receive equity-based awards as part of their discretionary variable compensation.
Other Compensation
In addition to base salary and discretionary variable compensation, the Investment Adviser has a number of additional benefits in place including (1) a 401k program
that enables employees to direct a percentage of their pretax salary and bonus income into a tax-qualified retirement plan; and (2) investment opportunity programs in which certain professionals may participate subject to certain eligibility
requirements.
Portfolio Managers Portfolio Managers Ownership of Securities in the Fund
The following table shows the portfolio managers ownership of securities in the Fund as of November 30, 2013:
|
|
|
Name of Portfolio Manager
|
|
Dollar Range of Equity Securities Beneficially Owned by
Portfolio Manager
|
Kyri Loupis
|
|
$100,001 - $500,000
|
Ganesh V. Jois*
|
|
$10,001 - $50,000
|
Matthew Cooper*
|
|
$10,001 - $50,000
|
*
|
Information for this Portfolio Manager is as of March 26, 2014.
|
B-45
Distributor and Transfer Agent
Distributor.
Goldman Sachs, 200 West Street, New York, New York 10282, serves as the exclusive distributor of shares of the Fund
pursuant to a best efforts arrangement as provided by a distribution agreement with the Trust on behalf of the Fund. Shares of the Fund are offered and sold on a continuous basis by Goldman Sachs, acting as agent. Pursuant to the
distribution agreement, after the Prospectus and periodic reports have been prepared, set in type and mailed to shareholders, Goldman Sachs will pay for the printing and distribution of copies thereof used in connection with the offering to
prospective investors. Goldman Sachs will also pay for other supplementary sales literature and advertising costs. Goldman Sachs may enter into sales agreements with certain Authorized Institutions to solicit subscriptions for Class A, Class C,
Class R and Class IR Shares of the Fund. Goldman Sachs receives a portion of the sales charge imposed on the sale, in the case of Class A Shares, or redemption, in the case of Class C Shares (and in certain cases, Class A Shares), of Fund
shares.
Goldman Sachs retained approximately the following commissions on sales of Class A or Class C Shares during
the following period:
|
|
|
|
|
Fund
|
|
Fiscal Year
ended
November 30, 2013
*
|
|
MLP Energy Infrastructure Fund
|
|
$
|
54,754
|
|
*
|
The Fund commenced operations on March 28, 2013.
|
Dealer Reallowances.
Class A Shares of the Fund are sold subject to a front-end sales charge, as described in the Prospectus and in this SAI in the section SHARES OF THE
TRUST. Goldman Sachs may pay commissions to Authorized Institutions that sell Class A Shares of the Fund in the form of a reallowance of all or a portion of the sales charge paid on the purchase of those shares. Goldman Sachs
reallows 4.70% of the Funds offering price with respect to purchases under $50,000.
Dealer allowances may
be changed periodically. During special promotions, the entire sales charge may be reallowed to Authorized Institutions. Authorized Institutions to whom substantially the entire sales charge is reallowed may be deemed to be underwriters
under the 1933 Act.
Transfer Agent.
Goldman Sachs, 71 South Wacker Drive, Chicago, IL 60606 serves as the Trusts
transfer and dividend disbursing agent. Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken with the Trust with respect to the Fund to: (i) record the issuance, transfer and redemption of shares, (ii) provide
purchase and redemption confirmations and quarterly statements, as well as certain other statements, (iii) provide certain information to the Trusts custodian and the relevant subcustodian in connection with redemptions, (iv) provide
dividend crediting and certain disbursing agent services, (v) maintain shareholder accounts, (vi) provide certain state Blue Sky and other information, (vii) provide shareholders and certain regulatory authorities with tax related
information, (viii) respond to shareholder inquiries, and (ix) render certain other miscellaneous services. For its transfer agency and dividend disbursing agent services, Goldman Sachs is entitled to receive a fee equal, on an annualized
basis, to 0.04% of average daily net assets with respect to the Funds Institutional Shares and 0.19% of average daily net assets with respect to the Funds Class A, Class C, Class R and Class IR Shares. Goldman Sachs may pay to
certain intermediaries who perform transfer agent services to shareholders a networking or sub-transfer agent fee. These payments will be made from the transfer agency fees noted above and in the Funds Prospectus.
As compensation for the services rendered to the Fund by Goldman Sachs as transfer and dividend disbursing agent and the assumption by
Goldman Sachs of the expenses related thereto, Goldman Sachs received fees for the fiscal year ended November 30, 2013 from the Fund as follows under the fee schedule then in effect:
|
|
|
|
|
Fund
|
|
Fiscal Year
ended
November 30, 2013
*
|
|
MLP Energy Infrastructure Fund
|
|
$
|
57,661
|
|
*
|
The Fund commenced operations on March 28, 2013.
|
B-46
The Trusts distribution and transfer agency agreements each provide that Goldman Sachs
may render similar services to others so long as the services Goldman Sachs provides thereunder are not impaired thereby. Such agreements also provide that the Trust will indemnify Goldman Sachs against certain liabilities.
Expenses
The Trust, on
behalf of the Fund, is responsible for the payment of the Funds expenses. The expenses include, without limitation, the fees payable to the Investment Adviser, the fees and expenses of the Trusts custodian and subcustodians, transfer
agent fees and expenses, pricing service fees and expenses, brokerage fees and commissions, filing fees for the registration or qualification of the Trusts shares under federal or state securities laws, expenses of the organization of the
Trust, fees and expenses incurred by the Trust in connection with membership in investment company organizations including, but not limited to, the Investment Company Institute, taxes, interest, costs of liability insurance, fidelity bonds or
indemnification, any costs, expenses or losses arising out of any liability of, or claim for damages or other relief asserted against, the Trust for violation of any law, legal, tax and auditing fees and expenses (including the cost of legal and
certain accounting services rendered by employees of Goldman Sachs or its affiliates with respect to the Trust), expenses of preparing and setting in type Prospectuses, SAIs, proxy material, reports and notices and the printing and distributing of
the same to the Trusts shareholders and regulatory authorities, any expenses assumed by the Fund pursuant to its distribution and service plans, compensation and expenses of its Independent Trustees, the fees and expenses of pricing services,
and extraordinary expenses, if any, incurred by the Trust. Except for fees and expenses under any distribution and service plan applicable to a particular class and transfer agency fees and expenses, all Fund expenses are borne on a non-class
specific basis.
Fees and expenses borne by the Fund relating to legal counsel, registering shares of the Fund, holding
meetings and communicating with shareholders may include an allocable portion of the cost of maintaining an internal legal and compliance department. The Fund may also bear an allocable portion of the Investment Advisers costs of performing
certain accounting services not being provided by the Trusts custodian.
The imposition of the Investment Advisers
fees, as well as other operating expenses, will have the effect of reducing the total return to investors. From time to time, the Investment Adviser may waive receipt of fees and/or assume certain expenses of the Fund, which would have the effect of
lowering the Funds overall expense ratio and increasing total return to investors at the time such amounts are waived or assumed, as the case may be.
As of March 28, 2014, the Investment Adviser has agreed to reduce or limit Other Expenses (excluding acquired fund fees and expenses, transfer agency fees and expenses, taxes, interest,
brokerage fees, shareholder meeting, litigation, indemnification and other extraordinary expenses) to 0.064% of average daily net assets of the Fund through at least March 28, 2015. Such reductions or limits are calculated monthly on a
cumulative basis during the Funds fiscal year. The Funds Other Expenses may be further reduced by any custody and transfer agency fee credits received by the Fund. The Investment Adviser may not terminate the arrangement
prior to March 28, 2015 without the approval of the Board of Trustees.
Reimbursements
For the fiscal year ended November 30, 2013, Other Expenses of the Fund were reduced by the Investment Adviser in the
following amounts under expense limitations that were then in effect:
|
|
|
|
|
Fund
|
|
Fiscal Year
ended
November 30, 2013
*
|
|
MLP Energy Infrastructure Fund
|
|
$
|
520,174
|
|
*
|
The Fund commenced operations on March 28, 2013.
|
Custodian and Sub-Custodians
State Street, One Lincoln Street, Boston, MA
02111, is the custodian of the Funds portfolio securities and cash. State Street also maintains the Funds accounting records. State Street may appoint domestic and foreign sub-custodians and use depositories from time to time to hold
securities and other instruments purchased by the Trust in foreign countries and to hold cash and currencies for the Trust.
B-47
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, 125 High Street, Boston, Massachusetts 02110, is the Funds independent registered public accounting
firm. In addition to audit services, PricewaterhouseCoopers LLP prepares the Funds federal and state tax returns and provides assistance on certain non-audit matters.
POTENTIAL CONFLICTS OF INTEREST
General Categories of
Conflicts Associated with the Funds
Goldman Sachs (which, for purposes of this
POTENTIAL CONFLICTS OF
INTEREST
section, shall mean, collectively, The Goldman Sachs Group, Inc., the Investment Adviser and their affiliates, directors, partners, trustees, managers, members, officers and employees) is a worldwide, full-service investment
banking, broker-dealer, asset management and financial services organization and a major participant in global financial markets. As such, Goldman Sachs provides a wide range of financial services to a substantial and diversified client base. In
those and other capacities, Goldman Sachs advises clients in all markets and transactions and purchases, sells, holds and recommends a broad array of investments for its own accounts and for the accounts of clients and of its personnel, through
client accounts and the relationships and products it sponsors, manages and advises (such Goldman Sachs or other client accounts (including the Funds), relationships and products collectively, the Accounts). Goldman Sachs has direct and
indirect interests in the global fixed income, currency, commodity, equities, bank loan and other markets, and the securities and issuers, in which the Funds may directly and indirectly invest. As a result, Goldman Sachs activities and
dealings may affect the Funds in ways that may disadvantage or restrict the Funds and/or benefit Goldman Sachs or other Accounts. For purposes of this
POTENTIAL CONFLICTS OF INTEREST
section, Funds shall mean,
collectively, the Fund and any of the other Goldman Sachs Funds.
The following are descriptions of certain conflicts of
interest and potential conflicts of interest that may be associated with the financial or other interests that the Investment Adviser and Goldman Sachs may have in transactions effected by, with, and on behalf of the Funds. They are not, and are not
intended to be, a complete enumeration or explanation of all of the potential conflicts of interest that may arise. Additional information about potential conflicts of interest regarding the Investment Adviser and Goldman Sachs is set forth in the
Investment Advisers Form ADV, which prospective shareholders should review prior to purchasing Fund shares. A copy of Part 1 and Part 2 of the Investment Advisers Form ADV is available on the SECs website (www.adviserinfo.sec.gov).
A copy of Part 2 of the Investment Advisers Form ADV will be provided to shareholders or prospective shareholders upon request.
The Sale of Fund Shares and the Allocation of Investment Opportunities
Sales Incentives and Related Conflicts Arising from Goldman Sachs Financial and Other Relationships with Intermediaries
Goldman Sachs and its personnel, including employees of the Investment Adviser, may have relationships (both involving and not involving
the Funds, and including without limitation placement, brokerage, advisory and board relationships) with distributors, consultants and others who recommend, or engage in transactions with or for, the Funds. Such distributors, consultants and other
parties may receive compensation from Goldman Sachs or the Funds in connection with such relationships. As a result of these relationships, distributors, consultants and other parties may have conflicts that create incentives for them to promote the
Funds.
To the extent permitted by applicable law, Goldman Sachs and the Funds may make payments to authorized dealers and
other financial intermediaries and to salespersons to promote the Funds. These payments may be made out of Goldman Sachs assets or amounts payable to Goldman Sachs. These payments may create an incentive for such persons to highlight, feature
or recommend the Funds.
Allocation of Investment Opportunities Among the Funds and Other Accounts
The Investment Adviser may manage or advise multiple Accounts (including Accounts in which Goldman Sachs and its personnel have an
interest) that have investment objectives that are similar to the Funds and that may seek to make investments or sell investments in the same securities or other instruments, sectors or strategies as the Funds. This may create potential conflicts,
particularly in circumstances where the availability of such investment opportunities is limited (e.g., in local and emerging markets, high yield securities, fixed income securities, regulated industries, small capitalization and initial public
offerings/new issues) or where the liquidity of such investment opportunities is limited.
B-48
The Investment Adviser does not receive performance-based compensation in respect of its
investment management activities on behalf of the Funds, but may simultaneously manage Accounts for which the Investment Adviser receives greater fees or other compensation (including performance-based fees or allocations) than it receives in
respect of the Funds. The simultaneous management of Accounts that pay greater fees or other compensation and the Funds may create a conflict of interest as the Investment Adviser may have an incentive to favor Accounts with the potential to receive
greater fees. For instance, the Investment Adviser may be faced with a conflict of interest when allocating scarce investment opportunities given the possibly greater fees from Accounts that pay performance-based fees. To address these types of
conflicts, the Investment Adviser has adopted policies and procedures under which it will allocate investment opportunities in a manner that it believes is consistent with its obligations as an investment adviser. However, the amount, timing,
structuring or terms of an investment by the Funds may differ from, and performance may be lower than, the investments and performance of other Accounts.
To address these potential conflicts, the Investment Adviser has developed allocation policies and procedures that provide that Goldman Sachs personnel making portfolio decisions for Accounts will make
purchase and sale decisions for, and allocate investment opportunities among, Accounts consistent with the Investment Advisers fiduciary obligations. These policies and procedures may result in the pro rata allocation (on a basis determined by
the Investment Adviser) of limited opportunities across eligible Accounts managed by a particular portfolio management team, but in many other cases the allocations reflect numerous other factors as described below. Accounts managed by different
portfolio management teams may be viewed separately for allocation purposes. There will be cases where certain Accounts (including Accounts in which Goldman Sachs and Goldman Sachs personnel have an interest) receive an allocation of an investment
opportunity when the Funds do not.
Allocation-related decisions for the Funds and other Accounts may be made by reference to
one or more factors, including without limitation: the Accounts portfolio and its investment horizons, objectives, guidelines and restrictions (including legal and regulatory restrictions affecting certain Accounts or affecting holdings across
Accounts); strategic fit and other portfolio management considerations, including different desired levels of exposure to certain strategies; the expected future capacity of the applicable Accounts; limits on the Investment Advisers brokerage
discretion; cash and liquidity considerations; and the availability of other appropriate investment opportunities. Suitability considerations, reputational matters and other considerations may also be considered. The application of these
considerations may cause differences in the performance of Accounts that have strategies similar to those of the Fund. In addition, in some cases the Investment Adviser may make investment recommendations to Accounts where the Accounts make
investments independently of the Investment Adviser. In circumstances in which there is limited availability of an investment opportunity, if such Accounts invest in the investment opportunity prior to a Fund, the availability of the investment
opportunity for the Fund will be reduced irrespective of the Investment Advisers policies regarding allocation of investments. Additional information about the Investment Advisers allocation policies is set forth in Item 6
(
PERFORMANCE-BASED FEES AND SIDE-BY-SIDE MANAGEMENTSide-by-Side Management
) of the Investment Advisers Form ADV.
The Investment Adviser may, from time to time, develop and implement new trading strategies or seek to participate in new trading strategies and investment opportunities. These strategies and
opportunities may not be employed in all Accounts or employed pro rata among Accounts where they are employed, even if the strategy or opportunity is consistent with the objectives of such Accounts.
During periods of unusual market conditions, the Investment Adviser may deviate from its normal trade allocation practices. For example,
this may occur with respect to the management of unlevered and/or long-only Accounts that are typically managed on a side-by-side basis with levered and/or long-short Accounts.
The Investment Adviser and the Funds may receive notice of, or offers to participate in, investment opportunities. The Investment Adviser
in its sole discretion will determine whether a Fund will participate in any such investment opportunities and investors should not expect that the Fund will participate in any such investment opportunities. Notwithstanding anything in the
foregoing, the Funds may or may not receive, but in any event will have no rights with respect to, opportunities sourced by Goldman Sachs businesses and affiliates other than the Investment Adviser. Opportunities or any portion thereof that the
Funds do not participate in may be offered to other Accounts, Goldman Sachs (including the Investment Adviser), all or certain investors in the Funds, or such other persons or entities as determined by Goldman Sachs in its sole discretion, and the
Funds will not receive any compensation related to such opportunities.
Goldman Sachs Financial and Other Interests May
Incentivize Goldman Sachs to Promote the Sale of Fund Shares
Goldman Sachs and its personnel have interests in
promoting sales of Fund shares, and the compensation from such sales may be greater than the compensation relating to sales of interests in other Accounts. Therefore, Goldman Sachs and its personnel may have a financial interest in promoting Fund
shares over interests in other Accounts.
B-49
Management of the Funds by the Investment Adviser
Potential Restrictions and Issues Relating to Information Held by Goldman Sachs
Goldman Sachs has established certain information barriers and other policies to address the sharing of information between different
businesses within Goldman Sachs. As a result of information barriers, the Investment Adviser generally will not have access, or will have limited access, to information and personnel in other areas of Goldman Sachs, and generally will not be able to
manage the Funds with the benefit of information held by such other areas. Such other areas, including without limitation, Goldman Sachs prime brokerage and administration businesses, will have broad access to detailed information that is not
available to the Investment Adviser, including information in respect of markets and investments, which, if known to the Investment Adviser, might cause the Investment Adviser to seek to dispose of, retain or increase interests in investments held
by the Funds or acquire certain positions on behalf of the Funds, or take other actions. Goldman Sachs will be under no obligation or fiduciary or other duty to make any such information available to the Investment Adviser or personnel of the
Investment Adviser involved in decision-making for the Funds. In addition, Goldman Sachs will not have any obligation to make available any information regarding its trading activities, strategies or views, or the activities, strategies or views
used for other Accounts, for the benefit of the Funds. Different portfolio management teams within the Investment Adviser may make decisions based on information or take (or refrain from taking) actions with respect to Accounts they advise in a
manner that may be adverse to the Funds. Such teams may not share information with the Funds portfolio management teams, including as a result of certain information barriers and other policies, and will not have any obligation to do so.
Valuation of the Funds Investments
The Investment Adviser, while not the primary valuation agent of the Funds, performs certain valuation services related to securities and assets in the Funds. The Investment Adviser values securities and
assets in the Funds according to its valuation policies. The Investment Adviser may value an identical asset differently than another division or unit within Goldman Sachs values the asset, including because such other division or unit has
information regarding valuation techniques and models or other information that it does not share with the Investment Adviser. This is particularly the case in respect of difficult-to-value assets. The Investment Adviser may also value an identical
asset differently in different Accounts (e.g., because different Accounts are subject to different valuation guidelines pursuant to their respective governing agreements, different third party vendors are hired to perform valuation functions for the
Accounts or the Accounts are managed or advised by different portfolio management teams within the Investment Adviser). The Investment Adviser may face a conflict with respect to such valuations as they affect the Investment Advisers
compensation.
Goldman Sachs and the Investment Advisers Activities on Behalf of Other Accounts
Goldman Sachs engages in various activities in the global financial markets. Goldman Sachs, acting in various capacities (including
investment banker, market maker, investor, broker, advisor and research provider), may take actions or advise on transactions in respect of Accounts (including the Funds) or companies or affiliated or unaffiliated investment funds in which one or
more Funds have an interest that may have potential adverse effects on the Funds.
The Investment Adviser provides advisory
services to the Funds. The Investment Advisers decisions and actions on behalf of the Funds may differ from those on behalf of other Accounts. Advice given to, or investment or voting decisions made for, one or more Accounts may compete with,
affect, differ from, conflict with, or involve timing different from, advice given to or investment decisions made for the Funds.
Goldman Sachs (including the Investment Adviser), the clients it advises, and its personnel have interests in and advise Accounts that have investment objectives or portfolios similar to or opposed to
those of the Funds, and/or which engage in and compete for transactions in the same types of securities and other instruments as the Funds. Transactions by such Accounts may involve the same or related securities or other instruments as those in
which the Funds invest, and may negatively affect the Funds or the prices or terms at which the Funds transactions may be effected. For example, Accounts may engage in a strategy while the Funds are undertaking the same or a differing
strategy, any of which could directly or indirectly disadvantage the Funds. The Funds on one hand and Goldman Sachs or Accounts on the other hand may also vote differently on or take or refrain from taking different actions with respect to the same
security, which may be disadvantageous to the Funds. Goldman Sachs or Accounts, on the one hand, and a Fund, on the other hand, may also invest in or extend credit to different classes of securities or different parts of the capital structure of the
same issuer and as a result Goldman Sachs or Accounts may take actions that adversely affect the Fund. In addition, Goldman Sachs (including the Investment Adviser) may advise Accounts with respect to different parts of the capital structure of the
same issuer, or classes of securities that are subordinate or senior to securities, in which a Fund invests. As a result, Goldman Sachs may pursue or enforce rights or activities, or refrain from pursuing or enforcing rights or activities, on behalf
of Accounts with respect to a particular issuer in which one or more Funds have invested. The Funds could sustain losses during periods in which Goldman Sachs and other Accounts achieve profits. The negative effects described above may be more
pronounced in connection with transactions in, or the Funds use of, small capitalization, emerging market, distressed or less liquid strategies.
B-50
Goldman Sachs (including the Investment Adviser) and its personnel may advise on
transactions, make investment decisions or recommendations, provide differing investment views or have views with respect to research or valuations that are inconsistent with, or adverse to, the interests and activities of the Funds. Similarly, the
Investment Advisers investment teams may have differing investment views in respect of an issuer or a security, and the positions a Funds investment team takes in respect of the Fund may be inconsistent with, or adversely affected by,
the interests and activities of the Accounts advised by other investment teams of the Investment Adviser. Research, analyses or viewpoints may be available to clients or potential clients at different times. Goldman Sachs will not have any
obligation to make available to the Funds any research or analysis prior to its public dissemination. The Investment Adviser is responsible for making investment decisions on behalf of the Funds and such investment decisions can differ from
investment decisions or recommendations by Goldman Sachs on behalf of other Accounts. Goldman Sachs, on behalf of one or more Accounts and in accordance with its management of such Accounts, may implement an investment decision or strategy ahead of,
or contemporaneously with, or behind similar investment decisions or strategies made for the Funds. The relative timing for the implementation of investment decisions or strategies for Accounts, on the one hand, and the Funds, on the other hand, may
disadvantage the Funds. Certain factors, for example, market impact, liquidity constraints, or other circumstances, could result in the Funds receiving less favorable trading results or incurring increased costs associated with implementing such
investment decisions or strategies, or being otherwise disadvantaged.
Subject to applicable law, the Investment Adviser may
cause the Funds to invest in securities, bank loans or other obligations of companies affiliated with or advised by Goldman Sachs or in which Goldman Sachs or Accounts have an equity, debt or other interest, or to engage in investment transactions
that may result in other Accounts being relieved of obligations or otherwise divested of investments, which may enhance the profitability of Goldman Sachs or other Accounts investment in and activities with respect to such companies.
When the Investment Adviser wishes to place an order for different types of Accounts (including the Funds) for which
aggregation is not practicable, the Investment Adviser may use a trade sequencing and rotation policy to determine which type of Account is to be traded first. Under this policy, each portfolio management team may determine the length of its trade
rotation period and the sequencing schedule for different categories of clients within this period provided that the trading periods and these sequencing schedules are designed to be fair and equitable over time. The portfolio management teams
currently base their trading periods and rotation schedules on the relative amounts of assets managed for different client categories (e.g., unconstrained client accounts, wrap program accounts, etc.) and, as a result, the Funds may
trade behind other Accounts. Within a given trading period, the sequencing schedule establishes when and how frequently a given client category will trade first in the order of rotation. The Investment Adviser may deviate from the predetermined
sequencing schedule under certain circumstances, and the Investment Advisers trade sequencing and rotation policy may be amended, modified or supplemented at any time without prior notice to clients.
Investments in Goldman Sachs Funds
To the extent permitted by applicable law, the Funds may invest in money market and other funds sponsored, managed or advised by Goldman Sachs. In connection with any such investments, a Fund, to the
extent permitted by the Act, will pay all advisory, administrative or Rule 12b-1 fees applicable to the investment, and fees to the Investment Adviser in its capacity as manager of the Funds will not be reduced thereby (i.e., there could be
double fees involved in making any such investment because Goldman Sachs could receive fees with respect to both the management of the Funds and such money market fund). In such circumstances, as well as in all other circumstances in
which Goldman Sachs receives any fees or other compensation in any form relating to the provision of services, no accounting or repayment to the Funds will be required.
Goldman Sachs May In-Source or Outsource
Subject to applicable law,
Goldman Sachs, including the Investment Adviser, may from time to time and without notice to investors in-source or outsource certain processes or functions in connection with a variety of services that it provides to the Funds in its administrative
or other capacities. Such in-sourcing or outsourcing may give rise to additional conflicts of interest.
Distributions of Assets Other
Than Cash
With respect to redemptions from the Funds, the Funds may, in certain circumstances, have discretion to
decide whether to permit or limit redemptions and whether to make distributions in connection with redemptions in the form of securities or other assets, and in such case, the composition of such distributions. In making such decisions, the
Investment Adviser may have a potentially conflicting division of loyalties and responsibilities with respect to redeeming investors and remaining investors.
B-51
Goldman Sachs May Act in a Capacity Other Than Investment Adviser to the Funds
Principal and Cross Transactions
When permitted by applicable law and the Investment Advisers policies, the Investment Adviser, acting on behalf of the Funds, may enter into transactions in securities and other instruments with or
through Goldman Sachs or in Accounts managed by the Investment Adviser, and may cause the Funds to engage in transactions in which the Investment Adviser acts as principal on its own behalf (principal transactions), advises both sides of a
transaction (cross transactions) and acts as broker for, and receives a commission from, the Funds on one side of a transaction and a brokerage account on the other side of the transaction (agency cross transactions). There may be potential
conflicts of interest or regulatory issues relating to these transactions which could limit the Investment Advisers decision to engage in these transactions for the Funds. Goldman Sachs may have a potentially conflicting division of loyalties
and responsibilities to the parties in such transactions, and has developed policies and procedures in relation to such transactions and conflicts. Any principal, cross or agency cross transactions will be effected in accordance with fiduciary
requirements and applicable law.
Goldman Sachs May Act in Multiple Commercial Capacities
To the extent permitted by applicable law, Goldman Sachs may act as broker, dealer, agent, lender or advisor or in other commercial
capacities for the Funds or issuers of securities held by the Funds. Goldman Sachs may be entitled to compensation in connection with the provision of such services, and the Funds will not be entitled to any such compensation. Goldman Sachs will
have an interest in obtaining fees and other compensation in connection with such services that are favorable to Goldman Sachs, and in connection with providing such services may take commercial steps in its own interests, or may advise the parties
to which it is providing services to take actions or engage in transactions, that negatively affect the Funds. For example, Goldman Sachs may advise a company to make changes to its capital structure the result of which would be a reduction in the
value or priority of a security held by one or more Funds. Actions taken or advised to be taken by Goldman Sachs in connection with other types of transactions may also result in adverse consequences for the Fund. In addition, due to its access to
and knowledge of funds, markets and securities based on its other businesses, Goldman Sachs may make decisions based on information or take (or refrain from taking) actions with respect to interests in investments of the kind held directly or
indirectly by the Funds in a manner that may be adverse to the Funds. Goldman Sachs may also provide various services to the Funds or to issuers of securities in which the Funds invest, which may result in fees, compensation and remuneration as well
as other benefits to Goldman Sachs, enhance Goldman Sachs relationships with various parties, facilitate additional business development and enable Goldman Sachs to obtain additional business and generate additional revenue.
To the extent permitted by applicable law, Goldman Sachs (including the Investment Adviser) may create, write, sell, issue, invest in or
act as placement agent or distributor of derivative instruments related to the Funds, or with respect to underlying securities or assets of the Funds, or which may be otherwise based on or seek to replicate or hedge the performance of the Funds.
Such derivative transactions, and any associated hedging activity, may differ from and be adverse to the interests of the Funds.
Goldman Sachs may make loans to shareholders or enter into similar transactions that are secured by a pledge of, or mortgage over, a shareholders Fund shares, which would provide Goldman Sachs with
the right to redeem such Fund shares in the event that such shareholder defaults on its obligations. These transactions and related redemptions may be significant and may be made without notice to the shareholders.
Goldman Sachs may make loans to clients or enter into asset-based or other credit facilities or similar transactions with clients that
are secured by a clients assets or interests other than Fund shares. In connection with its rights as lender, Goldman Sachs may take actions that adversely affect the borrower. The borrowers actions may in turn adversely affect the Funds
(
e.g.
, if the borrower rapidly liquidates a large position in a security that is held by one or more Funds, the value of such security may decline and the value of the Funds may in turn decline in value or may be unable to liquidate their
positions in such security at an advantageous price).
Code of Ethics and Personal Trading
Each of the Funds and Goldman Sachs, as each Funds Investment Adviser and distributor, has adopted a Code of Ethics (the Code
of Ethics) in compliance with Section 17(j) of the Act designed to provide that personnel of the Investment Adviser, and certain additional Goldman Sachs personnel who support the Investment Adviser, comply with applicable federal
securities laws and place the interests of clients first in conducting personal securities transactions. The Code of Ethics imposes certain restrictions on securities transactions in the personal accounts of covered persons to help avoid conflicts
of interest. Subject to the limitations of the Code of Ethics, covered persons may buy and sell securities or other investments for their personal accounts, including investments in the Funds, and may also take positions that are the same as,
different from, or made at different times than, positions taken by the Funds. The Codes of Ethics can be reviewed and copied at the SECs Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-202-942-8090. The Codes of Ethics are also available on the EDGAR Database on the SECs Internet site at http://www.sec.gov. Copies may also be obtained after paying a duplicating fee by writing the
SECs Public Reference Section, Washington, DC 20549-0102, or by electronic request to
B-52
publicinfo@sec.gov. Additionally, all Goldman Sachs personnel, including personnel of the Investment Adviser, are subject to firm-wide policies and procedures regarding confidential and
proprietary information, information barriers, private investments, outside business activities and personal trading.
Proxy Voting by
the Investment Adviser
The Investment Adviser 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 its fiduciary obligations to its clients. Notwithstanding such
proxy voting policies and procedures, proxy voting decisions made by the Investment Adviser in respect of securities held by the Funds may benefit the interests of Goldman Sachs and/or Accounts other than the Funds. For a more detailed discussion of
these policies and procedures, see the section of this SAI entitled
PROXY VOTING
.
Potential Limitations and
Restrictions on Investment Opportunities and Activities of Goldman Sachs and the Funds
The Investment Adviser may
restrict its investment decisions and activities on behalf of the Funds in various circumstances, including as a result of applicable regulatory requirements, information held by Goldman Sachs, Goldman Sachs internal policies and/or potential
reputational risk in connection with Accounts (including the Funds). As a result, the Investment Adviser might not engage in transactions for one or more Funds in consideration of Goldman Sachs activities outside the Funds (e.g., the
Investment Adviser may refrain from making investments for the Funds that would cause Goldman Sachs to exceed position limits or cause Goldman Sachs to have additional disclosure obligations and may limit purchases or sales of securities in respect
of which Goldman Sachs is engaged in an underwriting or other distribution). The Investment Adviser may also reduce a Funds interest in an investment opportunity that has limited availability so that other Accounts that pursue similar
investment strategies may be able to acquire an interest in the investment opportunity. In addition, the Investment Adviser is not permitted to obtain or use material non-public information in effecting purchases and sales in public securities
transactions for the Funds. The Investment Adviser may also limit an activity or transaction engaged in by the Funds, and may limit its exercise of rights on behalf of the Funds for reputational or other reasons, including where Goldman Sachs is
providing (or may provide) advice or services to an entity involved in such activity or transaction, where Goldman Sachs or an Account is or may be engaged in the same or a related transaction to that being considered on behalf of the Funds, where
Goldman Sachs or an Account has an interest in an entity involved in such activity or transaction, or where such activity or transaction or the exercise of such rights on behalf of or in respect of the Funds could affect Goldman Sachs, the
Investment Adviser or their activities. The Investment Adviser may restrict its investment decisions and activities on behalf of one or more Funds and not on behalf of other Accounts.
Brokerage Transactions
The Investment Adviser may select
broker-dealers (including affiliates of the Investment Adviser) that furnish the Investment Adviser, the Funds, their affiliates and other Goldman Sachs personnel with proprietary or third party brokerage and research services (collectively,
brokerage and research services) that provide, in the Investment Advisers view, appropriate assistance to the Investment Adviser in the investment decision-making process. As a result, the Investment Adviser may pay for such
brokerage and research services with soft or commission dollars.
Brokerage and research services may be used to
service the Funds and any or all other Accounts, including Accounts that do not pay commissions to the broker-dealer relating to the brokerage and research service arrangements. As a result, brokerage and research services (including soft dollar
benefits) may disproportionately benefit other Accounts relative to the Funds based on the relative amount of commissions paid by the Funds. The Investment Adviser does not attempt to allocate soft dollar benefits proportionately among clients or to
track the benefits of brokerage and research services to the commissions associated with a particular Account or group of Accounts.
Aggregation of Trades by the Investment Adviser
The Investment Adviser follows policies and procedures pursuant to which it may combine or aggregate purchase or sale orders for the same security for multiple Accounts (including Accounts in which
Goldman Sachs has an interest) (sometimes called bunching), so that the orders can be executed at the same time. The Investment Adviser aggregates orders when the Investment Adviser considers doing so appropriate and in the interests of
its clients generally. In addition, under certain circumstances trades for the Funds may be aggregated with Accounts that contain Goldman Sachs assets.
When a bunched order is completely filled, the Investment Adviser generally will allocate the securities purchased or proceeds of sale pro rata among the participating Accounts, based on the purchase or
sale order. If an order is filled at several different prices, through multiple trades (whether at a particular broker-dealer or among multiple broker-dealers), generally all participating Accounts will receive the average price and pay the average
commission, however, this may not always be the case (due to, e.g., odd lots, rounding, market practice or constraints applicable to particular Accounts).
B-53
Although it may do so in certain circumstances, the Investment Adviser generally does not
bunch or aggregate orders for different Funds, or net buy and sell orders for the same Fund, if portfolio management decisions relating to the orders are made by separate portfolio management teams, if bunching, aggregating or netting is not
appropriate or practicable from the Investment Advisers operational or other perspective, or if doing so would not be appropriate in light of applicable regulatory considerations. The Investment Adviser may be able to negotiate a better price
and lower commission rate on aggregated trades than on trades for Funds that are not aggregated, and incur lower transaction costs on netted trades than trades that are not netted. Where transactions for a Fund are not aggregated with other orders,
or not netted against orders for the Fund, the Fund may not benefit from a better price and lower commission rate or lower transaction cost.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The
Investment Adviser is responsible for decisions to buy and sell securities for the Fund, the selection of brokers and dealers to effect the transactions and the negotiation of brokerage commissions, if any. Purchases and sales of securities may be
executed internally by a broker-dealer, effected on an agency basis in a block transaction, or routed to competing market centers for execution. The compensation paid to the broker for providing execution services generally is negotiated and
reflected in either a commission or a net price. Executions provided on a net price basis, with dealers acting as principal for their own accounts without a stated commission, usually include a profit to the dealer. Orders may be
directed to any broker including, to the extent and in the manner permitted by applicable law, Goldman Sachs. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally
referred to as the underwriters concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid.
In placing orders for portfolio securities or other financial instruments of the Fund, the Investment Adviser is generally required to
give primary consideration to obtaining the most favorable execution and net price available. This means that the Investment Adviser will seek to execute each transaction at a price and commission, if any, which provides the most favorable total
cost or proceeds reasonably attainable in the circumstances. As permitted by Section 28(e) of the Securities Exchange Act of 1934 (Section 28(e)), the Fund may pay a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another broker would have charged for effecting that transaction. Such practice is subject to a good faith determination that such commission is reasonable in light of the services
provided and to such policies as the Trustees may adopt from time to time. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, the Fund will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Investment Adviser will consider research and investment services provided by brokers or dealers who effect or are parties to portfolio transactions of the Fund, the Investment Adviser and its affiliates, or
their other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include research reports on particular industries and companies; economic surveys and analyses;
recommendations as to specific securities; research products including quotation equipment and computer related programs; advice concerning the value of securities, the advisability of investing in, purchasing or selling securities and the
availability of securities or the purchasers or sellers of securities; analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and performance of accounts; services relating to effecting
securities transactions and functions incidental thereto (such as clearance and settlement); and other lawful and appropriate assistance to the Investment Adviser in the performance of its decision-making responsibilities.
Such services are used by the Investment Adviser in connection with all of its investment activities, and some of such services obtained
in connection with the execution of transactions for the Fund may be used in managing other investment accounts. Conversely, brokers furnishing such services may be selected for the execution of transactions of such other accounts, whose aggregate
assets may be larger than those of the Fund, and the services furnished by such brokers may be used by the Investment Adviser in providing management services for the Trust. The Investment Adviser may also participate in so-called commission
sharing arrangements and client commission arrangements under which the Investment Adviser 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 the Investment Adviser. The Investment Adviser excludes from use under these arrangements those products and services that are not fully eligible under applicable law and regulatory
interpretationseven as to the portion that would be eligible if accounted for separately.
The research services
received as part of commission sharing and client commission arrangements will comply with Section 28(e) and may be subject to different legal requirements in the jurisdictions in which the Investment Adviser does business. Participating in
commission sharing and client commission arrangements may enable the Investment Adviser to consolidate payments for research through one or more channels using accumulated client commissions or credits from transactions executed through a particular
broker-dealer to obtain research provided by other firms. Such arrangements also help to ensure the continued receipt of research services
B-54
while facilitating best execution in the trading process. The Investment Adviser believes such research services are useful in its investment decision-making process by, among other things,
ensuring access to a variety of high quality research, access to individual analysts and availability of resources that the Investment Adviser might not be provided access to absent such arrangements.
On occasions when the Investment Adviser deems the purchase or sale of a security or other financial instruments to be in the best
interest of the Fund as well as its other customers (including any other fund or other investment company or advisory account for which the Investment Adviser acts as investment adviser or sub-investment adviser), the Investment Adviser, to the
extent permitted by applicable laws and regulations, may aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for such other customers in order to obtain the best net price and most favorable execution
under the circumstances. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Investment Adviser in the manner it considers to be equitable and consistent with its
fiduciary obligations to the Fund and such other customers. In some instances, this procedure may adversely affect the price and size of the position obtainable for the Fund.
The Fund may participate in a commission recapture program. Under the program, participating broker-dealers rebate a percentage of
commissions earned on Fund portfolio transactions to the Fund from which the commissions were generated. The rebated commissions are expected to be treated as realized capital gains of the Fund.
Subject to the above considerations, the Investment Adviser may use Goldman Sachs or an affiliate as a broker for the Fund. In order for
Goldman Sachs or an affiliate, acting as agent, to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Goldman Sachs or an affiliate must be reasonable and fair compared to the commissions, fees or
other remuneration received by other brokers in connection with comparable transactions involving similar securities or futures contracts. Furthermore, the Trustees, including a majority of the Independent Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration paid to Goldman Sachs are consistent with the foregoing standard. Brokerage transactions with Goldman Sachs are also subject to such fiduciary standards as may be
imposed upon Goldman Sachs by applicable law.
Commission rates in the U.S. are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the broker in the light of generally prevailing rates. The allocation of orders among brokers and the commission rates paid are reviewed periodically by the Trustees. The
amount of brokerage commissions paid by the Fund may vary substantially from year to year because of differences in shareholder purchase and redemption activity, portfolio turnover rates and other factors.
During the fiscal year ended November 30, 2013, the Fund paid brokerage commissions as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Brokerage
Commissions Paid
|
|
Total
Brokerage
Commissions Paid to
Goldman Sachs (1)
|
|
|
Total Amount
of
Transactions on which
Commissions Paid (2)
|
|
|
Amount of
Transactions
Effected
through Brokers
Providing
Proprietary
Research(3)
|
|
|
Total
Brokerage
Commissions
Paid
for
Proprietary
Research(3)
|
|
$243,938
|
|
$
|
0
|
(0%)
|
|
$
|
278,671,903
|
(0%)
|
|
$
|
392,180,487
|
|
|
$
|
243,938
|
|
1
|
Percentages refer to percentage of total commissions paid to Goldman Sachs.
|
2
|
Percentages refer to percentage of total amount of transactions involving the payment of commissions effected through Goldman Sachs.
|
3
|
The information above reflects the full commission amounts paid to brokers that provide research to the Investment Adviser. Only a portion of such commission pays for
research and the remainder of such commission is to compensate the broker for execution services, commitment of capital and other services related to the execution of brokerage transactions.
|
The Funds Investments in Regular Broker-Dealers
During the fiscal year ended November 30, 2013, the Funds regular broker-dealers, as defined in Rule 10b-1 under the Act, were: JPMorgan Chase & Co., Citigroup, Inc., State
Street Corp., Morgan Stanley & Co., Inc., Credit Suisse First Boston Corp., Deutsche Bank Securities, Inc., Barclays Capital, Inc., BNP Paribas Securities Corp., Wells Fargo Bank and Toronto Dominion Bank.
B-55
As of the same date, the Fund did not acquire or hold any securities of its regular
broker-dealers, as defined in Rule 10b-1 under the Act, or their parents.
NET ASSET VALUE
In accordance with procedures adopted by the Trustees, the net asset value per share of each class of the Fund is
calculated by determining the value of the net assets attributed to each class of the Fund and dividing by the number of outstanding shares of that class. All securities are valued on each Business Day as of the close of regular trading on the NYSE
(normally, but not always, 4:00 p.m. Eastern time) or such other time as the NYSE or NASDAQ market may officially close. The term Business Day means any day the NYSE is open for trading, which is Monday through Friday except for
holidays. The NYSE is closed on the following holidays: New Years Day, Martin Luther King, Jr. Day, Washingtons Birthday (observed), Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas.
The time at which transactions and shares are priced and the time by which orders must be received may be changed in case of an emergency
or if regular trading on the NYSE is stopped at a time other than 4:00 p.m. Eastern time. The Trust reserves the right to reprocess purchase, redemption and exchange transactions that were initially processed at a net asset value other than the
Funds official closing net asset value that is subsequently adjusted, and to recover amounts from (or distribute amounts to) shareholders based on the official closing net asset value. The Trust reserves the right to advance the time by which
purchase and redemption orders must be received for same business day credit as otherwise permitted by the SEC. In addition, the Fund may compute its net asset value as of any time permitted pursuant to any exemption, order or statement of the SEC
or its staff.
The Fund is treated as a regular corporation, or C corporation, for U.S. federal income tax
purposes. Accordingly, the Fund is subject to U.S. federal income tax on its taxable income at the Corporate Tax Rate as well as state and local income taxes. In calculating the Funds daily NAV, the Fund will, among other things, account for
its current taxes and deferred tax liability and/or asset balances. The Fund may accrue a deferred income tax liability balance at the Corporate Tax Rate, plus an estimated state and local income tax rate, for its future tax liability associated
with the capital appreciation of its investments and the distributions received by the Fund on equity securities of MLPs considered to be return of capital and for any net operating gains. Any deferred tax liability balance will reduce the
Funds NAV. The Fund may also accrue a deferred tax asset balance, which reflects an estimate of the Funds future tax benefit associated with net operating losses and unrealized losses. Any deferred tax asset balance will increase the
Funds NAV. To the extent the Fund has a deferred tax asset balance, consideration is given as to whether or not a valuation allowance, which would offset the value of some or all of the deferred tax asset balance, is required. The Fund will
rely to some extent on information provided by MLPs, which may not be provided to the Fund on a timely basis, to estimate the Funds current taxes and deferred tax liability and/or asset balances for purposes of financial statement reporting
and determining its NAV. The daily estimate of the Funds current taxes and deferred tax liability and/or asset balances used to calculate the Funds NAV could vary dramatically from the Funds actual tax liability or benefit, and, as
a result, the determination of the Funds actual tax liability or benefit may have a material impact on the Funds NAV. From time to time, the Fund may modify its estimates or assumptions regarding its current taxes and deferred tax
liability and/or asset balances as new information becomes available, which modifications in estimates or assumptions may have a material impact on the Funds NAV.
Portfolio securities of the Fund for which market quotations are readily available are valued as follows: (i) securities listed on any U.S. or foreign stock exchange or on NASDAQ will be valued at
the last sale price, or the official closing price, on the exchange or system in which they are principally traded on the valuation date. If there is no sale on the valuation day, securities traded will be valued at the closing bid price, or if a
closing bid price is not available, at either the exchange or system-defined close price on the exchange or system in which such securities are principally traded. If the relevant exchange or system has not closed by the above-mentioned time for
determining the Funds net asset value, the securities will be valued at the last sale price or official closing price, or if not available at the bid price at the time the net asset value is determined; (ii) over-the-counter securities
not quoted on NASDAQ will be valued at the last sale price on the valuation day or, if no sale occurs, at the last bid price at the time net asset value is determined; (iii) equity securities for which no prices are obtained under sections
(i) or (ii) including those for which a pricing service supplies no exchange quotation or a quotation that is believed by the portfolio manager/trader to be inaccurate, will be valued at their fair value in accordance with procedures
approved by the Board of Trustees; (iv) fixed income securities, with the exception of short term securities with remaining maturities of 60 days or less, will be valued using evaluated prices provided by a recognized pricing service
(
e.g.
, Interactive Data Corp., Reuters, etc.) or dealer-supplied quotations; (v) fixed income securities for which accurate market quotations are not readily available are valued by the Investment Adviser based on valuation models that
take into account various factors such as spread and daily yield changes on government or other securities in the appropriate market (
i.e.
matrix pricing); (vi) short-term fixed income securities with a remaining maturity of 60 days or
less are valued at amortized cost, which the Trustees have determined to approximate fair value; (vii) investments in open-end registered investment companies (excluding investments in ETFs)
B-56
are valued based on the NAV of those registered investment companies (which may use fair value pricing as discussed in their prospectus); and (viii) all other instruments, including those
for which a pricing service supplies no exchange quotation or a quotation that is believed by the portfolio manager/trader to be inaccurate, will be valued in accordance with the valuation procedures approved by the Board of Trustees.
The value of all assets and liabilities expressed in foreign currencies will be converted into U.S. dollar values at current exchange
rates of such currencies against U.S. dollars as of the close of regular trading on the New York Stock Exchange (normally, but not always, 4:00 p.m. Eastern time). If such quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in securities on European, Asian
and Far Eastern securities exchanges and on over-the-counter markets in these regions is substantially completed at various times prior to the close of business on each Business Day in New York (
i.e.
, a day on which the New York Stock
Exchange is open for trading). In addition, European, Asian or Far Eastern securities trading generally or in a particular country or countries may not take place on all Business Days in New York. Furthermore, trading takes place in various foreign
markets on days which are not Business Days in New York and days on which the Funds net asset values are not calculated. Such calculation does not take place contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. For investments in foreign equity securities, fair value prices are provided by an independent fair value service (if available), in accordance with the fair value procedures approved by the
Trustees, and are intended to reflect more accurately the value of those securities at the time the Funds NAV is calculated. Fair value prices are used because many foreign markets operate at times that do not coincide with those of the major
U.S. markets. Events that could affect the values of foreign portfolio holdings may occur between the close of the foreign market and the time of determining the NAV, and would not otherwise be reflected in the NAV. If the independent fair value
service does not provide a fair value for a particular security or if the value does not meet the established criteria for the Fund, the most recent closing price for such a security on its principal exchange will generally be its fair value on such
date.
The Investment Adviser, consistent with its procedures and applicable regulatory guidance, may (but need not) determine
to make an adjustment to the previous closing prices of either domestic or foreign securities in light of significant events, to reflect what it believes to be the fair value of the securities at the time of determining the Funds NAV.
Significant events that could affect a large number of securities in a particular market may include, but are not limited to: situations relating to one or more single issuers in a market sector; significant fluctuations in U.S. or foreign markets;
market dislocations; market disruptions or unscheduled market closings; equipment failures; natural or man-made disasters or acts of God; armed conflicts; governmental actions or other developments; as well as the same or similar events which may
affect specific issuers or the securities markets even though not tied directly to the securities markets. Other significant events that could relate to a single issuer may include, but are not limited to: corporate actions such as reorganizations,
mergers and buy-outs; corporate announcements, including those relating to earnings, products and regulatory news; significant litigation; ratings downgrades; bankruptcies; and trading suspensions.
In general, fair value represents a good faith approximation of the current value of an asset and may be used when there is no public
market or possibly no market at all for an asset. A security that is fair valued may be valued at a price higher or lower than actual market quotations or the value determined by other funds using their own fair valuation procedures. The fair value
of an asset may not be the price at which that asset is ultimately sold.
The proceeds received by the Fund and each other
series of the Trust from the 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 the Fund or particular series and
constitute the underlying assets of that Fund or series. The underlying assets of the Fund will be segregated on the books of account, and will be charged with the liabilities in respect of the Fund and with a share of the general liabilities of the
Trust. Expenses of the Trust with respect to the Fund and the other series of the Trust are generally allocated in proportion to the net asset values of the respective Fund or series except where allocations of expenses can otherwise be fairly made.
Errors and Corrective Actions
The Investment Adviser will report to the Board of Trustees any material breaches of investment objective, policies or restrictions and any material errors in the calculation of the NAV of the Fund or the
processing of purchases and redemptions. Depending on the nature and size of an error, corrective action may or may not be required. Corrective action may involve a prospective correction of the NAV only, correction of any erroneous NAV and
compensation to the Fund, or correction of any erroneous NAV, compensation to the Fund and reprocessing of individual shareholder transactions. The Trusts policies on errors and corrective action limit or restrict when corrective action will
be taken or when compensation to the Fund or its shareholders will be paid, and not all mistakes
B-57
will result in compensable errors. As a result, neither the Fund nor its shareholders who purchase or redeem shares during periods in which errors accrue or occur may be compensated in connection
with the resolution of an error. Shareholders will generally not be notified of the occurrence of a compensable error or the resolution thereof absent unusual circumstances.
As discussed in more detail under NET ASSET VALUE, the Funds portfolio securities may be priced based on quotations for those securities provided by pricing services. There can be no
guarantee that a quotation provided by a pricing service will be accurate.
SHARES OF THE TRUST
The Fund is a series of Goldman Sachs Trust, a Delaware statutory trust established by an Agreement and Declaration of
Trust dated January 28, 1997. The Funds fiscal year end is November 30.
The Trustees have authority under
the Trusts Declaration of Trust to create and classify shares of beneficial interest in separate series, without further action by shareholders. The Trustees also have authority to classify and reclassify any series of shares into one or more
classes of shares. As of March 28, 2014, the Trustees have classified the shares of the Fund into five classes: Class A Shares, Class C Shares, Institutional Shares, Class R Shares and Class IR Shares. Additional series and classes may be added
in the future.
Each Class A Share, Class C Share, Institutional Share, Class R Share and Class IR Share of the Fund
represents a proportionate interest in the assets belonging to the applicable class of the Fund. All expenses of the Fund are borne at the same rate by each class of shares, except that fees under the Distribution and Service Plan (the
Plan) are borne exclusively by Class A, Class C or Class R Shares and transfer agency fees and expenses are borne at different rates by different share classes. The Trustees may determine in the future that it is appropriate to
allocate other expenses differently among classes of shares and may do so to the extent consistent with the rules of the SEC and positions of the IRS. Each class of shares may have different minimum investment requirements and be entitled to
different shareholder services. With limited exceptions, shares of a class may only be exchanged for shares of the same or an equivalent class of another fund. See Shareholder Guide in the Prospectus and OTHER INFORMATION REGARDING
MAXIMUM SALES CHARGE, PURCHASES, REDEMPTIONS, EXCHANGES AND DIVIDENDS below. In addition, the fees and expenses set forth below for each class may be subject to fee waivers or reimbursements, as discussed more fully in the Funds
Prospectus.
Class A Shares are sold with an initial sales charge of up to 5.5% through brokers and dealers who are
members of the Financial Industry Regulatory Authority (FINRA) and certain other financial service firms that have sales agreements with Goldman Sachs. Class A Shares bear the cost of distribution fees at the aggregate rate of up to
0.25% of the average daily net assets of such Class A Shares of the Fund. With respect to Class A Shares, the distributor at its discretion may use compensation for distribution services paid under the Distribution and Service Plan for
personal and account maintenance services and expenses so long as such total compensation under the Plan does not exceed the maximum cap on service fees imposed by FINRA.
Class C Shares of the Fund are sold subject to a CDSC of up to 1.0% through brokers and dealers who are members of FINRA and certain
other financial services firms that have sales arrangements with Goldman Sachs. Class C Shares bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of the average daily net assets attributable to Class C Shares. Class
C Shares also bear the cost of service fees at an annual rate of up to 0.25% of the average daily net assets attributable to Class C Shares.
Class IR and Class R Shares are sold at net asset value without a sales charge. As noted in the Prospectus, Class IR and Class R Shares are not sold directly to the public. Instead, Class IR and Class R
Shares generally are available only to Section 401(k) plans, 403(b), 457, profit sharing, money purchase pension, tax-sheltered annuity, defined benefit pension, non-qualified deferred compensation plans and non-qualified pension plans or other
employee benefit plans (including health savings accounts) or SIMPLE plans that are sponsored by one or more employers (including governmental or church employers) or employee organizations (Employee Benefit Plans). Such an Employee
Benefit Plan must purchase Class IR or Class R Shares through a plan level or omnibus account. Class IR Shares may also be sold to accounts established under a fee-based program that is sponsored and maintained by an Authorized Institution that is
approved by Goldman Sachs (Eligible Fee-Based Program). Class IR and R Shares are not available to traditional and Roth Individual Retirement Accounts (IRAs), SEPs and SARSEPs; except that Class IR Shares are available to such accounts
or plans to the extent they are purchased through an Eligible Fee-Based Program. Participants in an Employee Benefit Plan should contact their Employee Benefit Plan service provider for information regarding purchases, sales and exchanges of Class
IR and Class R Shares. Class R Shares bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.50% of the average daily net assets attributable to Class R Shares. With respect to Class R Shares the distributor at its
discretion may use compensation for distribution services paid under the Distribution and Service Plan for personal and account maintenance services and expenses so long as such total compensation under the Plan does not exceed the maximum cap on
service fees imposed by FINRA.
B-58
Institutional Shares may be purchased at net asset value without a sales charge for accounts
in the name of an investor or institution that is not compensated by the Fund under a Plan for services provided to the institutions customers.
It is possible that an institution or its affiliate may offer different classes of shares (
i.e.
, Class A, Class C, Class R, Class IR, or Institutional Shares) to its customers and thus receive
different compensation with respect to different classes of shares of the Fund. Dividends paid by the Fund, if any, with respect to each class of shares will be calculated in the same manner, at the same time on the same day and will be the same
amount, except for differences caused by the fact that the respective transfer agency and Plan fees relating to a particular class will be borne exclusively by that class. Similarly, the net asset value per share may differ depending upon the class
of shares purchased.
Certain aspects of the shares may be altered after advance notice to shareholders if it is deemed
necessary in order to satisfy certain tax regulatory requirements.
When issued for the consideration described in the
Funds Prospectus, shares are fully paid and non-assessable. The Trustees may, however, cause shareholders, or shareholders of a particular series or class, to pay certain custodian, transfer agency, servicing or similar charges by setting off
the same against declared but unpaid dividends or by reducing share ownership (or by both means). In the event of liquidation, shareholders are entitled to share pro rata in the net assets of the applicable class of the Fund available for
distribution to such shareholders. All shares are freely transferable and have no preemptive, subscription or conversion rights. The Trustees may require shareholders to redeem Shares for any reason under terms set by the Trustees.
The Act requires that where more than one series of shares exists, each series must be preferred over all other series in respect of
assets specifically allocated to such series. In addition, Rule 18f-2 under the Act provides that any matter required to be submitted by the provisions of the Act or applicable state law, or otherwise, 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 series affected by such matter. Rule 18f-2 further provides
that a series shall be deemed to be affected by a matter unless the interests of each series in the matter are substantially identical or the matter does not affect any interest of such series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts and the election of trustees from the separate voting requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and does not intend to hold such meetings. In the event that a meeting of shareholders is held, each share of the Trust will be entitled,
as determined by the Trustees without the vote or consent of the shareholders, either to one vote for each share or to one vote for each dollar of net asset value represented by such share on all matters presented to shareholders including the
election of Trustees (this method of voting being referred to as dollar based voting). However, to the extent required by the Act or otherwise determined by the Trustees, series and classes of the Trust will vote separately from each
other. Shareholders of the Trust do not have cumulative voting rights in the election of Trustees. Meetings of shareholders of the Trust, or any series or class thereof, may be called by the Trustees, certain officers or upon the written request of
holders of 10% or more of the shares entitled to vote at such meetings. The Trustees will call a special meeting of shareholders for the purpose of electing Trustees, if, at any time, less than a majority of Trustees holding office at the time were
elected by shareholders. The shareholders of the Trust will have voting rights only with respect to the limited number of matters specified in the Declaration of Trust and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers, employees and agents of the Trust unless the
recipient is adjudicated (i) to be liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office or (ii) not to have acted in good faith in the
reasonable belief that such persons actions were in the best interest of the Trust. The Declaration of Trust provides that, if any shareholder or former shareholder of any series is held personally liable solely by reason of being or having
been a shareholder and not because of the shareholders acts or omissions or for some other reason, the shareholder or former shareholder (or the shareholders heirs, executors, administrators, legal representatives or general successors)
shall be held harmless from and indemnified against all loss and expense arising from such liability. The Trust, acting on behalf of any affected series, must, upon request by such shareholder, assume the defense of any claim made against such
shareholder for any act or obligation of the series and satisfy any judgment thereon from the assets of the series.
The
Declaration of Trust permits the termination of the Trust or of any series or class of the Trust (i) by a majority of the affected shareholders at a meeting of shareholders of the Trust, series or class; or (ii) by a majority of the
Trustees without shareholder
B-59
approval if the Trustees determine, in their sole discretion, that such action is in the best interest of the Trust, such series, such class or their respective shareholders. The Trustees may
consider such factors as they, in their sole discretion, deem appropriate in making such determination, including (i) the inability of the Trust or any series or class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type in which it invests; or (iii) economic developments or trends having a significant adverse impact on the business or operations of the Trust or series.
The Declaration of Trust authorizes the Trustees, without shareholder approval, to cause the Trust, or any series thereof, to merge or
consolidate with any corporation, association, trust or other organization or sell or exchange all or substantially all of the property belonging to the Trust or any series thereof. In addition, the Trustees, without shareholder approval, may adopt
a master-feeder structure by investing all or a portion of the assets of a series of the Trust in the securities of another open-end investment company with substantially the same investment objective, restrictions and policies.
The Declaration of Trust permits the Trustees to amend the Declaration of Trust without a shareholder vote. However, shareholders of the
Trust have the right to vote on any amendment (i) that would adversely affect the voting rights of shareholders; (ii) that is required by law to be approved by shareholders; (iii) that would amend the provisions of the Declaration of
Trust regarding amendments and supplements thereto; or (iv) that the Trustees determine to submit to shareholders.
The
Trustees may appoint separate Trustees with respect to one or more series or classes of the Trusts shares (the Series Trustees). Series Trustees may, but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust. To the extent provided by the Trustees in the appointment of Series Trustees, the Series Trustees may have, to the exclusion of any other Trustees of the Trust, all the powers and authorities of Trustees under the Declaration of
Trust with respect to such Series or Class, but may have no power or authority with respect to any other series or class.
Shareholder and
Trustee Liability
Under Delaware Law, the shareholders of the Fund are not generally subject to liability for the debts or
obligations of the Trust. Similarly, Delaware law provides that a series of the Trust will not be liable for the debts or obligations of any other series of the Trust. However, no similar statutory or other authority limiting statutory trust
shareholder liability exists in other states. As a result, to the extent that a Delaware statutory trust or a shareholder is subject to the jurisdiction of courts of such other states, the courts may not apply Delaware law and may thereby subject
the Delaware statutory trust shareholders to liability. To guard against this risk, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of a series. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a series of the Trust. The Declaration of Trust provides for indemnification by the relevant series for all loss suffered by a shareholder as a result of an obligation of
the series. The Declaration of Trust also provides that a series shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the series and satisfy any judgment thereon. In view of the above, the
risk of personal liability of shareholders of a Delaware statutory trust is remote.
In addition to the requirements under
Delaware law, the Declaration of Trust provides that shareholders of a series may bring a derivative action on behalf of the series only if the following conditions are met: (a) shareholders eligible to bring such derivative action under
Delaware law who hold at least 10% of the outstanding shares of the series, or 10% of the outstanding shares of the class to which such action relates, shall join in the request for the Trustees to commence such action; and (b) the Trustees
must be afforded a reasonable amount of time to consider such shareholder request and to investigate the basis of such claim. The Trustees will be entitled to retain counsel or other advisers in considering the merits of the request and may require
an undertaking by the shareholders making such request to reimburse the series for the expense of any such advisers in the event that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law, but
nothing in the Declaration of Trust protects a Trustee against liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
TAXATION
The following is a general summary of certain U.S. federal income tax considerations affecting the Fund and investors in the Fund. This
discussion does not purport to be complete or to deal with all aspects of federal income taxation that may be relevant to you in light of your particular circumstances or to investors who are subject to special rules, such as banks, thrift
institutions and
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certain other financial institutions, REITs, regulated investment companies, insurance companies, brokers and dealers in securities or currencies, certain securities traders, S corporations,
individual retirement accounts, certain tax-deferred accounts or foreign investors.
Unless otherwise noted, this discussion
assumes that you are a U.S. Shareholder and that you hold Fund shares as capital assets. For purposes of this summary, a U.S. Shareholder means a beneficial owner of the Funds shares that, for U.S. federal income tax purposes, is
(i) an individual who is a citizen or resident of the U.S., (ii) a corporation or other entity taxable as a corporation created in or organized under the laws of the U.S. or any state of the U.S., (iii) an estate the income of which
is subject to U.S. federal income tax regardless of its source, or (iv) a trust if (A) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control
all substantial decisions of such trust or (B) the trust has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. If a partnership holds shares, the U.S. federal income tax treatment of a partner in
such partnership generally will depend upon the status of the partner and the activities of the partnership. Partners of partnerships that hold shares should consult their tax advisors.
The following discussion is based upon the Code, Treasury Regulations, judicial authorities, published positions of the IRS and other
applicable authorities, all as in effect on the date of this Prospectus and all of which are subject to change or differing interpretations (possibly with retroactive effect). No ruling has been or will be sought from the IRS regarding any matter
discussed in this prospectus. Counsel to the Fund has not rendered any legal opinion regarding any tax consequences relating to the Fund or your investment in the Fund. No assurance can be given that the IRS would not assert, or that a court would
not sustain a position contrary to any of the tax information set out below.
Tax matters are complicated, and the tax
consequences of an investment in and holding of the Funds shares will depend on the particular facts of each investors situation. You are advised to consult your own tax advisors with respect to the application to your own circumstances
of the general federal income tax rules described below and with respect to other federal, state, local or foreign tax consequences to you before making an investment in the Funds shares.
Federal Income Taxation of the Fund
Although the Code generally provides that a regulated investment company does not pay an entity-level income tax, provided that it distributes all or substantially all of its income, the Fund does not
meet current tests for qualification as a regulated investment company under Subchapter M of the Code because of the fact that most or substantially all of the Funds investments will consist of investments in certain MLPs intended to be
treated as partnerships for federal income tax purposes. The regulated investment company tax rules therefore do not apply to the Fund or to its shareholders. As a result, the Fund is treated as a corporation for federal and state income tax
purposes, and will pay federal and state income tax on its taxable income.
The Fund invests primarily in MLPs, which
generally are intended to be treated as partnerships for federal income tax purposes. As a partner in the MLPs, the Fund must report its allocable share of the MLPs taxable income or loss in computing the Funds taxable income or loss,
regardless of the extent (if any) to which the MLPs make distributions. Based upon a review of the historic results of the type of MLPs in which the Fund intends to invest, the Fund expects that the cash flow received by the Fund with respect to its
MLP investments will generally exceed the taxable income allocated to the Fund (and this excess generally will not be currently taxable to the Fund but, rather, will result in a reduction of the Funds adjusted tax basis in each MLP as
described in the following paragraph). This is the result of a variety of factors, including significant non-cash deductions, such as accelerated depreciation. Past performance is not necessarily an indication of future results and there is no
assurance that the Investment Advisers expectation regarding the tax character of MLP distributions will be realized. If this expectation is not realized and cash distributions are less than the taxable income allocated to the Fund, there may
be greater tax expense borne by the Fund and less cash available to distribute to shareholders or to pay to expenses.
The
Fund will be subject to U.S. federal income tax at the regular corporate income tax rates on the Funds share of any taxable income from its investment in MLPs and on gain recognized by the Fund on any sale of equity securities of an MLP. As
explained above, cash distributions from an MLP to the Fund that exceed the Funds allocable share of such MLPs net taxable income will reduce the Funds adjusted tax basis in the equity securities of the MLP. These reductions in the
Funds adjusted tax basis in the MLP equity securities will increase the amount of gain (or decrease the amount of loss) recognized by the Fund on a subsequent sale of the securities of an MLP.
The Funds allocable share of certain percentage depletion deductions and intangible drilling costs of the MLPs in which the Fund
invests may be treated as items of tax preference for purposes of calculating the Funds alternative minimum taxable income. Such items may increase the Funds alternative minimum taxable income and increase the likelihood that the Fund
may be subject to the alternative minimum tax.
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Federal Income Taxation of Holders of the Funds Shares U.S. Shareholders
Receipt of Distributions.
Distributions made to you by the Fund (other than distributions in redemption of shares subject to
Section 302(b) of the Internal Revenue Code) will generally constitute taxable dividends to the extent of your allocable share of the Funds current or accumulated earnings and profits, as calculated for federal income tax purposes.
Generally, a corporations earnings and profits are computed based upon taxable income, with certain specified adjustments. As explained above, based upon the historic performance of the types of MLPs in which the Fund intends to invest, the
Fund anticipates that the distributed cash from the MLPs generally will exceed the Funds share of the MLPs taxable income. Consequently, the Fund anticipates that only a portion of the Funds distributions will be treated as
dividend income to you. To the extent that distributions to you exceed your allocable share of the Funds current and accumulated earnings and profits, your basis in the Funds shares with respect to which the distribution is made will be
reduced, which will increase the amount of gain (or decrease the amount of loss) realized upon a subsequent sale or redemption of such shares. To the extent you hold such shares as a capital asset and have no further basis in the shares to offset
the distribution, you will report the excess as capital gain.
Because the Fund will invest a substantial portion of its
assets in MLPs, special rules will apply to the calculation of the Funds earnings and profits. For example, the Funds earnings and profits will be calculated using the straight-line depreciation method rather than the accelerated
depreciation method. This difference in treatment may, for example, result in the Funds earnings and profits being higher than the Funds taxable income in a particular year if the MLPs in which the Fund invests calculate their income
using accelerated depreciation. Because of these differences, the Fund may make distributions in a particular year out of earnings and profits (treated as dividends) in excess of the amount of the Funds taxable income for such year.
Distributions to you from the Fund treated as dividends under the foregoing rules generally will be taxable as ordinary
income to you but are generally expected to be treated as qualified dividend income to eligible taxpayers. Qualified dividend income received by individuals and other noncorporate shareholders is taxed at long-term capital gain rates,
which currently reach a maximum of 15%, or, for certain high income individuals, 20%. For a dividend to constitute qualified dividend income, the shareholder generally must hold the shares paying the dividend for more than 60 days during the 121-day
period beginning 60 days before the ex-dividend date, although a longer period may apply if the shareholder engages in certain risk reduction transactions with respect to the common stock.
In addition to constituting qualified dividend income to noncorporate investors, such dividends are expected to be eligible for the
dividends received deduction available to corporate shareholders of the Fund under Section 243 of the Code. However, corporate shareholders of the Fund should be aware that certain limitations apply to the availability of the dividends received
deduction, including rules which limit the deduction in cases where (i) certain holding period requirements are not met, (ii) a corporate shareholder of the Fund is obligated (e.g., pursuant to a short sale) to make related payments with
respect to positions in substantially similar or related property, or (iii) the corporate shareholders investment in shares of the Fund is financed with indebtedness. Corporate shareholders of the Fund should consult their own tax
advisors regarding the application of these limitations to their particular situations.
If you participate in the Funds
automatic dividend reinvestment plan, upon the Funds payment of a dividend to you, you will be treated for federal income tax purposes as receiving a taxable distribution from the Fund in an amount equal to the fair market value of the shares
issued to you under the plan. The portion of such a distribution that is treated as dividend income will be determined under the rules described above.
Redemptions and Sales of Shares.
A redemption of common shares will be treated as a sale or exchange of such shares, provided the redemption either: (i) is not essentially equivalent to a
dividend; (ii) is a substantially disproportionate redemption; (iii) is a complete redemption of a shareholders entire interest in the Fund; or (iv) is in partial liquidation of the Fund. Redemptions that do not qualify for sale
or exchange treatment will be treated as described in Receipt of Distributions above.
Upon a redemption treated
as a sale or exchange under the foregoing rules, or upon a sale of your shares to a third party, you generally will recognize capital gain or loss equal to the difference between the cost of your shares and the amount you receive when you sell them.
Any such capital gain or loss will be a long-term capital gain or loss if you held the shares for more than one year at the time of disposition. Long-term capital gains of noncorporate shareholders of the Fund (including individuals) are currently
subject to U.S. federal income taxation at a maximum rate of 15%, or, for certain high income individuals, 20%. The deductibility of capital losses for both corporate and non-corporate shareholders of the Fund is subject to limitations under the
Code.
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Investment by Tax-Exempt Investors and Regulated Investment Companies.
Employee
benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on their unrelated business taxable income, or UBTI. Because the Trust
is a corporation for federal income tax purposes, an owner of the Funds shares will not report on its federal income tax return any items of income, gain, loss and deduction that are allocated to the Fund from the MLPs in which the Fund
invests. Moreover, dividend income from, and gain from the sale of, corporate stock generally does not constitute UBTI unless the corporate stock is debt-financed. Therefore, a tax-exempt investor will not have UBTI attributable to its ownership,
sale, or redemption of the Funds shares unless its ownership is debt-financed. In general, shares are considered to be debt-financed if the tax-exempt owner of the shares incurred debt to acquire the shares or otherwise incurred a debt that
would not have been incurred if the shares had not been acquired. Similarly, the income and gain realized from an investment in the Funds shares by an investor that is a regulated investment company will constitute qualifying income for the
regulated investment company.
Foreign, State and Local Taxes.
It is possible that the Fund may be liable for foreign,
state and local taxes payable in the country, state or locality in which it is a resident or doing business or in a country, state or locality in which an MLP in which the Fund invests conducts or is deemed to conduct business.
Medicare Tax.
An additional 3.8% Medicare tax will be imposed on certain net investment income (including ordinary dividends
received from a Fund and net gains from redemptions or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual)
or adjusted gross income (in the case of an estate or trust) exceed certain threshold amounts.
Cost Basis
Reporting.
The Fund is required to report to you and the IRS annually on Form 1099-B not only the gross proceeds of Fund shares you sell or redeem but also their cost basis.
Cost basis will generally be calculated using the Funds
default method of first-in, first-out, unless you instruct a Fund to use a different methodology.
If you would like to use the first-in, first-out method of calculation, no action is required. To elect an alternative method, you should contact
Goldman Sachs Funds at the address or phone number on the back cover of the Funds Prospectus. If your account is held with an Authorized Institution, contact your representative with respect to reporting of cost basis and available elections
for your account.
Because your tax situation is unique, you should consult your tax professional about federal, state and
local tax consequences.
Federal Income Taxation of Holders of the Funds Shares Non-U.S. Shareholders
For purposes of this summary, the term Non-U.S. Shareholder means a beneficial owner of the Funds shares
that is not a U.S. Shareholder.
Distributions to Non-U.S. Shareholders generally will be subject to U.S. federal withholding
tax at the rate of 30% on distributions unless the tax is reduced or eliminated pursuant to a tax treaty or the distributions are effectively connected with a U.S. trade or business of the shareholder.
Any capital gain realized by a Non-U.S. Shareholder upon a sale or redemption of shares of the Fund will generally not be subject to U.S.
federal income or withholding tax unless (i) the gain is effectively connected with the shareholders trade or business in the U.S., or in the case of a shareholder who is a nonresident alien individual, the shareholder is present in the
U.S. for 183 days or more during the taxable year and certain other conditions are met or (ii) the Fund is or has been a U.S. real property holding corporation, as defined below, at any time within the five-year period preceding the date of
disposition of the Funds shares or, if shorter, within the period during which the Non-U.S. Shareholder has held the common shares. Generally, a corporation is a U.S. real property holding corporation if the fair market value of its U.S. real
property interests, as defined in the Code and applicable regulations, equals or exceeds 50% of the aggregate fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. A Fund may be,
or may prior to a Non-U.S. Shareholders disposition of shares become, a U.S. real property holding corporation.
Any
Non-U.S. Shareholder who is described in one of the foregoing cases is urged to consult his, her or its own tax advisor regarding the U.S. federal income tax consequences of the redemption, sale, exchange or other disposition of shares of the Fund.
Non-U.S. Shareholders of a Fund may also be subject to U.S. estate tax with respect to their shares of the Fund.
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Effective July 1, 2014, the Fund will be required to withhold U.S. tax (at a 30% rate)
on payments of dividends and (effective January 1, 2017) redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and withholding
requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the Fund to enable the Fund to determine whether withholding is
required.
Each Non-U.S. Shareholder should consult his, her or its tax adviser regarding the U.S. and non-U.S. tax
consequences of ownership of the Funds shares and receipt of distributions from the Fund.
Backup Withholding
Federal regulations generally require the Fund to withhold and remit to the U.S. Treasury a backup withholding tax with
respect to dividends and the proceeds of any redemption paid to you if you fail to furnish the Fund or the Funds paying agent with a properly completed and executed IRS Form W-9, W-8BEN or other applicable form. Furthermore, the IRS may notify
the Fund to institute backup withholding if the IRS determines that your TIN is incorrect or if you have failed to properly report taxable dividends or interest on a federal tax return. A TIN is either the Social Security number or employer
identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account and may be claimed as a credit on the record owners
federal income tax return. The backup withholding rate is currently 28%.
FINANCIAL STATEMENTS
The audited financial statements and related report of PricewaterhouseCoopers LLP, independent registered public
accounting firm for the Fund, contained in the Funds November 30, 2013 Annual Report are hereby incorporated by reference. The financial statements in the Funds Annual Report have been incorporated herein by reference in reliance
upon such report given upon the authority of such firm as experts in accounting and auditing. No other parts of any Annual Report are incorporated by reference herein. A copy of the annual report of the Fund may be obtained upon request and without
charge by writing Goldman, Sachs & Co., P.O. Box 06050, Chicago, Illinois 60606 or by calling Goldman, Sachs & Co., at the telephone number on the back cover of the Funds Prospectus.
PROXY VOTING
The Trust, on behalf of the Fund, has delegated the voting of portfolio securities to the Investment Adviser. For client accounts for which the Investment Adviser has voting discretion, the Investment
Adviser has adopted policies and procedures (the Proxy Voting Policy) for the voting of proxies. Under the Proxy Voting Policy, the Investment Advisers guiding principles in performing proxy voting are to make decisions that favor
proposals that in the Investment Advisers view tend to maximize a companys shareholder value and are not influenced by conflicts of interest. To implement these guiding principles for investments in publicly-traded equities, the
Investment Adviser has developed customized proxy voting guidelines (the Guidelines) that it generally applies when voting on behalf of client accounts. Attached as Appendix B is a summary of the Guidelines. These Guidelines address a
wide variety of individual topics, including, among other matters, shareholder voting rights, anti-takeover defenses, board structures, the election of directors, executive and director compensation, reorganizations, mergers, issues of corporate
social responsibility and various shareholder proposals. The Guidelines embody the positions and factors the Investment Adviser generally considers important in casting proxy votes.
The Proxy Voting Policy, including the Guidelines, is reviewed periodically to ensure that it continues to be consistent with the
Investment Advisers guiding principles.
The Investment Adviser has retained a third-party proxy voting service
(Proxy Service), currently Institutional Shareholder Services, to assist in the implementation and administration of certain proxy voting-related functions including, without limitation, operational, recordkeeping and reporting services.
The Proxy Service also prepares a written analysis and recommendation (a Recommendation) of each proxy vote that reflects the Proxy Services application of the Guidelines to particular proxy issues. While it is the Investment
Advisers policy generally to follow the Guidelines and Recommendations from the Proxy Service, the Investment Advisers portfolio management teams (Portfolio Management Teams) may on certain proxy votes seek approval to
diverge from the Guidelines or a Recommendation by following an override process. Such decisions are subject to a review and approval process, including a determination that the decision is not influenced by any conflict of interest. A
Portfolio Management Team that receives approval through the override process to cast a proxy vote that diverges from the Guidelines and/or a
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Recommendation may vote differently than other Portfolio Management Teams that did not seek to override that vote. In forming their views on particular matters, the Portfolio Management Teams are
also permitted to consider applicable regional rules and practices, including codes of conduct and other guides, regarding proxy voting, in addition to the Guidelines and Recommendations. The Investment Adviser may hire other service providers to
replace or supplement the Proxy Service with respect to any of the services the Investment Adviser currently receives from the Proxy Service.
GSAM conducts periodic due diligence meetings with the Proxy Service which include, but are not limited to, a review of the Proxy Services general organizational structure, new developments with
respect to research and technology, work flow improvements and internal due diligence with respect to conflicts of interest.
From time to time, the Investment Adviser may face regulatory, compliance, legal or logistical limits with respect to voting securities
that it may purchase or hold for client accounts, which can affect the Investment Advisers ability to vote such proxies, as well as the desirability of voting such proxies. Among other limits, federal, state and foreign regulatory restrictions
or company specific ownership limits, as well as legal matters related to consolidated groups, may restrict the total percentage of an issuers voting securities that the Investment Adviser can hold for clients and the nature of the Investment
Advisers voting in such securities. The Investment Advisers ability to vote proxies may also be affected by, among other things: (i) late receipt of meeting notices; (ii) requirements to vote proxies in person:
(iii) restrictions on a foreigners ability to exercise votes; (iv) potential difficulties in translating the proxy; (v) requirements to provide local agents with unrestricted powers of attorney to facilitate voting instructions;
and (vi) requirements that investors who exercise their voting rights surrender the right to dispose of their holdings for some specified period in proximity to the shareholder meeting.
The Investment Adviser has adopted policies and procedures designed to prevent conflicts of interest from influencing its proxy voting
decisions that the Investment Adviser makes on behalf of a client account. These policies and procedures include the Investment Advisers use of the Guidelines and Recommendations from the Proxy Service, the override approval process previously
discussed, and the establishment of information barriers between the Investment Adviser and other businesses within The Goldman Sachs Group, Inc. Notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of the
Investment Adviser may have the effect of benefitting the interests of other clients or businesses of other divisions or units of Goldman Sachs and/or its affiliates.
Voting decisions with respect to fixed income securities and the securities of privately held issuers generally will be made by the Funds managers based on their assessment of the particular
transactions or other matters at issue.
Information regarding how the Fund voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 will be available on or through the Funds website at www.gsamfunds.com and on the SECs website at www.sec.gov.
PAYMENTS TO INTERMEDIARIES
The Investment Adviser, Distributor and/or their affiliates may make payments to Intermediaries from time to time to promote the sale, distribution and/or servicing of shares of the Fund. These payments
(Additional Payments) are made out of the Investment Advisers, Distributors and/or their affiliates own assets (which may come directly or indirectly from fees paid by the Fund), are not an additional charge to the Fund
or its shareholders, and do not change the price paid by investors for the purchase of the Funds shares or the amount the Fund receives as proceeds from such purchases. Although paid by the Investment Adviser, Distributor, and/or their
affiliates, the Additional Payments are in addition to the distribution and service fees paid by the Fund to the Intermediaries as described in the Funds Prospectus and this SAI, and are also in addition to the sales commissions payable to
Intermediaries as set forth in the Prospectus. For purposes of this Payments to Intermediaries section, Funds shall mean, collectively, the Fund and any of the other Goldman Sachs Funds.
The Additional Payments are intended to compensate Intermediaries for, among other things: marketing shares of the Funds, which may
consist of payments relating to funds included on preferred or recommended fund lists or in certain sales programs from time to time sponsored by the Intermediaries; due diligence examination and/or review of the Funds from time to time;
access to the Intermediaries registered representatives or salespersons, including at conferences and other meetings; assistance in training and education of personnel; finders or referral fees for directing investors
to the Funds; marketing support fees for providing assistance in promoting the sale of Fund shares (which may include promotions in communications with the Intermediaries customers, registered representatives and salespersons); and/or other
specified services intended to assist in the distribution and marketing of the Funds. In addition, the Investment Adviser, Distributor and/or their affiliates may make Additional Payments (including through sub-transfer agency and networking
agreements) for subaccounting, administrative and/or shareholder processing
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services that are in addition to the transfer agent, shareholder administration, servicing and processing fees paid by the Funds. These Additional Payments may exceed amounts earned on these
assets by the Investment Adviser, Distributor and/or their affiliates for the performance of these or similar services. The Additional Payments may be a fixed dollar amount; may be based on the number of customer accounts maintained by an
Intermediary; may be based on a percentage of the value of shares sold to, or held by, customers of the Intermediary involved; or may be calculated on another basis. The Additional Payments are negotiated with each Intermediary based on a range of
factors, including but not limited to the Intermediarys ability to attract and retain assets (including particular classes of Fund shares), target markets, customer relationships, quality of service and industry reputation. Although the
individual components may be higher or lower and the total amount of Additional Payments made to any Intermediary in any given year will vary, the amount of these Additional Payments (excluding payments made through sub-transfer agency and
networking agreements), on average, is normally not expected to exceed 0.50% (annualized) of the amount sold or invested through an Intermediary.
These Additional Payments may be significant to certain Intermediaries, and may be an important factor in an Intermediarys willingness to support the sale of the Funds through its distribution
system.
The Investment Adviser, Distributor and/or their affiliates may be motivated to make Additional Payments since they
promote the sale of Fund shares to clients of Intermediaries and the retention of those investments by those clients. To the extent Intermediaries sell more shares of the Funds or retain shares of the Funds in their clients accounts, the
Investment Adviser and Distributor benefit from the incremental management and other fees paid by the Funds with respect to those assets.
In addition, certain Intermediaries may have access to certain research and investment services from the Investment Adviser, Distributor and/or their affiliates. Such research and investment services
(Additional Services) may include research reports, economic analysis, portfolio analysis tools, business planning services, certain marketing and investor education materials and strategic asset allocation modeling. The Intermediary may
not pay for these products or services. The cost of the Additional Services and the particular services provided may vary from Intermediary to Intermediary.
The Additional Payments made by the Investment Adviser, Distributor and/or their affiliates or the Additional Services received by an Intermediary may vary with respect to the type of fund (e.g., equity,
fund, fixed income fund, specialty fund, asset allocation portfolio or money market fund) sold by the Intermediary. In addition, the Additional Payment arrangements may include breakpoints in compensation which provide that the percentage rate of
compensation varies as the dollar value of the amount sold or invested through an Intermediary increases.
The presence of
these Additional Payments or Additional Services, the varying fee structure and the basis on which an Intermediary compensates its registered representatives or salespersons may create an incentive for a particular Intermediary, registered
representative or salesperson to highlight, feature or recommend funds, including the Funds, or other investments based, at least in part, on the level of compensation paid. Additionally, if one mutual fund sponsor makes greater distribution
payments than another, an Intermediary may have an incentive to recommend one fund complex over another. Similarly, if an Intermediary receives more distribution assistance for one share class versus another, that Intermediary may have an incentive
to recommend that share class. Because Intermediaries may be paid varying amounts per class for sub-transfer agency and related recordkeeping services, the service requirements of which also may vary by class, this may create an additional incentive
for financial firms and their financial advisors to favor one fund complex over another, or one fund class over another. You should consider whether such incentives exist when evaluating any recommendations from an Intermediary to purchase or sell
Shares of the Fund and when considering which share class is most appropriate for you.
For the year ended
December 31, 2013, the Investment Adviser, Distributor and their affiliates made Additional Payments out of their own assets to approximately 171 Intermediaries, totaling approximately $119.2 million (excluding payments made through
sub-transfer agency and networking agreements and certain other types of payments described below), with respect the Fund, Goldman Sachs Trust, all of the funds in an affiliated investment company, Goldman Sachs Variable Insurance Trust, and the
Goldman Sachs Credit Strategies Fund, an affiliated closed-end investment company. During the year ended December 31, 2013, the Investment Adviser, Distributor and/or their affiliates had contractual arrangements to make Additional Payments to
the Intermediaries listed below (or their affiliates or successors), among others. This list will change over time, and any additions, modifications or deletions thereto that have occurred since December 31, 2013 are not reflected. Additional
Intermediaries may receive payments in 2014 and in future years. Certain arrangements are still being negotiated, and there is a possibility that payments will be made retroactively to Intermediaries not listed below.
ADP Broker Dealer, Inc.
ADP, Inc.
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American Enterprise Investment Services Inc;
Allstate Life Insurance Company
Allstate Life
Insurance Company of New York
Amalga Trust Company
Amalgamated Bank of Chicago
American National Trust and Investment Management Company dba Old
National Trust Company (Oltrust & Co.)
American United Life Insurance Company
Ameriprise Financial Services, Inc.
Ascensus, Inc.
Associated Trust Company, N.A.;
Associated Investment Services Inc.
AXA Equitable Life Insurance Company
Banc of America Securities, LLC
Bancorp South
Bank Hapoalim B.M.
Bank of New York
Bankers Trust
Barclays Capital Inc.
BB&T Capital Markets
BMO Harris Bank,
N.A.
BMO Nesbitt Burns
BOSC,
Inc.
Branch Banking & Trust Company
Brown Brothers Harriman & Co
C.M. Life Insurance Company
Charles Schwab & Co., Inc.
Chicago
Mercantile Exchange, Inc.; CME Shareholder Servicing, LLC.
CIGNA Financial Services
Citibank N.A.
Citibank N.A. Agency
and Trust Department
Citigroup Private Bank at Citibank N.A.
Citizens Bank Wealth Management N.A.
Comerica Bank
Comerica Securities, Inc.
Commerce Bank
Commerce Bank N.A.
Commerce Trust
Co.
Commonwealth Annuity and Life Insurance Company
Companion Life Insurance Company
Compass Bank
Computershare Trust Company, N.A.
Connecticut
General Life Insurance Company
Daily Access Corporation
Dain Rauscher Inc.
Deutsche Bank Trust Company Americas
Diversified Investment Advisors
Dubuque
Bank & Trust
Edward D. Jones & Co., L.P.
E*Trade Clearing LLC
Farmers New World Life Insurance Co.
Federal Deposit Insurance Corporation
Fidelity Brokerage Services LLC
Fidelity
Investments Institutional Operations Company, Inc
Financial Network Investment Corporation
Fifth Third Bank
Fifth Third Securities
First National Bank of Omaha
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Fulton Bank N.A. Cash Sweep Affiliates
Fulton Financial Advisors, National Association
Genworth Financial Securities
Corporation
Genworth Financial Trust Company
Genworth Life and Annuity Insurance Company; Genworth Life Insurance Company of New York; Genworth Life Insurance Company
GW Capital Management, LLC
GWFS Equities, Inc.
Great-West Life & Annuity Insurance Company
Harris Trust & Savings Bank
Hartford Life Insurance Company
Hartford Retirement Services, LLC
Hartford
Securities Distribution Company Inc.
Hewitt Associates LLC
Horace Mann Life Insurance Company
HSBC Bank USA
Hunt Dupree & Rhine
ICMA-RC Services,
LLC
ING Financial Advisors, LLC
ING Investment Advisors, LLC
ING Institutional Plan Services, LLC
ING Institutional Plan Services, LLP
ING Life
Insurance and Annuity Company
Institutional Cash Distributors (division of Merriman Curhan Ford & Co.)
Invesmart, Inc.
Jefferson Pilot
Financial Insurance Company
Jefferson National Life Insurance Company
J.P. Morgan Chase Bank
J.P. Morgan Chase Bank, N.A.
J.P. Morgan Clearing Corp.
J.P. Morgan
Retirement Plan Services, LLC
J.P. Morgan Securities, Inc.
Kemper Investors Life Insurance Company
Key Bank Capital Markets
LaSalle Bank N.A.
Law Debenture Trust Company
of New York
Lincoln Benefit Life Company
Lincoln Retirement Services Company, LLC
LPL Financial Corporation
LPL Financial LLC
M&T Bank
M&T Securities, Inc.
Massachusetts
Mutual Life Insurance Company
McCready and Keen, Inc.
Mellon Bank N.A. (Directed Account Plan Board of Directors)
Mercer HR Services, LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Midland National Life Insurance Company
Minnesota Life Insurance Company
Morgan Stanley Smith Barney LLC
MSCS
Financial Services (Division of Broadridge Business Process Outsourcing, LLC)
Multi Financial Securities Corporation
My Treasury Limited
National Financial Services
LLC
National Security Life and Annuity Company
Nationwide Financial Services, Inc.
B-68
Nationwide Investment Services Corporation
Newport Retirement Services, Inc
NYLife Distributors, Inc.
Oppenheimer & Co. Inc.
Pershing,
LLC
PNC Bank, N.A.
PNC Bank,
National Organization
PNC Capital Markets LLC
PrimeVest Financial Services
Principal Life Insurance Company
Protective Life Insurance Company
PruCo Life
Insurance Company; PruCo Life Insurance Company of New Jersey
Raymond James & Associates, Inc. and Raymond James Financial
Services
Regions Bank
Reliance
Trust Company
Riversource Life Insurance Company;
Riversource Life Insurance Company of New York; Riversource Distributors, Inc.
Robert W.
Baird & Co., Incorporated
Scott & Stringfellow
Security Benefit Life Insurance Company; Security Distributors, Inc.
Signature Bank
Silicon Valley Bank
State Street
Global Markets, LLC and State Street Bank and Trust Company
Sun Life Assurance Company of Canada (US); Sun Life Insurance and Annuity
Company of New York
Sungard Institutional Brokerage, Inc
SunTrust Bank
SunTrust Robinson Humphrey, Inc.
SVB Securities
Synovus Securities
TD Ameritrade Clearing, Inc.
Teachers Insurance
and Annuity Association of America
T. Rowe Price Retirement Plan Services, Inc
The Guardian Insurance and Annuity Company, Inc
The Lincoln National Life Insurance Company;
Lincoln Life & Annuity Company of New York
The Ohio National Life Insurance Company
The Prudential Insurance Company of America
The Prudential Life Insurance Company of America
The Travelers Insurance Company; The Travelers Life and Annuity Company
The Vanguard Group, Inc.
Transamerica Life Insurance Company; Transamerica Financial Life Insurance Company
Treasury Curve, LLC
Trustmark National Bank
UBS Financial Services, Inc.
Union Bank, N.A.
United of Omaha Life Insurance Company
U.S. Bank National Association
U.S. Fiduciary Services, Inc.
Valic Retirement Services Company
Wachovia
Capital Markets, LLC.
Wells Fargo Advisors, LLC
Wells Fargo Advisors, LLC; Wells Fargo Investments, LLC
Wells Fargo Bank N.A.
Wells Fargo Bank National Association
Wells
Fargo Corporate Trust Services
Wilmington Trust Company
Wilmington Trust Retirement and Institutional Services Company
Xerox HR Solutions, LLC
Zions First National Bank
B-69
Your Authorized Dealer or other Intermediary may charge you additional fees or
commissions other than those disclosed in the Prospectus. Shareholders should contact their Authorized Dealer or other Intermediary for more information about the Additional Payments or Additional Services they receive and any potential conflicts of
interest, as well as for information regarding any fees and/or commissions it charges. For additional questions, please contact Goldman Sachs Funds at 1-800-621-2550.
Not included on the list above are other subsidiaries of Goldman Sachs who may receive revenue from the Investment Adviser, Distributor and/or their affiliates through intra-company compensation
arrangements and for financial, distribution, administrative and operational services.
Furthermore, the Investment Adviser,
Distributor and/or their affiliates may, to the extent permitted by applicable regulations, contribute to various non-cash and cash incentive arrangements to promote the sale of Fund shares, as well as sponsor various educational programs, sales
contests and/or promotions. The Investment Adviser, Distributor and their affiliates may also pay for the travel expenses, meals, lodging and entertainment of Intermediaries and their salespersons and guests in connection with educational, sales and
promotional programs subject to applicable FINRA regulations. Other compensation may also be offered from time to time to the extent not prohibited by applicable federal or state laws or FINRA regulations. This compensation is not included in, and
is made in addition to, the Additional Payments described above.
OTHER INFORMATION
Selective Disclosure of Portfolio Holdings
The Board of Trustees of the Trust and the Investment Adviser have adopted a policy on selective disclosure of portfolio holdings in accordance with regulations that seek to ensure that disclosure of
information about portfolio securities is in the best interest of Fund shareholders and to address the conflicts between the interests of Fund shareholders and its service providers. The policy provides that neither the Fund nor its Investment
Adviser, Distributor or any agent, or any employee thereof (Fund Representative) will disclose the Funds portfolio holdings information to any person other than in accordance with the policy. For purposes of the policy,
portfolio holdings information means the Funds actual portfolio holdings, as well as nonpublic information about its trading strategies or pending transactions. Under the policy, neither the Fund nor any Fund Representative may
solicit or accept any compensation or other consideration in connection with the disclosure of portfolio holdings information. A Fund Representative may provide portfolio holdings information to third parties if such information has been included in
the Funds public filings with the SEC or is disclosed on the Funds publicly accessible website. Information posted on the Funds website may be separately provided to any person commencing the day after it is first published on the
Funds website.
Portfolio holdings information that is not filed with the SEC or posted on the publicly available
website may be provided to third parties only if the third party recipients are required to keep all portfolio holdings information confidential and are prohibited from trading on the information they receive. Disclosure to such third parties must
be approved in advance by the Investment Advisers legal or compliance department. Disclosure to providers of auditing, custody, proxy voting and other similar services for the Fund, as well as rating and ranking organizations, will generally
be permitted; however, information may be disclosed to other third parties (including, without limitation, individuals, institutional investors, and intermediaries that sell shares of the Fund,) only upon approval by the Funds Chief Compliance
Officer, who must first determine that the Fund has a legitimate business purpose for doing so. In general, each recipient of non-public portfolio holdings information must sign a confidentiality and non-trading agreement, although this requirement
will not apply when the recipient is otherwise subject to a duty of confidentiality. In accordance with the policy, the identity of those recipients who receive non-public portfolio holdings information on an ongoing basis is as follows: the
Investment Adviser and its affiliates, the Funds independent registered public accounting firm, the Funds custodianState Street, the Funds legal counselDechert LLP, the Funds financial printerRR Donnelley,
and the Funds proxy voting serviceISS. In addition, certain fixed income funds of the Trust provide non-public portfolio holdings information to Standard & Poors to allow such funds to be rated by it and certain equity
funds provide non-public portfolio holdings information to FactSet, a provider of global financial and economic information. These entities are obligated to keep such information confidential. Third party providers of custodial or accounting
services to the Fund may release non-public portfolio holdings information of the Fund only with the permission of Fund Representatives. From time to time portfolio holdings information may be provided to broker-dealers, prime brokers, futures
commission merchants or derivatives clearing merchants, in connection with the Funds portfolio trading activities. In providing this information reasonable precautions, including limitations on the scope of the portfolio holdings information
disclosed, are taken to
B-70
avoid any potential misuse of the disclosed information. All marketing materials prepared by the Trusts principal underwriter are reviewed by Goldman Sachs Compliance department for
consistency with the Trusts portfolio holdings disclosure policy.
The Fund currently intends to publish on the
Trusts website (http://www.gsamfunds.com) complete portfolio holdings for the Fund as of the end of each calendar quarter subject to a fifteen calendar day lag between the date of the information and the date on which the information is
disclosed. In addition, the Fund intends to publish on the Trusts website month-end top ten holdings subject to a fifteen calendar day lag between the date of the information and the date on which the information is disclosed. The Fund may
publish on the website complete portfolio holdings information more frequently if it has a legitimate business purpose for doing so.
Under the policy, Fund Representatives will initially supply the Board of the Trustees with a list of third parties who receive portfolio holdings information pursuant to any ongoing arrangement. In
addition, the Board is to receive information, on a quarterly basis, regarding any other disclosures of non-public portfolio holdings information that were permitted during the preceding quarter. In addition, the Board of Trustees is to approve at
its meetings a list of Fund Representatives who are authorized to disclose portfolio holdings information under the policy. As of March 28, 2014, only certain officers of the Trust as well as certain senior members of the compliance and legal groups
of the Investment Adviser have been approved by the Board of Trustees to authorize disclosure of portfolio holdings information.
Disclosure of NAV per Share
The Funds current NAV per share is available through the Funds website at www.gsamfunds.com or by contacting the Fund at 1-800-292-4726.
Miscellaneous
The Fund
will redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day period for any one shareholder. The Fund, however, reserves the right, in its sole discretion, to pay redemptions by a
distribution in kind of securities (instead of cash) if (i) the redemption exceeds the lesser of $250,000 or 1% of the net asset value of the Fund at the time of redemption; or (ii) with respect to lesser redemption amounts, the redeeming
shareholder requests in writing a distribution in-kind of securities instead of cash. The securities distributed in kind would be readily marketable and would be valued for this purpose using the same method employed in calculating the Funds
net asset value per share. See NET ASSET VALUE. If a shareholder receives redemption proceeds in kind, the shareholder should expect to incur transaction costs upon the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by the Fund may be suspended for more than seven days for
any period during which the New York Stock Exchange is closed, other than the customary weekends or holidays, or when trading on such Exchange is restricted as determined by the SEC; or during any emergency, as determined by the SEC, as a result of
which it is not reasonably practicable for the Fund to dispose of securities owned by it or fairly to determine the value of its net assets; or for such other period as the SEC may by order permit for the protection of shareholders of the Fund. (The
Trust may also suspend or postpone the recordation of the transfer of shares upon the occurrence of any of the foregoing conditions.)
As stated in the Prospectus, the Trust may authorize Authorized Institutions and other institutions that provide recordkeeping, reporting and processing services to their customers to accept on the
Trusts behalf purchase, redemption and exchange orders placed by or on behalf of their customers and, if approved by the Trust, to designate other intermediaries to accept such orders. These institutions may receive payments from the Trust or
Goldman Sachs for their services. Certain Authorized Institutions or other institutions may enter into sub-transfer agency agreements with the Trust or Goldman Sachs with respect to their services.
In the interest of economy and convenience, the Trust does not issue certificates representing the Funds shares. Instead, the
Transfer Agent maintains a record of each shareholders ownership. Each shareholder receives confirmation of purchase and redemption orders from the Transfer Agent. Fund shares and any distributions paid by the Fund are reflected in account
statements from the Transfer Agent.
The Prospectus and this SAI do not contain all the information included in the
Registration Statement filed with the SEC under the 1933 Act with respect to the securities offered by the Prospectus. Certain portions of the Registration Statement have been omitted from the Prospectus and this SAI pursuant to the rules and
regulations of the SEC. The Registration Statement including the exhibits filed therewith may be examined at the office of the SEC in Washington, D.C.
B-71
Statements contained in the Prospectus or in this SAI as to the contents of any contract or
other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement of which the Prospectus and this SAI form a part, each
such statement being qualified in all respects by such reference.
Line of Credit
The Fund intends to participate in a $630,000,000 committed, unsecured revolving line of credit facility together with other funds of the
Trust and registered investment companies having management or investment advisory agreements with GSAM or its affiliates. Pursuant to the terms of this facility, the Fund and other borrowers may increase the credit amount by an additional
$340,000,000, for a total of up to $970,000,000. This facility is to be used for temporary emergency purposes or to allow for an orderly liquidation of securities to meet redemption requests. The interest rate on borrowings is based on the federal
funds rate. The facility also requires a fee to be paid by the Fund based on the amount of the commitment that has not been utilized.
Large Trade Notifications
The Transfer Agent may from time to time receive notice that an Authorized Institution or other financial intermediary has received an
order for a large trade in the Funds shares. The Fund may determine to enter into portfolio transactions in anticipation of that order, even though the order will not be processed until the following business day. This practice provides for a
closer correlation between the time shareholders place trade orders and the time the Fund enters into portfolio transactions based on those orders, and permits the Fund to be more fully invested in investment securities, in the case of purchase
orders, and to more orderly liquidate its investment positions, in the case of redemption orders. On the other hand, the Authorized Institution or other financial intermediary may not ultimately process the order. In this case, the Fund may be
required to borrow assets to settle the portfolio transactions entered into in anticipation of that order, and would therefore incur borrowing costs. The Fund may also suffer investment losses on those portfolio transactions. Conversely, the Fund
would benefit from any earnings and investment gains resulting from such portfolio transactions.
Corporate Actions
From time to time, the issuer of a security held in the Funds portfolio may initiate a corporate action relating to that security.
Corporate actions relating to equity securities may include, among others, an offer to purchase new shares, or to tender existing shares, of that security at a certain price. Corporate actions relating to debt securities may include, among others,
an offer for early redemption of the debt security, or an offer to convert the debt security into stock. Certain corporate actions are voluntary, meaning that the Fund may only participate in the corporate action if it elects to do so in a timely
fashion. Participation in certain corporate actions may enhance the value of the Funds investment portfolio. In cases where the Fund or its Investment Adviser receives sufficient advance notice of a voluntary corporate action, the Investment
Adviser will exercise its discretion, in good faith, to determine whether the Fund will participate in that corporate action. If the Fund or its Investment Adviser does not receive sufficient advance notice of a voluntary corporate action, the Fund
may not be able to timely elect to participate in that corporate action. Participation or lack of participation in a voluntary corporate action may result in a negative impact on the value of the Funds investment portfolio.
DISTRIBUTION AND SERVICE PLANS
(Class A Shares, Class C Shares and Class R Shares only)
Distribution
and Service Plans.
As described in the Prospectus, the Trust has adopted, on behalf of Class A, Class C and Class R Shares of the Fund, Distribution and Service Plans (each a Plan). See Shareholder GuideDistribution
and Service Fees in the Prospectus. The distribution fees payable under the Plans are subject to Rule 12b-1 under the Act and finance distribution and other services that are provided to investors in the Fund and enable the Fund to offer
investors the choice of investing in Class A, Class C or Class R Shares when investing in the Fund. In addition, distribution fees payable under the Plans may be used to assist the Fund in reaching and maintaining asset levels that are
efficient for the Funds operations and investments.
The Plans for the Funds Class A, Class C and Class R
Shares were most recently approved on June 13, 2013 by a majority vote of the Trustees of the Trust, including a majority of the non-interested Trustees of the Trust who have no direct or indirect financial interest in the Plans, cast in person at a
meeting called for the purpose of approving the Plans.
The compensation for distribution services payable under a Plan
to Goldman Sachs may not exceed 0.25%, 0.75% and 0.50% per annum of the Funds average daily net assets attributable to Class A, Class C and Class R Shares, respectively, of the Fund.
B-72
Under the Plan for Class C Shares, Goldman Sachs is also entitled to receive a separate fee
for personal and account maintenance services equal on an annual basis to 0.25% of the Funds average daily net assets attributable to Class C Shares. With respect to Class A and Class R Shares, the Distributor at its discretion may use
compensation for distribution services paid under the Plan for personal and account maintenance services and expenses so long as such total compensation under the Plan does not exceed the maximum cap on service fees imposed by FINRA.
Each Plan is a compensation plan which provides for the payment of a specified fee without regard to the expenses actually
incurred by Goldman Sachs. If such fee exceeds Goldman Sachs expenses, Goldman Sachs may realize a profit from these arrangements. The distribution fees received by Goldman Sachs under the Plans (and, as applicable, CDSCs) on Class A,
Class C and Class R Shares may be sold by Goldman Sachs as distributor to entities which provide financing for payments to Authorized Institutions in respect of sales of Class A, Class C and Class R Shares. To the extent such fees are not paid
to such dealers, Goldman Sachs may retain such fees as compensation for its services and expenses of distributing the Funds Class A, Class C and Class R Shares.
Under each Plan, Goldman Sachs, as distributor of the Funds Class A, Class C and Class R Shares, will provide to the Trustees of the Trust for their review, and the Trustees of the Trust will
review at least quarterly a written report of the services provided and amounts expended by Goldman Sachs under the Plans and the purposes for which such services were performed and expenditures were made.
The Plans will remain in effect until June 30, 2014 and from year to year thereafter, provided that such continuance is approved
annually by a majority vote of the Trustees of the Trust, including a majority of the non-interested Trustees of the Trust who have no direct or indirect financial interest in the Plans. The Plans may not be amended to increase materially the amount
of distribution compensation described therein without approval of a majority of the outstanding Shares of the affected share class but may be amended without shareholder approval to increase materially the amount of non-distribution compensation.
All material amendments of a Plan must also be approved by the Trustees of the Trust in the manner described above. A Plan may be terminated at any time as to the Fund without payment of any penalty by a vote of a majority of the non-interested
Trustees of the Trust or by vote of a majority of the Class A, Class C or Class R Shares. If a Plan was terminated by the Trustees of the Trust and no successor plan was adopted, the Fund would cease to make payments to Goldman Sachs under the
Plan and Goldman Sachs would be unable to recover the amount of any of its unreimbursed expenditures. So long as a Plan is in effect, the selection and nomination of non-interested Trustees of the Trust will be committed to the discretion of the
non-interested Trustees of the Trust. The Trustees of the Trust have determined that in their judgment there is a reasonable likelihood that the Plans will benefit the Fund and its Class A, Class C and Class R shareholders.
The following chart shows the distribution and service fees paid to Goldman Sachs for the fiscal year ended November 30, 2013 by the
Fund pursuant to the Class A Plan:
|
|
|
|
|
Fund
|
|
Fiscal Year ended
November 30, 2013
*
|
|
MLP Energy Infrastructure Fund
|
|
$
|
20,460
|
|
*
|
The Fund commenced operations on March 28, 2013.
|
The following chart shows the distribution and service fees paid to Goldman Sachs for the fiscal year ended November 30, 2013 by the Fund pursuant to the Class C Plan:
|
|
|
|
|
Fund
|
|
Fiscal Year ended
November 30, 2013
*
|
|
MLP Energy Infrastructure Fund
|
|
$
|
38,659
|
|
*
|
The Fund commenced operations on March 28, 2013.
|
B-73
The following chart shows the distribution and service fees paid to Goldman Sachs for
the fiscal year ended November 30, 2013 by the Fund pursuant to the Class R Plan:
|
|
|
|
|
Fund
|
|
Fiscal Year ended
November 30, 2013
*
|
|
MLP Energy Infrastructure Fund
|
|
$
|
56
|
|
*
|
The Fund commenced operations on March 28, 2013.
|
For the fiscal year ended November 30, 2013, the following expenses were incurred by Goldman Sachs in connection with distribution under the Class A Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation to
Dealers (1)
|
|
Compensation and
Expenses of the
Distributor and Its
Sales Personnel
|
|
|
Allocable
Overhead,
Telephone and
Travel Expenses
|
|
|
Printing and
Mailing of
Prospectuses to
Other Than
Current
Shareholders
|
|
|
Preparation and
Distribution of
Sales Literature
and Advertising
|
|
|
Totals
|
|
$14,902
|
|
$
|
64,305
|
|
|
$
|
26,945
|
|
|
$
|
1,727
|
|
|
$
|
4,272
|
|
|
$
|
112,151
|
|
1
|
Advance commissions paid to dealers of 1% on Class A Shares are considered deferred assets which are amortized over a period of 18 months; amounts presented above
reflect amortization expense recorded during the period presented.
|
During the fiscal year ended November 30, 2013, Goldman
Sachs incurred the following expenses in connection with distribution under the Funds Class C Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation to
Dealers (1)
|
|
Compensation and
Expenses of the
Distributor and Its
Sales Personnel
|
|
|
Allocable
Overhead,
Telephone and
Travel Expenses
|
|
|
Printing and
Mailing of
Prospectuses to
Other Than
Current
Shareholders
|
|
|
Preparation and
Distribution of
Sales Literature
and Advertising
|
|
|
Totals
|
|
$1,146
|
|
$
|
27,821
|
|
|
$
|
11,880
|
|
|
$
|
761
|
|
|
$
|
1,883
|
|
|
$
|
43,491
|
|
1
|
Advance commissions paid to dealers of 1% on Class C Shares are considered deferred assets which are amortized over a period of 18 months; amounts presented above
reflect amortization expense recorded during the period presented.
|
During the fiscal year ended
November 30, 2013, Goldman Sachs incurred the following expenses in connection with distribution under the Funds Class R Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation to
Dealers
|
|
Compensation and
Expenses of the
Distributor and Its
Sales Personnel
|
|
|
Allocable
Overhead,
Telephone and
Travel Expenses
|
|
|
Printing and
Mailing of
Prospectuses to
Other Than
Current
Shareholders
|
|
|
Preparation and
Distribution of
Sales Literature
and Advertising
|
|
|
Totals
|
|
$21
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
26
|
|
B-74
OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE, PURCHASES,
REDEMPTIONS, EXCHANGES AND DIVIDENDS
(Class A Shares, Class C Shares and Class R Shares Only)
The following
information supplements the information in the Prospectus under the captions Shareholder Guide and Dividends. Please see the Prospectus for more complete information.
Offering Price of Class A Shares
Class A Shares of the Fund
are sold with a maximum sales charge of 5.5%. Using the net asset value as of November 30, 2013, the maximum offering price of the Class A shares of the Fund would be:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset
Value
|
|
|
Maximum
Sales
Charge
|
|
|
Offering
Price to
Public
|
|
Class A
|
|
$
|
10.81
|
|
|
|
5.50
|
%
|
|
$
|
11.44
|
|
The actual sales charge that is paid by an investor on the purchase of Class A Shares may
differ slightly from the sales charge listed above or in the Funds Prospectus due to rounding in the calculations. For example, the sales load disclosed above and in the Funds Prospectus is only shown to one decimal place (
i.e.
,
5.5%). The actual sales charge that is paid by an investor will be rounded to two decimal places. As a result of such rounding in the calculations, the actual sales load paid by an investor may be somewhat greater (
e.g.
, 5.53%) or somewhat
lesser (
e.g.
, 5.48%) than that listed above or in the Prospectus. Contact your financial advisor for further information.
Other
Purchase Information/Sales Charge Waivers
The sales charge waivers on the Funds shares are due to the nature of the
investors involved and/or the reduced sales effort that is needed to obtain such investments.
At the discretion of the
Trusts officers and in addition to the NAV purchases permitted in the Funds Prospectus, Class A Shares of the Fund may also be sold at NAV without payment of any sales charge for shares purchased through certain Employee Benefit
Plans investing in the Fund.
Certain Goldman Sachs sponsored or partnered retirement platforms (specifically, GS
Retirement Plan Plus and Goldman Sachs 401(k) Program) will be eligible to purchase Class A Shares of the Funds of the Trust without a front-end sales charge.
In addition, certain former shareholders of certain funds (e.g., funds of AXA Enterprise Funds Trust, AXA Enterprise Multimanager Funds Trust, and The Enterprise Group of Funds, Inc., and the Signal Funds
of The Coventry Group) (the Acquired Funds) who (i) received shares of a Goldman Sachs Fund in connection with a reorganization of an Acquired Fund into a Goldman Sachs Fund, (ii) had previously qualified for purchases of
Class A shares of the Acquired Funds without the imposition of a sales load under the guidelines of the applicable Acquired Fund family, and (iii) as of August 24, 2012 held their Goldman Sachs Fund shares directly with the Goldman
Sachs Funds Transfer Agent, are permitted to purchase Class A Shares of a Goldman Sachs Fund without the imposition of a front-end sales load as long as they continue to hold the shares directly at the Transfer Agent.
If shares of the Fund are held in an account with an Authorized Institution, all recordkeeping, transaction processing and payments of
distributions relating to the beneficial owners account will be performed by the Authorized Institution, and not by the Fund and its Transfer Agent. Since the Fund will have no record of the beneficial owners transactions, a beneficial
owner should contact the Authorized Institution to purchase, redeem or exchange shares, to make changes in or give instructions concerning the account or to obtain information about the account. The transfer of shares in an account with one
Authorized Institution to an account with another Authorized Institution or to an account directly with the Fund involves special procedures and will require the beneficial owner to obtain historical purchase information about the shares in the
account from the Authorized Institution.
B-75
Right of Accumulation (Class A)
A Class A shareholder qualifies for cumulative quantity discounts if the current purchase price of the new investment plus the
shareholders current holdings of existing Class A and/or Class C Shares (acquired by purchase or exchange) of the Fund and Class A, Class B and/or Class C Shares of any other Goldman Sachs Fund total the requisite amount for
receiving a discount. For example, for certain Funds, if a shareholder owns shares with a current market value of $65,000 and purchases additional Class A Shares of a Fund with a purchase price of $45,000, the sales charge for the $45,000
purchase would be 3.75% (the rate applicable to purchases of $100,000 or more for certain of the Funds). Class A and/or Class C Shares of the Fund and Class A, Class B and/or Class C Shares of any other Goldman Sachs Fund purchased
(i) by an individual, his spouse, his parents and his children, and (ii) by a trustee, guardian or other fiduciary of a single trust estate or a single fiduciary account, will be combined for the purpose of determining whether a purchase
will qualify for such right of accumulation and, if qualifying, the applicable sales charge level. For purposes of applying the right of accumulation, shares of the Fund and any other Goldman Sachs Fund purchased by an existing client of Goldman
Sachs Wealth Management or GS Ayco Holding LLC will be combined with Class A, Class B and/or Class C Shares and other assets held by all other Goldman Sachs Wealth Management accounts or accounts of GS Ayco Holding LLC, respectively. In
addition, Class A and/or Class C Shares of the Fund and Class A, Class B and/or Class C Shares of any other Goldman Sachs Fund purchased by partners, directors, officers or employees of the same business organization, groups of individuals
represented by and investing on the recommendation of the same accounting firm, certain affinity groups or other similar organizations (collectively, eligible persons) may be combined for the purpose of determining whether a purchase
will qualify for the right of accumulation and, if qualifying, the applicable sales charge level. This right of accumulation is subject to the following conditions: (i) the business organizations, groups or firms agreement to
cooperate in the offering of the Funds shares to eligible persons; and (ii) notification to the Fund at the time of purchase that the investor is eligible for this right of accumulation. In addition, in connection with SIMPLE IRA
accounts, cumulative quantity discounts are available on a per plan basis if (i) your employee has been assigned a cumulative discount number by Goldman Sachs; and (ii) your account, alone or in combination with the accounts of other plan
participants also invested in Class A, Class B and/or Class C Shares of the Goldman Sachs Funds, totals the requisite aggregate amount as described in the Prospectus.
Statement of Intention (Class A)
If a shareholder anticipates purchasing
at least $50,000, not counting reinvestments of dividends and distributions, of Class A Shares of the Fund alone or in combination with Class A Shares of any other Goldman Sachs Fund within a 13-month period, the shareholder may purchase
shares of the Fund at a reduced sales charge by submitting a Statement of Intention (the Statement). Shares purchased pursuant to a Statement will be eligible for the same sales charge discount that would have been available if all of
the purchases had been made at the same time. The shareholder or his Authorized Institution must inform Goldman Sachs that the Statement is in effect each time shares are purchased. There is no obligation to purchase the full amount of shares
indicated in the Statement. A shareholder may include the value of all Class A Shares on which a sales charge has previously been paid as an accumulation credit toward the completion of the Statement, but a price readjustment will
be made only on Class A Shares purchased within ninety (90) days before submitting the Statement. The Statement authorizes the Transfer Agent to hold in escrow a sufficient number of shares which can be redeemed to make up any difference
in the sales charge on the amount actually invested. For purposes of satisfying the amount specified on the Statement, the gross amount of each investment, exclusive of any appreciation on shares previously purchased, will be taken into account.
The provisions applicable to the Statement, and the terms of the related escrow agreement, are set forth in Appendix C to
this SAI.
Cross-Reinvestment of Distributions
Shareholders may receive distributions in additional shares of the same class of the Fund or they may elect to receive them in cash or shares of the same class of other Goldman Sachs Funds, or Service
Shares of the Goldman Sachs Financial Square Prime Obligations Fund, if they hold Class A Shares of the Fund.
A Fund
shareholder should obtain and read the prospectus relating to the other Goldman Sachs Fund and its shares and consider its investment objective, policies and applicable fees before electing cross-reinvestment into that Fund. The election to
cross-reinvest distributions will not affect the tax treatment of such distributions, which will be treated as received by the shareholder and then used to purchase shares of the acquired fund. Such reinvestment of distributions in shares of other
Goldman Sachs Funds is available only in states where such reinvestment may legally be made.
B-76
Automatic Exchange Program
A Fund shareholder may elect to exchange automatically a specified dollar amount of shares of the Fund for shares of the same class or an equivalent class of another Goldman Sachs Fund provided the
minimum initial investment requirement has been satisfied. A Fund shareholder should obtain and read the prospectus relating to the other Goldman Sachs Fund and its shares and consider its investment objective, policies and applicable fees and
expenses before electing an automatic exchange into that Goldman Sachs Fund.
Class C Exchanges
As stated in the Prospectus, Goldman Sachs normally begins paying the annual 0.75% distribution fee on Class C Shares to Authorized
Institutions after the shares have been held for one year. When an Authorized Institution enters into an appropriate agreement with Goldman Sachs and stops receiving this payment on Class C Shares that have been beneficially owned by the Authorized
Institutions customers for at least ten years, those Class C Shares may be exchanged for Class A Shares (which bear a lower distribution fee) of the same Fund at their relative net asset value without a sales charge in recognition of the
reduced payment to the Authorized Institution.
Exchanges from Collective Investment Trusts to Goldman Sachs Funds
The Investment Adviser manages a number of collective investment trusts that hold assets of 401(k) plans and other retirement plans (each,
a Collective Investment Trust). An investor in a Collective Investment Trust (or an Intermediary acting on behalf of the investor) may elect to exchange some or all of the interests it holds in a Collective Investment Trust for shares of
one or more of the Goldman Sachs Funds. Generally speaking, Rule 22c-1 under the Act requires a purchase order for shares of a Goldman Sachs Fund to be priced based on the current NAV of the Goldman Sachs Fund that is next calculated after receipt
of the purchase order. A Goldman Sachs Fund will treat a purchase order component of an exchange from an investor in a Collective Investment Trust as being received in good order at the time it is communicated to an Intermediary or the Transfer
Agent, if the amount of shares to be purchased is expressed as a percentage of the value of the investors interest in a designated Collective Investment Trust that it is contemporaneously redeeming (e.g., if the investor communicates a desire
to exchange 100% of its interest in a Collective Investment Trust for shares of a Goldman Sachs Fund). The investors purchase price and the number of Goldman Sachs Fund shares it will acquire will therefore be calculated as of the pricing of
the Collective Investment Trust on the day of the purchase order. Such an order will be deemed to be irrevocable as of the time the Goldman Sachs Funds NAV is next calculated after receipt of the purchase order. An investor should obtain and
read the prospectus relating to any Goldman Sachs Fund and its shares and consider its investment objective, policies and applicable fees and expenses before electing an exchange into that Goldman Sachs Fund. For federal income tax purposes, an
exchange of interests in a Collective Investment Trust for shares of a Goldman Sachs Fund may be subject to tax, and you should consult your tax adviser concerning the tax consequences of an exchange.
Systematic Withdrawal Plan
A systematic withdrawal plan (the Systematic Withdrawal Plan) is available to shareholders of the Fund whose shares are worth at least $5,000. The Systematic Withdrawal Plan provides for
monthly payments to the participating shareholder of any amount not less than $50.
Distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional shares of the Fund at net asset value. The Transfer Agent acts as agent for the shareholder in redeeming sufficient full and fractional shares to provide the amount of the
systematic withdrawal payment. The Systematic Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written notice to the shareholder.
Withdrawal payments should not be considered to be dividends, yield or income. If periodic withdrawals continuously exceed new purchases and reinvested distributions, the shareholders original investment will be correspondingly reduced and
ultimately exhausted. The maintenance of a withdrawal plan concurrently with purchases of additional Class A or Class C Shares would be disadvantageous because of the sales charge imposed on purchases of Class A Shares or the imposition of
a CDSC on redemptions of Class A and Class C Shares. The CDSC applicable to Class A or Class C Shares redeemed under a Systematic Withdrawal Plan may be waived. See Shareholder Guide in the Prospectus. In addition, each
withdrawal constitutes a redemption of shares, and any gain or loss realized must be reported for federal and state income tax purposes. A shareholder should consult his or her own tax adviser with regard to the tax consequences of participating in
the Systematic Withdrawal Plan. For further information or to request a Systematic Withdrawal Plan, please write or call the Transfer Agent.
B-77
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 28, 2014, The Goldman Sachs Group, Inc., a Delaware corporation whose principal office is located at 200 West Street,
New York, NY 10282, owned of record and beneficially 25% or more of the outstanding shares of the Fund, and thus may be deemed to control the Fund.
As of February 28, 2014, the following shareholders were shown in the Trusts records as owning more than 5% of any class of the Funds shares. Except as listed below, the Trust does not
know of any persons who own of record or beneficially 5% of more of any class of the Funds shares:
|
|
|
|
|
Class
|
|
Name/Address
|
|
Percentage of Class
|
|
|
|
Class A
|
|
Charles Schwab & Co., Inc., Special Custody Acct. FBO Customers, Attn: Mutual Funds, 211 Main Street, San Francisco, CA 94105-1905.
|
|
29.26%
|
|
|
|
Class A
|
|
UBS Financial Services Inc., Attn: Dept. Manager, 1000 Harbor Blvd, 5
th
Floor, Weehawken, NJ 07086-6761.
|
|
11.36%
|
|
|
|
Class A
|
|
National Financial Services LLC, FBO Customers, Attn: Mutual Funds Dept, 4
th
Fl, 499 Washington Blvd., Jersey City, NJ 07310-2010.
|
|
15.92%
|
|
|
|
Class A
|
|
LPL Financial Corporation, 9785 Towne Centre Drive, San Diego, CA 92121-1968.
|
|
6.58%
|
|
|
|
Class A
|
|
Morgan Stanley & Co., Harborside Financial Center, Plaza II 3
rd
Floor, Jersey City, NJ 07311.
|
|
5.33%
|
|
|
|
Class A
|
|
American Enterprise Investment Services, 707
2
nd
Ave South, Minneapolis, MN 55402-2405.
|
|
21.15%
|
|
|
|
Class C
|
|
First Clearing, LLC, Special Custody Account FBO Customer, 2801 Market St., Saint Louis, MO 63103-2523.
|
|
12.65%
|
|
|
|
Class C
|
|
UBS Financial Services Inc., Attn: Dept. Manager, 1000 Harbor Blvd, 5
th
Floor, Weehawken, NJ 07086-6761.
|
|
7.09%
|
|
|
|
Class C
|
|
LPL Financial Corporation, 9785 Towne Centre Drive, San Diego, CA 92121-1968.
|
|
5.86%
|
|
|
|
Class C
|
|
Morgan Stanley & Co., Harborside Financial Center, Plaza II 3
rd
Floor, Jersey City, NJ 07311.
|
|
49.17%
|
|
|
|
Class C
|
|
Pershing LLC, 1 Pershing Plaza, Jersey City, NJ 07399-0002.
|
|
9.06%
|
|
|
|
Class C
|
|
American Enterprise Investment Services, 707
2
nd
Ave South, Minneapolis, MN 55402-2405.
|
|
11.03%
|
|
|
|
Institutional
|
|
First Clearing, LLC, Special Custody Account FBO Customer, 2801 Market St., Saint Louis, MO 63103-2523.
|
|
10.58%
|
|
|
|
Institutional
|
|
Morgan Stanley & Co., Attn: Mutual Fund Operations, 1 New York Plaza, Floor 12, New York, NY 10004-1901.
|
|
19.49%
|
B-78
|
|
|
|
|
|
|
|
Institutional
|
|
Goldman Sachs & Co., Goldman Sachs Tax-Advantage Global Equity Portfolio, One Beacon Street, 18
th
Floor, Boston, MA 02108-3107.
|
|
11.91%
|
|
|
|
Institutional
|
|
National Financial Services LLC, FBO Customers, Attn: Mutual Funds Dept, 4
th
Fl, 499 Washington Blvd., Jersey City, NJ 07310-2010.
|
|
5.57%
|
|
|
|
Institutional
|
|
Charles Schwab & Co., Inc., Special Custody Acct. FBO Customers, Attn: Mutual Funds, 101 Montgomery Street, San Francisco, CA 94104-4151.
|
|
6.89%
|
|
|
|
Institutional
|
|
Goldman Sachs & Co., FBO Omnibus, c/o Mutual Fund Ops, 295 Chipeta Way, Salt Lake City, UT 84108-1285.
|
|
38.44%
|
|
|
|
Class IR
|
|
RBC Capital Markets LLC, Attn: Mutual Fund Ops Manager, 60 S. 6
th
Street, Suite 700, #P08, Minneapolis, MN 55402-4413.
|
|
19.22%
|
|
|
|
Class IR
|
|
LPL Financial Corporation, 9785 Towne Centre Drive, San Diego, CA 92121-1968.
|
|
71.73%
|
|
|
|
Class IR
|
|
Pershing LLC, 1 Pershing Plaza, Jersey City, NJ 07399-0002.
|
|
8.93%
|
|
|
|
Class R
|
|
Goldman Sachs Group Seed Accounts, Attn: IMD-India-SAOS, Crystal Downs Fl. 3, Embassy Golf Links Business Park Bangalore 560071, India.
|
|
34.38%
|
|
|
|
Class R
|
|
JW Cole Financial, MG Trust Company, FBO Customer, 717
17
th
Street, Suite 1300, Denver, CO 80202-3304
|
|
65.03%
|
B-79
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Short-Term Credit Ratings
A Standard & Poors short-term
issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation having an original maturity of no more than 365 days. The following summarizes the rating categories used by
Standard & Poors for short-term issues:
A-1 A short-term obligation rated A-1 is
rated in the highest category by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates
that the obligors capacity to meet its financial commitment on these obligations is extremely strong.
A-2
short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligors capacity to meet its
financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3
exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant speculative characteristics. Ratings
of B-1, B-2, and B-3 may be assigned to indicate finer distinctions within the B category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
B-1 A short-term obligation rated B-1 is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term obligation
rated B-2 is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3 A short-term obligation rated B-3 is regarded as having significant speculative
characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
C A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D A short-term obligation rated D is in payment
default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made
during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks Country risk considerations are a standard part of Standard & Poors
analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligors capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency
due to the sovereign governments own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign
1-A
Currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.
Moodys Investors Service (Moodys) short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.
Moodys employs the following designations to indicate the relative repayment ability of rated issuers:
P-1 Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt
obligations.
P-3 Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay
short-term obligations.
NP Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Fitch, Inc. / Fitch Ratings Ltd. (Fitch) short-term ratings scale applies to foreign
currency and local currency ratings. A short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for U.S. public finance, in line with industry standards, to reflect unique risk characteristics of bond,
tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner. The following summarizes the
rating categories used by Fitch for short-term obligations:
F1 Securities possess the highest credit
quality. This designation indicates the strongest capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature.
F2 Securities possess good credit quality. This designation indicates a satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3
Securities possess fair credit quality. This designation indicates that the capacity for timely payment of financial commitments is adequate; however, near term adverse changes could result in a reduction to non investment grade.
B Securities possess speculative credit quality. This designation indicates minimal capacity for timely payment of
financial commitments, plus vulnerability to near term adverse changes in financial and economic conditions.
C
Securities possess high default risk. Default is a real possibility. This designation indicates a capacity for meeting financial commitments which is solely reliant upon a sustained, favorable business and economic environment.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
NR This designation indicates that Fitch does not publicly rate the associated issuer or issue.
WD This designation indicates that the rating has been withdrawn and is no longer maintained by Fitch.
2-A
The following summarizes the ratings used by Dominion Bond Rating Service Limited
(DBRS) for commercial paper and short-term debt:
R-1 (high) Short-term debt rated R-1
(high) is of the highest credit quality, and indicates an entity possessing unquestioned ability to repay current liabilities as they fall due. Entities rated in this category normally maintain strong liquidity positions, conservative debt
levels, and profitability that is both stable and above average. Companies achieving an R-1 (high) rating are normally leaders in structurally sound industry segments with proven track records, sustainable positive future results, and no
substantial qualifying negative factors. Given the extremely tough definition DBRS has established for an R-1 (high), few entities are strong enough to achieve this rating.
R-1 (middle) Short-term debt rated R-1 (middle) is of superior credit quality and, in most cases, ratings
in this category differ from R-1 (high) credits by only a small degree. Given the extremely tough definition DBRS has established for the R-1 (high) category, entities rated R-1 (middle) are also considered strong
credits, and typically exemplify above average strength in key areas of consideration for the timely repayment of short-term liabilities.
R-1 (low) Short-term debt rated R-1 (low) is of satisfactory credit quality. The overall strength and outlook for key liquidity, debt and profitability ratios are not
normally as favorable as with higher rating categories, but these considerations are still respectable. Any qualifying negative factors that exist are considered manageable, and the entity is normally of sufficient size to have some influence in its
industry.
R-2 (high) Short-term debt rated R-2 (high) is considered to be at the upper end of
adequate credit quality. The ability to repay obligations as they mature remains acceptable, although the overall strength and outlook for key liquidity, debt, and profitability ratios is not as strong as credits rated in the R-1 (low)
category. Relative to the latter category, other shortcomings often include areas such as stability, financial flexibility, and the relative size and market position of the entity within its industry.
R-2 (middle) Short-term debt rated R-2 (middle) is considered to be of adequate credit quality. Relative
to the R-2 (high) category, entities rated R-2 (middle) typically have some combination of higher volatility, weaker debt or liquidity positions, lower future cash flow capabilities, or are negatively impacted by a weaker
industry. Ratings in this category would be more vulnerable to adverse changes in financial and economic conditions.
R-2 (low) Short-term debt rated R-2 (low) is considered to be at the lower end of adequate credit quality,
typically having some combination of challenges that are not acceptable for an R-2 (middle) credit. However, R-2 (low) ratings still display a level of credit strength that allows for a higher rating than the R-3
category, with this distinction often reflecting the issuers liquidity profile.
R-3 Short-term debt
rated R-3 is considered to be at the lowest end of adequate credit quality, one step up from being speculative. While not yet defined as speculative, the R-3 category signifies that although repayment is still expected, the
certainty of repayment could be impacted by a variety of possible adverse developments, many of which would be outside the issuers control. Entities in this area often have limited access to capital markets and may also have limitations in
securing alternative sources of liquidity, particularly during periods of weak economic conditions.
R-4
Short-term debt rated R-4 is speculative. R-4 credits tend to have weak liquidity and debt ratios, and the future trend of these ratios is also unclear. Due to its speculative nature, companies with R-4 ratings
would normally have very limited access to alternative sources of liquidity. Earnings and cash flow would typically be very unstable, and the level of overall profitability of the entity is also likely to be low. The industry environment may be
weak, and strong negative qualifying factors are also likely to be present.
R-5 Short-term debt rated
R-5 is highly speculative. There is a reasonably high level of uncertainty as to the ability of the entity to repay the obligations on a continuing basis in the future, especially in periods of economic recession or industry adversity.
In some cases, short term debt rated R-5 may have challenges that if not corrected, could lead to default.
D A security rated D implies the issuer has either not met a scheduled payment or the issuer has made it
clear that it will be missing such a payment in the near future. In some cases, DBRS may not assign a D rating
3-A
under a bankruptcy announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the
missed payment continues to be in arrears, and until such time as the rating is discontinued or reinstated by DBRS.
Long-Term Credit
Ratings
The following summarizes the ratings used by Standard & Poors for long-term issues:
AAA An obligation rated AAA has the highest rating assigned by Standard & Poors. The
obligors capacity to meet its financial commitment on the obligation is extremely strong.
AA An
obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher-rated categories. However, the obligors capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
Obligations rated BB, B,
CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable
business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to
nonpayment.
C A C rating is assigned to obligations that are currently highly vulnerable to
nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the
C rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instruments terms.
D An obligation rated D is in payment default. The D rating category is used when payments on
an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus
(+) or minus (-) The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
4-A
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poors does not rate a particular obligation as a matter of policy.
Local Currency and Foreign Currency Risks Country risk considerations are a standard part of Standard & Poors analysis for credit ratings on any issuer or issue. Currency of
repayment is a key factor in this analysis. An obligors capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign governments own relatively lower
capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same issuer.
The following summarizes the ratings
used by Moodys for long-term debt:
Aaa Obligations rated Aaa are judged to be of the
highest quality, with minimal credit risk.
Aa Obligations rated Aa are judged to be of high
quality and are subject to very low credit risk.
A Obligations rated A are considered
upper-medium grade and are subject to low credit risk.
Baa Obligations rated Baa are subject
to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged to have speculative elements and are subject to substantial credit
risk.
B Obligations rated B are considered speculative and are subject to high credit risk.
Caa Obligations rated Caa are judged to be of poor standing and are subject to very high
credit risk.
Ca Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
C Obligations rated C are
the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through
Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating
category.
The following summarizes long-term ratings used by Fitch:
AAA Securities considered to be of the highest credit quality. AAA ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA Securities considered to be of very high credit quality. AA ratings denote expectations of very low
credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A Securities considered to be of high credit quality. A ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
5-A
BBB Securities considered to be of good credit quality. BBB
ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity.
This is the lowest investment grade category.
BB Securities considered to be speculative. BB
ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
B Securities considered to be highly
speculative. For issuers and performing obligations, B ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic environment. For individual obligations, may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery
Rating of RR1 (outstanding).
CCC For issuers and performing obligations, default is a real
possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior
levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions. Such obligations typically would possess a Recovery Rating of RR2 (superior), or RR3 (good) or RR4 (average).
CC For issuers and performing obligations, default of some kind appears probable. For individual
obligations, may indicate distressed or defaulted obligations with a Recovery Rating of RR4 (average) or RR5 (below average).
C For issuers and performing obligations, default is imminent. For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor
recoveries. Such obligations would possess a Recovery Rating of RR6 (poor).
RD Indicates an
entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
Plus (+) or minus (-) may be appended to a rating to denote relative status within major rating categories. Such suffixes are not
added to the AAA category or to categories below CCC.
NR Denotes that Fitch does
not publicly rate the associated issue or issuer.
WD Indicates that the rating has been withdrawn and is
no longer maintained by Fitch.
The following summarizes the ratings used by DBRS for long-term debt:
AAA Long-term debt rated AAA is of the highest credit quality, with exceptionally strong protection for
the timely repayment of principal and interest. Earnings are considered stable, the structure of the industry in which the entity operates is strong, and the outlook for future profitability is favorable. There are few qualifying factors present
that would detract from the performance of the entity. The strength of liquidity and coverage ratios is unquestioned and the entity has established a credible track record of superior performance. Given the extremely high standard that DBRS has set
for this category, few entities are able to achieve a AAA rating.
AA Long-term debt rated
AA is of superior credit quality, and protection of interest and principal is considered high. In many cases they differ from long-term debt rated AAA only to a small degree. Given the extremely restrictive definition DBRS
has for the AAA category, entities rated AA are also considered to be strong credits, typically exemplifying above-average strength in key areas of consideration and unlikely to be significantly affected by reasonably
foreseeable events.
6-A
A Long-term debt rated A is of satisfactory credit quality.
Protection of interest and principal is still substantial, but the degree of strength is less than that of AA rated entities. While A is a respectable rating, entities in this category are considered to be more susceptible to
adverse economic conditions and have greater cyclical tendencies than higher-rated securities.
BBB
Long-term debt rated BBB is of adequate credit quality
.
Protection of interest and principal is considered acceptable, but the entity is fairly susceptible to adverse changes in financial and economic conditions, or there may be
other adverse conditions present which reduce the strength of the entity and its rated securities.
BB
Long-term debt rated BB is defined to be speculative and non-investment grade, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession. Entities in the BB
range typically have limited access to capital markets and additional liquidity support. In many cases, deficiencies in critical mass, diversification, and competitive strength are additional negative considerations.
B Long-term debt rated B is considered highly speculative and there is a reasonably high level of
uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity.
CCC, CC and C Long-term debt rated in any of these categories is very highly speculative and is in
danger of default of interest and principal. The degree of adverse elements present is more severe than long-term debt rated B. Long-term debt rated below B often have features which, if not remedied, may lead to default. In
practice, there is little difference between these three categories, with CC and C normally used for lower ranking debt of companies for which the senior debt is rated in the CCC to B range.
D A security rated D implies the issuer has either not met a scheduled payment of interest or
principal or that the issuer has made it clear that it will miss such a payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in the
underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating is discontinued or reinstated by DBRS.
(high, low) Each rating category is denoted by the subcategories high and low. The
absence of either a high or low designation indicates the rating is in the middle of the category. The AAA and D categories do not utilize high, middle, and
low as differential grades.
Municipal Note Ratings
A Standard & Poors U.S. municipal note rating reflects the liquidity factors and market access risks unique to notes. Notes
due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
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Amortization schedule-the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
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Source of payment-the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
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Note rating symbols are as follows:
SP-1 The issuers of these municipal notes exhibit a strong capacity to pay principal and interest. Those issues
determined to possess a very strong capacity to pay debt service are given a plus (+) designation.
SP-2
The issuers of these municipal notes exhibit a satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3 The issuers of these municipal notes exhibit speculative capacity to pay principal and interest.
7-A
Moodys uses three rating categories for short-term municipal obligations that are
considered investment grade. These ratings are designated as Municipal Investment Grade (MIG) and are divided into three levels MIG-1 through MIG-3. In addition, those short-term obligations that are of
speculative quality are designated SG, or speculative grade. MIG ratings expire at the maturity of the obligation. The following summarizes the ratings used by Moodys for these short-term obligations:
MIG-1 This designation denotes superior credit quality. Excellent protection is afforded by established cash flows,
highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG-2
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG-3 This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt instruments in this category may lack
sufficient margins of protection.
In the case of variable rate demand obligations (VRDOs), a two-component rating
is assigned; a long- or short-term debt rating and a demand obligation rating. The first element represents Moodys evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents
Moodys evaluation of the degree of risk associated with the ability to receive purchase price upon demand (demand feature), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG
rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR,
e.g.
, Aaa/NR or NR/VMIG-1.
VMIG rating expirations are a function of each issues
specific structural or credit features.
VMIG-1 This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
VMIG-2 This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit
strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
VMIG-3 This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and
legal protections that ensure the timely payment of purchase price upon demand.
SG This designation
denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to
ensure the timely payment of purchase price upon demand.
Fitch uses the same ratings for municipal securities as described
above for other short-term credit ratings.
About Credit Ratings
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a
specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular investor.
8-A
Moodys credit ratings must be construed solely as statements of opinion and not as
statements of fact or recommendations to purchase, sell or hold any securities.
Fitchs credit ratings provide an
opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Fitch credit ratings are used by investors as indications of the
likelihood of receiving their money back in accordance with the terms on which they invested. Fitchs credit ratings cover the global spectrum of corporate, sovereign (including supranational and sub-national), financial, bank, insurance,
municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by receivables or other financial assets.
DBRS credit ratings are not buy, hold or sell recommendations, but rather the result of qualitative and quantitative analysis focusing
solely on the credit quality of the issuer and its underlying obligations.
9-A
EFFECTIVE: MARCH 2013