Post-effective Amendment (investment Company, Rule 485(a)) (485apos)
02 Abril 2014 - 3:19PM
Edgar (US Regulatory)
As filed with the Securities and
Exchange Commission on April 2, 2014
Securities Act File No. 33-26305
Investment Company Act File No. 811-05742
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 362
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and/or
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REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
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Amendment No. 364
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(Check appropriate box or boxes)
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BLACKROCK
FUNDS
SM
(Exact Name of Registrant as Specified in Charter)
100 Bellevue Parkway
,
Wilmington, Delaware 19809
United States of America
(Address of Principal Executive Offices)
Registrant’s Telephone Number,
including Area Code:
(800) 441-7762
John M. Perlowski
BlackRock Funds
SM
55 East 52
nd
Street
New York, New York 10055
United States of America
(Name and Address of Agent for Service)
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Copies to:
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Counsel for the Fund:
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John A. MacKinnon, Esq.
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Benjamin Archibald, Esq.
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Sidley Austin LLP
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BlackRock Advisors, LLC
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787 Seventh Avenue
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55 East 52nd Street
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New York, New York 10019-6018
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New York, New York 10055
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It is proposed that this filing will become effective (check
appropriate box)
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Immediately upon filing pursuant to paragraph (b)
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On (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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On (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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On (date) pursuant to paragraph (a)(2) of Rule 485
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If appropriate, check the following box:
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This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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Title of Securities Being Registered: Shares
of beneficial interest, par value $.001 per share.
[
], 2014
The information in this prospectus is
not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where
the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED APRIL 2,
2014
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PROSPECTUS
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BlackRock
Funds
SM
| Investor and Institutional Shares
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>
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BlackRock Multi-Manager Alternatives Fund
Investor
A: BMMAX • Investor C: BMMCX • Institutional: BMMNX
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This Prospectus contains information
you should know before investing, including information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange
Commission and the Commodity Futures Trading Commission have not approved or disapproved these securities or passed upon the
adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
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Not FDIC Insured • May Lose Value • No Bank Guarantee
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Table of
Contents
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Fund Overview
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Key facts and details about the Fund, including investment objective, principal investment strategies, principal risk factors, fee and expense
information, and historical performance information
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3
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3
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4
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6
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14
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14
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14
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14
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15
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15
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Details About the Fund
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16
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21
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Account Information
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Information about account services, sales charges & waivers, shareholder transactions, and distributions and other
payments
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40
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42
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45
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46
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52
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53
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53
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54
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Management of the Fund
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Information about BlackRock and the Portfolio Managers
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56
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59
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59
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60
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61
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62
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Financial Highlights
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63
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General Information
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64
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64
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65
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Glossary
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66
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For More Information
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Inside Back Cover
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Back Cover
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Fund Overview
Key Facts About BlackRock Multi-Manager
Alternatives Fund
The investment objective of the BlackRock Multi-Manager
Alternatives Fund (the “Fund”), a series of BlackRock Funds
SM
(the “Trust”), is to seek total
return.
Fees and Expenses of the
Fund
This table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least
$25,000 in the fund complex advised by BlackRock Advisors, LLC (“BlackRock”) or its affiliates. More information
about these and other discounts is available from your financial professional or your selected securities dealer, broker, investment adviser, service
provider or industry professional (including BlackRock, The PNC Financial Services Group, Inc. and their respective affiliates) (each a “Financial
Intermediary”) and in the “Details About the Share Classes” section on page [ ] of the Fund’s prospectus and in the “Purchase
of Shares” section on page [ ] of the Fund’s Statement of Additional Information
(“SAI”).
Shareholder Fees
(fees paid
directly from your investment)
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Investor A
Shares
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Investor C
Shares
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Institutional
Shares
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Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price)
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5.25
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%
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None
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None
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Maximum Deferred Sales Charge (Load) (as a percentage of offering price or redemption proceeds, whichever is lower)
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None
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1
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1.00
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%
2
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None
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Annual Fund Operating
Expenses
(expenses that you pay each year as a
percentage of the value of your investment)
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Investor A
Shares
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Investor C
Shares
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Institutional
Shares
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Management Fee
3
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1.95
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%
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1.95
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%
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1.95
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Distribution and/or Service (12b-1) Fees
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0.25
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%
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1.00
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%
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None
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Other Expenses
4
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0.80
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%
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0.80
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%
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0.75
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%
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Dividend Expense on Short Sales
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0.23%
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0.23%
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0.23%
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Miscellaneous Other Expenses of the Fund
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0.57%
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0.57%
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0.52%
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Other Expenses of the Subsidiary
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—
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—
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—
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Acquired Fund Fees and Expenses
5
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0.29
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%
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0.29
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%
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0.29
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%
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Total Annual Fund Operating Expenses
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3.29
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%
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4.04
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%
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2.99
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%
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Fee Waivers and/or Expense Reimbursements
3,6
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(0.40
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)%
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(0.40
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)%
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(0.40
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Total Annual Fund Operating Expenses After Fee Waivers and/or Expense
Reimbursements
3,6
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2.89
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%
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3.64
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%
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2.59
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%
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1
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A contingent deferred sales charge
(“CDSC”) of 1.00% is assessed on certain redemptions of Investor A Shares made within 18 months after purchase
where no initial sales charge was paid at time of purchase as part of an investment of $1,000,000 or more.
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2
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There is no CDSC on Investor C Shares after one
year.
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3
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The Management Fee payable by the Fund is based on
assets estimated to be attributable to the Fund’s direct investments in fixed-income and equity securities and instruments, including
exchange-traded funds (“ETFs”) advised by BlackRock or other investment advisers, other investments and cash and cash equivalents (including
money market funds). BlackRock has contractually agreed to waive the Management Fee on assets estimated to be attributed to the Fund’s investments
in other equity and fixed-income mutual funds managed by BlackRock or its affiliates (the “mutual funds”) until January 1,
2016. The agreement may be terminated upon 90 days’ notice by a majority of the non-interested trustees of the Trust or by a vote of a majority of
the outstanding voting securities of the Fund.
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4
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Other Expenses are based on estimated amounts for
the current fiscal year.
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5
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Acquired Fund Fees and Expenses are estimated for
the current fiscal year.
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6
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As described in the “Management of the
Fund” section of the Fund’s prospectus on page [ ], BlackRock has contractually agreed to waive and/or reimburse fees or expenses in order to
limit Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding Dividend Expense, Interest Expense, Acquired Fund
Fees and Expenses and certain other Fund expenses) as a percentage of average daily net assets to 2.60% (for Investor A Shares),
3.35% (for Investor C Shares) and 2.35% (for Institutional Shares) until January 1, 2016. The Fund may have
to repay some of these waivers and reimbursements to BlackRock in the following two years. The agreement may be terminated upon 90 days’ notice by
a majority of the non-interested trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Fund.
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3
Example:
This Example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the
Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would
be:
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1 Year
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3 Years
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Investor A Shares
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$802
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$1,449
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Investor C Shares
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$466
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$1,193
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Institutional Shares
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$262
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$ 887
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You would pay the following expenses if you did not redeem your
shares:
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1 Year
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3 Years
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Investor C Shares
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$366
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$1,193
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Portfolio Turnover:
The Fund pays transaction costs, such as commissions, when it buys
and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may
result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the
example, affect the Fund’s performance.
Principal Investment Strategies
of the Fund
The Fund seeks to achieve its investment objective by allocating
to multiple affiliated and unaffiliated investment managers (“Sub-Advisers”) that employ a variety of alternative investment strategies. Each
of the Sub-Advisers generally provides day-to-day management for a portion of the Fund’s assets.
Each Sub-Adviser may use different investment strategies in
managing Fund assets, acts independently from the others, and uses its own methodology for selecting investments. BlackRock is responsible for
identifying and retaining (subject to approval of the Trust’s Board of Trustees (the “Board”)) the Sub-Advisers for the selected
strategies and for monitoring the services provided by the Sub-Advisers. BlackRock reviews a number of qualitative and quantitative factors as part of
its process for selecting and monitoring the Sub-Advisers, as described in the “Details About the Fund” section of this prospectus.
BlackRock is also responsible for selecting the Fund’s alternative investment strategies and for determining the amount of Fund assets to allocate
to each Sub-Adviser. Based on BlackRock’s ongoing evaluation of the Sub-Advisers, BlackRock may adjust allocations among Sub-Advisers, or make
recommendations to the Board with respect to the hiring, termination or replacement of Sub-Advisers.
The primary strategies that will initially be employed by the Fund
and its Sub-Advisers include: Relative Value, Event Driven, Fundamental Long/Short and Directional Trading.
Relative Value Strategies
seek to profit from mispricing
of financial instruments relative to each other or historical norms. These strategies utilize quantitative and qualitative analysis to identify
securities or spreads between securities that deviate from their theoretical fair value and/or historical norms.
Event Driven Strategies
concentrate on companies that
are subject to corporate events such as mergers, acquisitions, restructurings, spin-offs, shareholder activism, or other special situations that alter
a company’s financial structure or operating strategy. The intended goal of event driven strategies is to profit when the price of a security
changes to reflect more accurately the likelihood and potential impact of the occurrence, or non-occurrence, of the extraordinary event. This can be
done by taking a long position in a security or other financial instrument that is believed to be underpriced or a short position in a security or
other financial instrument that is believed to be overpriced.
Fundamental Long/Short Strategies
involve buying or selling securities believed to be overpriced or underpriced
relative to their potential value. Investment strategies within the fundamental long/short
discipline include long and short equity- or credit-based strategies that emphasize a
fundamental valuation framework and equity active value strategies where an active role
is taken to enhance corporate value.
Directional Trading Strategies
seek to profit from changes in macro-level exposures, such as
interest rates, currencies, equities and commodities. This strategy may involve analyzing fundamental macroeconomic
inputs, as well as technical information, such as price to identify investment opportunities across a broad array of asset
classes and
geographies.
4
BlackRock also may allocate the Fund’s assets to additional
strategies in the future. There is no assurance that any or all of the strategies discussed in this prospectus will be used by BlackRock or the
Sub-Advisers. BlackRock currently intends to allocate assets to the following Sub-Advisers:
Investment Strategy
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Sub-Adviser
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Fundamental Long/Short
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Benefit Street Partners LLC
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Event Driven
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Carl M. Loeb Advisory Partners L.P.
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Fundamental Long/Short
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Independence Capital Asset Partners, LLC
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Fundamental Long/Short
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LibreMax Capital, LLC
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Fundamental Long/Short
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MeehanCombs LP
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Relative Value
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Peak6 Advisors LLC
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Directional Trading
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QMS Capital Management LP
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Relative Value
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Saiers Capital, LLC
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The investment strategy for each Sub-Adviser is its principal
strategy but the Sub-Advisers may also implement other investment strategies in the portion of assets assigned to them.
BlackRock may also manage Fund assets directly to seek to
enhance returns, or to implement various market hedges and to manage the Fund’s cash and short-term instruments. BlackRock may invest a
significant portion of the Fund’s assets in affiliated and unaffiliated equity, money-market and fixed income mutual funds and affiliated
and unaffiliated exchange-traded funds (“ETFs”).
BlackRock and the Sub-Advisers implement the various alternative
investment strategies by taking long or short positions in a broad range of asset classes, such as equity securities, fixed- and
floating-rate debt instruments, derivatives, other investment companies, currency- and commodity-related instruments and structured products. Long
positions benefit from an increase in the price of the underlying instrument or asset class, while short positions benefit from a decrease in
that price. The Fund may implement short positions through short sales of any instrument (including ETFs) that the Fund may purchase for
investment or by using options, swaps, futures, forwards, and other derivatives. For example, the Fund may enter into a futures contract
pursuant to which it agrees to sell an asset that it does not currently own at a specified price and time in the future. This gives the Fund a short
position with respect to that asset. The Fund has flexibility in the relative weighting of each asset class and expects to vary the percentages of
assets invested in each asset category from time to time. The Fund may invest in securities and other financial instruments of companies of
any market capitalization. The Fund may invest in securities and other financial instruments available in and which have exposure to both U.S.
and non-U.S. markets, including emerging markets, which can be U.S. dollar-denominated or non-U.S. dollar-denominated and may be currency
hedged or unhedged. The Fund may also invest in bonds of any maturity and in securities and other financial instruments of any credit rating
(including below investment grade securities, commonly known as “junk bonds”). Up to 15% of the Fund’s net assets may be
invested in illiquid investments.
With respect to the Fund’s equity investments, the Fund may
invest in common stock, preferred stock, rights and warrants to purchase common stock, depositary receipts, securities convertible into common and
preferred stock and non-convertible preferred stock. From time to time, the Fund may invest in shares of companies through initial public offerings
(“IPOs”).
With respect to the Fund’s fixed income investments, the Fund
may invest in a variety of instruments such as government obligations, corporate bonds and notes, including bonds and notes convertible into equity
securities, mortgage-backed securities, asset-backed securities, floating or variable rate obligations (including senior secured floating rate loans or
debt, and second lien or other subordinated or unsecured floating rate loans or debt), loan assignments and participations, inflation indexed bonds,
municipal obligations, zero coupon debt securities, bank loans, structured products (including, but not limited to, structured notes, credit linked
notes and participation notes, or other instruments evidencing interests in special purpose vehicles, trusts, or other entities that hold or represent
interests in fixed-income securities), and exchange traded notes (“ETNs”). The average portfolio duration of the fixed income portion
of the Fund will vary based on the Sub-Advisers’ and BlackRock’s forecast of interest rates and there are no limits regarding portfolio
duration or average maturity.
The Fund may invest in other pooled investment vehicles, including
other investment companies, ETFs, European registered investment funds (“UCITS”), real estate investment trusts (“REITs”), private
investment funds, and partnership interests, including master limited partnerships (“MLPs”). Unless otherwise indicated or the
context
5
requires otherwise, references to the Fund’s investments
and related risk factors in this prospectus and the SAI include investments by any underlying mutual funds, ETFs or other pooled
investment vehicles in which the Fund
may invest.
The Fund may invest in derivatives, including, but not limited to,
interest rate swaps, total return swaps, credit default swaps, variance swaps, indexed and inverse floating rate
securities, options, futures, options on futures and swaps and foreign currency transactions (including swaps), for hedging purposes, as well as to
increase the return on its portfolio investments (although BlackRock and the Sub-Advisers are not required to hedge any of the Fund’s positions or
to use derivatives). The Fund may invest in derivative instruments that combine features of these instruments or are developed from time to time.
The Fund expects to utilize contracts for difference, swap agreements and other derivative instruments to maintain a
significant portion of its long and short positions. The Fund may seek to obtain market exposure to the securities in which it primarily invests by
entering into a series of purchase and sale contracts or by using other investment techniques (such as repurchase agreements, reverse repurchase
agreements or dollar rolls). The Fund may (but is not required to) also use forward foreign currency exchange contracts (obligations to buy or sell a
currency at a set rate in the future) for investment purposes or to hedge against movement in the value of non-U.S. currencies. The pooled
investment vehicles in which the Fund may invest may, to varying degrees, also invest in derivatives.
The Fund may also gain exposure to commodity markets by investing
up to 25% of its total assets in BlackRock Cayman Multi-Manager Alternatives Fund, Ltd. (the “Subsidiary”), a
wholly owned subsidiary of the Fund formed in the Cayman Islands, which invests primarily in commodity-related instruments.
The Fund is non-diversified, which means it may invest in fewer
issuers than a “diversified” fund.
BlackRock and the Fund have applied to the
Securities and Exchange Commission (the “SEC”) for an exemptive order from the SEC that, if granted, would permit BlackRock, with respect to
the Fund, to appoint and replace Sub-Advisers, and enter into, amend and terminate sub-advisory agreements with these Sub-Advisers, subject to Board
approval but without shareholder approval (the “Manager of Managers Structure”). The use of the Manager of Managers Structure with respect to
the Fund may be subject to certain conditions set forth in the SEC exemptive order. There can be no assurance that the SEC will grant the Fund’s
application for an exemptive order.
Principal Risks of Investing in
the Fund
Risk is inherent in all investing. The value of your investment in
the Fund, as well as the amount of return you receive on your investment, may fluctuate significantly from day to day and over time. You may lose part
or all of your investment in the Fund or your investment may not perform as well as other similar investments. The following is a summary description
of principal risks of investing in the Fund.
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n
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Affiliated Fund Risk
— In managing the Fund,
BlackRock will have authority to select and substitute ETFs or mutual funds. BlackRock may be subject to potential conflicts of interest in selecting
ETFs or mutual funds because the fees paid to BlackRock by some ETFs or mutual funds are higher than the fees paid by other ETFs or mutual funds.
However, BlackRock is a fiduciary to the Fund and is legally obligated to act in the Fund’s best interests when selecting ETFs and mutual
funds.
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n
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Allocation Risk
— The Fund’s ability to
achieve its investment objective depends upon the Sub-Advisers’ and BlackRock’s skill in determining the Fund’s strategic
allocation to investment strategies and in selecting the best mix of ETFs, mutual funds and direct investments. There is a risk that
the Sub-Advisers’ and BlackRock’s evaluations and assumptions regarding investment strategies, asset classes or ETFs or mutual
funds may be incorrect in view of actual market conditions.
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n
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Bank Loan Risk
— The market for bank loans may
not be highly liquid and the Fund may have difficulty selling them. These investments expose the Fund to the credit risk of both the financial
institution and the underlying borrower.
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n
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Borrowing Risk
— Borrowing may exaggerate
changes in the net asset value of Fund shares and in the return on the Fund’s portfolio. Borrowing will cost the Fund interest expense and other
fees. The costs of borrowing may reduce the Fund’s return. Borrowing may cause the Fund to liquidate positions when it may not be advantageous to
do so to satisfy its obligations.
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n
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Collateralized Debt Obligations Risk
— The pool
of high yield securities underlying collateralized debt obligations is typically separated into groupings called tranches representing different
degrees of credit quality. The higher quality tranches have greater degrees of protection and pay lower interest rates. The lower tranches, with
greater risk, pay higher interest rates.
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6
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n
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Commodities Related Investments Risks
—
Exposure to the commodities markets may subject the Fund to greater volatility than investments in traditional securities. The value of
commodity-linked derivative investments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates,
or sectors affecting a particular industry or commodity, such as drought, floods, weather, embargoes, tariffs and international economic, political and
regulatory developments.
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Concentration Risk
— To the extent that the
Fund’s portfolio reflects concentration in the securities of issuers in a particular region, market, industry, group of industries, country, group
of countries, sector or asset class, the Fund may be adversely affected by the performance of those securities, may be subject to increased price
volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that region, market, industry, group
of industries, country, group of countries, sector or asset class.
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Convertible Securities Risk
— The market value
of a convertible security performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible security
usually falls. In addition, convertible securities are subject to the risk that the issuer will not be able to pay interest or dividends when due, and
their market value may change based on changes in the issuer’s credit rating or the market’s perception of the issuer’s
creditworthiness. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject
to the same types of market and issuer risks that apply to the underlying common stock.
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Corporate Loans Risk
— Commercial banks and
other financial institutions or institutional investors make corporate loans to companies that need capital to grow or restructure. Borrowers generally
pay interest on corporate loans at rates that change in response to changes in market interest rates such as the London Interbank Offered Rate
(“LIBOR”) or the prime rates of U.S. banks. As a result, the value of corporate loan investments is generally less exposed to the adverse
effects of shifts in market interest rates than investments that pay a fixed rate of interest. The market for corporate loans may be subject to
irregular trading activity, wide bid/ask spreads and extended trade settlement periods.
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Counterparty Risk
— The counterparty to an
over-the-counter derivatives contract or a borrower of the Fund’s securities may be unable or unwilling to make timely principal, interest or
settlement payments, or otherwise to honor its obligations.
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Debt Securities Risk
— Debt securities, such
as bonds, involve interest rate risk, credit risk, extension risk, and prepayment risk, among other things.
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Interest Rate Risk
— The
market value of bonds and other fixed-income securities changes in response to interest rate changes and other factors. Interest rate risk is
the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The
Fund may be subject to a greater risk of rising interest rates due to the current period of historically low rates. For example, if interest
rates increase by 1%, assuming a current portfolio duration of ten years, and all other factors being equal, the value of the Fund’s
portfolio would be expected to decrease by 10%. The magnitude of these fluctuations in the market price of bonds and other fixed-income
securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Fund’s investments
will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Fund’s net asset value.
The Fund may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by Fund management. To the extent the
Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-backed securities), the sensitivity of
such securities to changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because rates on
certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and
significant changes) can be expected to cause some fluctuations in the net asset value of the Fund to the extent that it invests in floating
rate debt securities. These basic principles of bond prices also apply to U.S. Government securities. A security backed by the “full faith
and credit” of the U.S. Government is guaranteed only as to its stated interest rate and face value at maturity, not its current
market price. Just like other fixed-income securities, government-guaranteed securities will fluctuate in value when interest rates
change.
Credit Risk
— Credit risk
refers to the possibility that the issuer of a debt security (i.e., the borrower) will not be able to make principal and interest payments when
due. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditworthiness may also affect the value of
the Fund’s investment in that issuer. The degree of credit risk depends on the issuer’s financial condition and on the terms of the
securities.
Extension Risk
— When
interest rates rise, certain obligations will be paid off by the obligor more slowly than anticipated, causing the value of these obligations to
fall.
Prepayment Risk
— When
interest rates fall, certain obligations will be paid off by the obligor more quickly than originally anticipated, and the Fund may have to
invest the proceeds in securities with lower yields.
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Derivatives Risk
— The Fund’s use of
derivatives may reduce the Fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a
market to fluctuate significantly in price within a short time period. A risk of the Fund’s use of derivatives is that the fluctuations in their
values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the
other party in the transaction will not fulfill its contractual obligation. The possible lack of a liquid secondary market for derivatives and the
resulting inability of the Fund to sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives more
difficult for the Fund to value accurately. Valuation may be more difficult in times of market turmoil since many investors and market makers may be
reluctant to purchase complex instruments or quote prices for them. Derivatives also may expose the Fund to greater risk and increase its costs.
Certain transactions in derivatives involve substantial leverage risk and may expose the Fund to potential losses that exceed the amount originally
invested by the Fund. The U.S. Government is in the process of adopting and implementing regulations governing derivatives markets, including
mandatory clearing of certain derivatives, margin, reporting and registration requirements. The ultimate impact of the regulations remains unclear.
Additional US or other regulations may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the
value or performance of derivatives. Certain aspects of the tax treatment of derivative instruments, including swap agreements and commodity-linked
derivative instruments are currently unclear and may be affected by changes in legislation, regulations or other legally binding authority that could
affect the character, timing and amount of the Fund’s taxable income or gains and distributions.
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Directional Trading Strategies Risk
— The Fund may
use quantitative methods to select investments. Securities or other investments selected using quantitative methods may perform differently from the
market as a whole or from their expected performance for many reasons, including factors used in building the quantitative analytical framework, the
weights placed on each factor, and changing sources of market returns, among others. Any errors or imperfections in BlackRock’s or a
Sub-Adviser’s quantitative analyses or models, or in the data on which they are based, could adversely affect the ability of BlackRock or a
Sub-Adviser to use such analyses or models effectively, which in turn could adversely affect the Fund’s performance. There can be no assurance
that these methodologies will help the Fund to achieve its investment objective.
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Distressed Securities Risk
— Distressed
securities are speculative and involve substantial risks in addition to the risks of investing in junk bonds. The Fund will generally not receive
interest payments on the distressed securities and may incur costs to protect its investment. In addition, distressed securities involve the
substantial risk that principal will not be repaid. These securities may present a substantial risk of default or may be in default at the time of
investment. The Fund may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal of or
interest on its portfolio holdings. In any reorganization or liquidation proceeding relating to a portfolio company, the Fund may lose its entire
investment or may be required to accept cash or securities with a value less than its original investment. Distressed securities and any securities
received in an exchange for such securities may be subject to restrictions on resale.
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Dollar Rolls Risk
— Dollar rolls involve the
risk that the market value of the securities that the Fund is committed to buy may decline below the price of the securities the Fund has sold. These
transactions may involve leverage.
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Emerging Markets Risk
— Emerging markets are
riskier than more developed markets because they tend to develop unevenly and may never fully develop. Investments in emerging markets may be
considered speculative. Emerging markets are more likely to experience hyperinflation and currency devaluations, which adversely affect returns to U.S.
investors. In addition, many emerging securities markets have far lower trading volumes and less liquidity than developed markets.
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Equity Securities Risk
— Stock markets are
volatile. The price of equity securities fluctuates based on changes in a company’s financial condition and overall market and economic
conditions.
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Event-Driven Strategies Risk
— The Fund may
invest in event-driven strategies, which entail investing in companies involved, or potentially involved, in significant corporate actions. Such
investments are subject to the risk that the contemplated corporate actions do not occur or do not occur on the predicted schedule, and the risk of
default, among others. Some special situations are sufficiently uncertain that the Fund may lose its entire investment. When utilizing arbitrage
strategies, the Fund may purchase securities at prices only slightly below the anticipated value to be paid or exchanged for such securities in a
merger, exchange offer or cash tender offer, and substantially above the prices at which such securities traded immediately prior to announcement of
the transaction. If there is a perception that the proposed transaction will not be consummated or will be delayed, the market price of the security
may decrease. To the extent that the Fund utilizes activist strategies, it is subject to the risks that such strategies will have an adverse affect on
its investments or that, if the strategy is not successful, the market price of the company’s securities may decrease. The Fund may purchase
securities of a company which is the subject of a proxy contest with the expectation that the price of the company’s securities will increase in
the future. If the proxy contest, or the new management, is not successful, the market price of the company’s securities may
decrease.
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Foreign Securities Risk
— Foreign investments
often involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. These risks
include:
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The Fund generally holds its foreign securities and cash in
foreign banks and securities depositories, which may be recently organized or new to the foreign custody business and may be subject to only limited or
no regulatory oversight.
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Changes in foreign currency exchange rates can affect the value of
the Fund’s portfolio.
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The economies of certain foreign markets may not compare favorably
with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance
of payments position.
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The governments of certain countries may prohibit or impose
substantial restrictions on foreign investments in their capital markets or in certain industries.
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Many foreign governments do not supervise and regulate stock
exchanges, brokers and the sale of securities to the same extent as does the United States and may not have laws to protect investors that are
comparable to U.S. securities laws.
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Settlement and clearance procedures in certain foreign markets may
result in delays in payment for or delivery of securities not typically associated with settlement and clearance of U.S. investments.
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The European financial markets have recently experienced
volatility and adverse trends due to concerns about economic downturns in, or rising government debt levels of, several European countries. These
events may spread to other countries in Europe. These events may affect the value and liquidity of certain of the Fund’s investments.
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Fundamental Long/Short Strategies Risk
—
Long/short strategies generally seek to generate capital appreciation through the establishment of both long and short positions in equities or fixed
income, by purchasing undervalued securities and selling overvalued securities to generate returns and to hedge out some portion of general market
risk. If BlackRock’s or a Sub-Adviser’s analysis is incorrect or based on inaccurate information, these investments may result in significant
losses to the Fund. Since a long/short strategy involves identifying securities that are generally undervalued (or, in the case of short positions,
overvalued) by the marketplace, the success of the strategy necessarily depends upon the market eventually recognizing such value in the price of the
security, which may not necessarily occur, or may occur over extended time frames that limit profitability. Positions may undergo significant
short-term declines and experience considerable price volatility during these periods. In addition, long and short positions may or may not be related.
If the long and short positions are not related, it is possible to have investment losses in both the long and short sides of the
portfolio.
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High Portfolio Turnover Risk
— The Fund may engage in active and frequent
trading of its portfolio securities. High portfolio turnover (more than 100%) may result in increased transaction costs to the
Fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment
in other securities. The sale of Fund portfolio securities may result in the realization and/or distribution to shareholders of
higher capital gains or losses as compared to a fund with less active trading policies. These effects of higher than normal portfolio
turnover may adversely affect Fund performance.
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Inflation Indexed Bonds Risk
— The value of
inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between
nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation, real interest rates may rise,
leading to a decrease in value of inflation-indexed bonds. Short-term increases in inflation may lead to a decline in value. Any increase in the
principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until
maturity.
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Periodic adjustments for inflation to
the principal amount of an inflation-indexed bond may give rise to original issue discount, which will be includable in the Fund’s gross income.
Due to original issue discount, the Fund may be required to make annual distributions to shareholders that exceed the cash received, which may cause
the Fund to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation-indexed bond is adjusted
downward due to deflation, amounts previously distributed in the taxable year may be characterized in some circumstances as a return of
capital.
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Investment in Other Investment
Companies Risk
— As with other investments, investments in other investment companies are subject to market and selection
risk. In addition, if the Fund acquires shares of investment companies, including ones affiliated with the Fund, shareholders
bear both their proportionate share of expenses in
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the Fund (including management and advisory fees) and, indirectly, the expenses of the investment
companies. To the extent the Fund is held by an affiliated fund, the ability of the Fund itself to hold other investment companies
may be limited.
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Investment Style Risk
— Because different kinds
of stocks go in and out of favor depending on market conditions, the Fund’s performance may be better or worse than other funds with different
investment styles (e.g., growth vs. value, large cap vs. small cap).
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Junk Bonds Risk
— Although junk bonds generally
pay higher rates of interest than investment grade bonds, junk bonds are high risk investments that may cause income and principal losses for the
Fund.
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Leverage Risk
— Some transactions may give rise
to a form of economic leverage and as a result, the sum of the Fund’s investment exposures may significantly exceed the amount of assets invested
in the Fund, although these exposures may vary over time. These transactions may include, among others, derivatives, and may expose the Fund to greater
risk and increase its costs. The use of leverage may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to
satisfy its obligations or to meet any required asset segregation requirements. Increases and decreases in the value of the Fund’s portfolio will
be magnified when the Fund uses leverage.
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Liquidity Risk
— Liquidity risk exists when
particular investments are difficult to purchase or sell. The Fund’s investments in illiquid securities may reduce the returns of the Fund because
it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Fund’s principal investment
strategies involve derivatives or securities with substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity
risk. Liquid investments may become illiquid after purchase by the Fund, particularly during periods of market turmoil. Illiquid investments may be
harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash
needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain securities, the Fund, due to limitations on
illiquid investments, may be subject to purchase and sale restrictions.
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Management and Model Risk
—
The Fund’s
ability to achieve its investment objective depends upon BlackRock’s skill in determining the Fund’s strategic allocation to
investment strategies and in selecting the best mix of Sub-Advisers. The value of your investment may decrease if BlackRock’s judgment about
the attractiveness, value or market trends affecting a particular Sub-Adviser or investment strategy is incorrect. The various investment
strategies may not always be complementary, which could adversely affect the performance of the Fund. Further, there can be no assurance that any
allocation among investment strategies can produce a return that exhibits reduced correlation to the direction of markets generally.
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Some Sub-Advisers have little experience
managing registered investment companies which, unlike the private investment funds these Sub-Advisers have been managing, are subject to daily inflows
and outflows of investor cash and are subject to certain legal and tax-related restrictions on their investments and operations. Subject to the overall
supervision of the Fund’s investment program by BlackRock, each Sub-Adviser is responsible, with respect to the portion of the Fund’s assets
it manages, for compliance with the Fund’s investment strategies and applicable law.
Investment decisions and strategies may
not produce the returns expected, may cause the Fund’s shares to lose value or may cause the Fund to underperform other funds with similar
investment objectives. The Sub-Advisers’ investment models may not adequately take into account certain factors and may result in the Fund having
a lower return than if the Sub-Advisers utilized another model or investment strategy. Certain Sub-Advisers may attempt to execute strategies for the
Fund using proprietary quantitative models. Investments selected using these models may perform differently than expected as a result of the factors
used in the models, the weight placed on each factor, changes from the factors’ historical trends, and technical issues in the construction and
implementation of the models (including, for example, data problems and/or software issues). There is no guarantee that a Sub-Adviser’s use of
quantitative models will result in effective investment decisions for the Fund.
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Market Risk and Selection Risk
— Market risk is
the risk that one or more markets in which the Fund invests will go down in value, including the possibility that the markets will go down sharply and
unpredictably. Selection risk is the risk that the instruments in which the Fund invests will underperform the markets, the relevant indices or the
securities selected by other funds with similar investment objectives and investment strategies. This means you may lose money.
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Master Limited Partnerships Risk
— The common
units of an MLP are listed and traded on U.S. securities exchanges and their value fluctuates predominantly based on prevailing market conditions and
the success of the MLP. Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability annually
to elect directors. In the event of liquidation, common units have preference over subordinated units, but not over debt or preferred units, to the
remaining assets of the MLP.
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Mezzanine Securities Risk
— Mezzanine
securities carry the risk that the issuer will not be able to meet its obligations and that the equity securities purchased with the mezzanine
investments may lose value.
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Money Market Securities Risk
— If market
conditions improve while the Fund has invested some or all of its assets in high quality money market securities, this strategy could result in
reducing the potential gain from the market upswing, thus reducing the Fund’s opportunity to achieve its investment objective.
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Mortgage- and Asset-Backed Securities Risks
—
Mortgage- and asset-backed securities represent interests in “pools” of mortgages or other assets, including consumer loans or receivables
held in trust. Mortgage- and asset-backed securities are subject to credit, interest rate, prepayment and extension risks. These securities also are
subject to risk of default on the underlying mortgage or asset, particularly during periods of economic downturn. Small movements in interest rates
(both increases and decreases) may quickly and significantly reduce the value of certain mortgage-backed securities.
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“New Issues” Risk
— “New
issues” are initial public offerings of equity securities. Securities issued in IPOs have no trading history, and information about the companies
may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the
initial public offering.
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Non-Diversification Risk
— The Fund is a
non-diversified fund. Because the Fund may invest in securities of a smaller number of issuers, it may be more exposed to the risks associated with and
developments affecting an individual issuer than a fund that invests more widely.
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Preferred Securities Risk
— Preferred
securities may pay fixed or adjustable rates of return. Preferred securities are subject to issuer-specific and market risks applicable generally to
equity securities. In addition, a company’s preferred securities generally pay dividends only after the company makes required payments to holders
of its bonds and other debt. For this reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or
perceived changes in the company’s financial condition or prospects. Preferred securities of smaller companies may be more vulnerable to adverse
developments than preferred stock of larger companies.
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Real Estate Related Securities Risk
— The main
risk of real estate related securities is that the value of the underlying real estate may go down. Many factors may affect real estate values. These
factors include both the general and local economies, the amount of new construction in a particular area, the laws and regulations (including zoning
and tax laws) affecting real estate and the costs of owning, maintaining and improving real estate. The availability of mortgages and changes in
interest rates may also affect real estate values. If the Fund’s real estate related investments are concentrated in one geographic area or in one
property type, the Fund will be particularly subject to the risks associated with that area or property type.
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REIT Investment Risk
— Investments in REITs
involve unique risks. REITs may have limited financial resources, may trade less frequently and in limited volume and may be more volatile than other
securities.
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Relative Value Strategies Risk
— BlackRock and
the Sub-Advisers utilize, among others, relative value trading strategies which are composed of positions in contracts relating to two or more assets
the prices of which are expected to either converge or diverge and, in theory, mitigate the absolute price risk associated with taking an outright,
unhedged position in respect of a single asset, and may be based upon historical price relationships and intended to neutralize the adverse (and
positive) price effects of macro-economic events and trends. However, relative value strategies are subject to certain risks. The success of
BlackRock’s or the Sub-Advisers’ trading activities depends, among other things, on BlackRock’s or the Sub-Advisers’ ability to
identify unjustified or temporary discrepancies between the fundamental value and the market price of an asset or between the market prices of two or
more assets whose prices are expected to move in relation to each other and to exploit those discrepancies to derive a profit to the extent that
BlackRock and the Sub-Advisers are able to anticipate in which direction the relative values or prices will move to eliminate the identified
discrepancy. For example, a relative value strategy may fail to profit fully or at all or may suffer a loss or a greater loss due to a failure of the
component contract prices to converge or diverge as anticipated. This may occur with respect to prices relating to all or only certain contract
maturities.
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Identification and exploitation of the
investment opportunities that may be pursued by BlackRock or the Sub-Advisers involve a high degree of uncertainty. If what BlackRock or the
Sub-Advisers perceive as an unjustified or temporary price or value discrepancy posing an investment opportunity is nothing more than a price
differential due to reasons not likely to disappear within the time horizon of an investment made by the Fund, if BlackRock or the Sub-Advisers fail to
anticipate the direction in which the relative prices or values will move to eliminate a discrepancy, or if BlackRock or the Sub-Advisers have
incorrectly evaluated the extent of the expected spread relationships, so that, for example, the value of the Fund’s long positions appreciates at
a slower rate than the value of the Fund’s short positions in related assets, then the expected returns for the Fund will not materialize, and the
Fund may sustain a loss that will adversely affect the value of the Fund.
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The discrepancies that BlackRock or the
Sub-Advisers seek to identify and turn into profit opportunities for the Fund may arise due to a variety of circumstances. Some may be due to uneven
flows of information to the relevant markets, with the market for one asset reflecting the impact of specified items of information before or after
the same information has an impact on
the market for a related asset. Others may be the result of regulatory or legal restrictions applicable to one type of asset, but not to a functionally
equivalent asset (which occurs, for example, when regulated financial institutions are prohibited from investing in a particular type of asset, but are
free to take, via derivative arrangements, positions that leave them exposed to the performance of the same asset). A reduction in the volatility and
market inefficiencies that create the opportunities in which BlackRock or the Sub-Advisers may seek to invest, as well as other market factors, will
reduce the scope for BlackRock’s or the Sub-Advisers’ investments and may limit the Fund’s opportunities for profit and adversely affect
the value of the Fund.
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Repurchase Agreements and Purchase and Sale Contracts
Risks
— If the other party to a repurchase agreement or purchase and sale contract defaults on its obligation under the agreement, the
Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in
either situation and the market value of the security declines, the Fund may lose money.
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Reverse Repurchase Agreements Risk
— Reverse
repurchase agreements involve the sale of securities held by the Fund with an agreement to repurchase the securities at an agreed-upon price, date and
interest payment. Reverse repurchase agreements involve the risk that the other party may fail to return the securities in a timely manner or at all.
The Fund could lose money if it is unable to recover the securities and the value of the collateral held by the Fund, including the value of the
investments made with cash collateral, is less than the value of securities. These events could also trigger adverse tax consequences to the
Fund.
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Rights Risk
— The failure to exercise
subscription rights to purchase common stock would result in the dilution of the Fund’s interest in the issuing company. The market for such
rights is not well developed, and, accordingly, the Fund may not always realize full value on the sale of rights.
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Risks of Loan Assignments and Participations
—
As the purchaser of an assignment, the Fund typically succeeds to all the rights and obligations of the assigning institution and becomes a lender
under the credit agreement with respect to the debt obligation; however, the Fund may not be able unilaterally to enforce all rights and remedies under
the loan and with regard to any associated collateral. Because assignments may be arranged through private negotiations between potential assignees and
potential assignors, the rights and obligations acquired by the Fund as the purchaser of an assignment may differ from, and be more limited than, those
held by the assigning lender. In addition, if the loan is foreclosed, the Fund could become part owner of any collateral and could bear the costs and
liabilities of owning and disposing of the collateral. The Fund may be required to pass along to a purchaser that buys a loan from the Fund by way of
assignment a portion of any fees to which the Fund is entitled under the loan. In connection with purchasing participations, the Fund generally will
have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the
borrower, and the Fund may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, the
Fund will be subject to the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the
lender selling a participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and
the borrower.
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Second Lien Loans Risk
— Second lien loans
generally are subject to similar risks as those associated with investments in senior loans. Because second lien loans are subordinated or unsecured
and thus lower in priority of payment to senior loans, they are subject to the additional risk that the cash flow of the borrower and property securing
the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the
borrower.
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Senior Loans Risk
—There is less readily
available, reliable information about most senior loans than is the case for many other types of securities. An economic downturn generally leads to a
higher non-payment rate, and a senior loan may lose significant value before a default occurs.
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Moreover, any specific collateral used
to secure a senior loan may decline in value or become illiquid, which would adversely affect the senior loan’s value. No active trading market
may exist for certain senior loans, which may impair the ability of the Fund to realize full value in the event of the need to sell a senior loan and
which may make it difficult to value senior loans. Although senior loans in which the Fund will invest generally will be secured by specific
collateral, there can be no assurance that liquidation of such collateral would satisfy the borrower’s obligation in the event of non-payment of
scheduled interest or principal or that such collateral could be readily liquidated. To the extent that a senior loan is collateralized by stock in the
borrower or its subsidiaries, such stock may lose all of its value in the event of the bankruptcy of the borrower. Uncollateralized senior loans
involve a greater risk of loss. The senior loans in which the Fund invests may be rated below investment grade.
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Short Sales Risk
— The Fund may enter into a
short position through a futures contract, an option or swap agreement or by shorting a security directly. Because making short sales in securities
that it does not own exposes the Fund to the risks associated with those securities, such short sales involve speculative exposure risk. The Fund may
incur a loss as a result of a short sale if the price of the security increases between the date of the short sale
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and the date on which the Fund replaces the security sold short.
If the price of the underlying instrument or market on which the Fund has taken a short position increases, then the Fund will incur a loss equal to
the increase in price from the time that the short position was entered into plus any related interest payments or other fees. Taking short positions
involves the risk that losses may be disproportionate and may exceed the amount invested.
|
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n
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Small and Mid-Capitalization Company Risk
—
Companies with small or mid-size market capitalizations will normally have more limited product lines, markets and financial resources and will be
dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller
companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by
relatively few securities analysts.
|
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n
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Sovereign Debt Risk
— Sovereign debt
instruments are subject to the risk that a governmental entity may delay or refuse to pay interest or repay principal on its sovereign debt, due, for
example, to cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of the governmental entity’s
debt position in relation to the economy or the failure to put in place economic reforms required by the International Monetary Fund or other
multilateral agencies.
|
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n
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Structured Products Risk
— Holders of
structured products bear risks of the underlying investments, index or reference obligation and are subject to counterparty risk. The Fund may have the
right to receive payments only from the structured product, and generally does not have direct rights against the issuer or the entity that sold the
assets to be securitized. Certain structured products may be thinly traded or have a limited trading market. In addition to the general risks
associated with debt securities discussed herein, structured products carry additional risks, including, but not limited to: the possibility that
distributions from collateral securities will not be adequate to make interest or other payments; the quality of the collateral may decline in value or
default; and the possibility that the structured products are subordinate to other classes.
|
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n
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Subsidiary Risk
— By investing in the
Subsidiary, the Fund is indirectly exposed to the risks associated with the Subsidiary’s investments. The commodity-related instruments held by
the Subsidiary are generally similar to those that are permitted to be held by the Fund and are subject to the same risks that apply to similar
investments if held directly by the Fund (see “Commodities Related Investments Risks” above). There can be no assurance that the investment
objective of the Subsidiary will be achieved. The Subsidiary is not registered under the Investment Company Act of 1940, as amended (the
“Investment Company Act”), and, unless otherwise noted in this prospectus, is not subject to all the investor protections of the Investment
Company Act. However, the Fund wholly owns and controls the Subsidiary, and the Fund and the Subsidiary are both managed by BlackRock, making it
unlikely that the Subsidiary will take action contrary to the interests of the Fund and its shareholders. Changes in the laws of the United States
and/or the Cayman Islands could result in the inability of the Fund and/or the Subsidiary to operate as described in this prospectus and the SAI and
could adversely affect the Fund.
|
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n
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Supranational Entities Risk
— The Fund may
invest in obligations issued or guaranteed by the International Bank for Reconstruction and Development (the World Bank). If one or more stockholders
of the World Bank fail to make necessary additional capital contributions, the entity may be unable to pay interest or repay principal on its debt
securities, and the Fund may lose money on such investments.
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n
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U.S. Government Obligations Risk
— Certain
securities in which the Fund may invest, including securities issued by certain U.S. Government agencies and U.S. Government sponsored enterprises, are
not guaranteed by the U.S. Government or supported by the full faith and credit of the United States.
|
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n
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Variable and Floating Rate Instrument Risk
—
The absence of an active market for these instruments could make it difficult for the Fund to dispose of them if the issuer
defaults.
|
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n
|
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Warrants Risk
— If the price of the underlying
stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and the Fund loses any amount
it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the
same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock.
|
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n
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When-Issued and Delayed Delivery Securities and Forward
Commitments Risk
— When-issued and delayed delivery securities and forward commitments involve the risk that the security the Fund buys
will lose value prior to its delivery. There also is the risk that the security will not be issued or that the other party to the transaction will not
meet its obligation. If this occurs, the Fund loses both the investment opportunity for the assets it set aside to pay for the security and any gain in
the security’s price.
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13
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n
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Zero Coupon Securities Risk
— While interest
payments are not made on such securities, holders of such securities are deemed to have received income (“phantom income”) annually,
notwithstanding that cash may not be received currently. Some of these securities may be subject to substantially greater price fluctuations during
periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero coupon bonds are more exposed to
interest rate risk than shorter term zero coupon bonds.
|
Because the Fund has not commenced operations as of the date of
this Prospectus, it does not have historical performance information shown. Current performance information, including its current net asset value, can
be obtained by visiting www.blackrock.com/funds or can be obtained by phone at (800) 882-0052. The Fund’s primary benchmark is the BofA
Merrill Lynch 3-Month U.S. Treasury Bill Index.
The Fund’s investment manager is BlackRock Advisors,
LLC.
The Fund’s Sub-Advisers are Benefit Street
Partners LLC, Carl M. Loeb Advisory Partners L.P., Independence Capital Asset Partners, LLC, LibreMax Capital, LLC,
MeehanCombs LP, Peak6 Advisors LLC, QMS Capital Management LP, and Saiers Capital, LLC.
Name
|
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Portfolio Manager
of the Fund
Since
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Title
|
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Mark Everitt, CFA
|
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2014
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Managing Director or BlackRock, Inc.
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Albert Matriotti
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2014
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Managing Director or BlackRock, Inc.
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David Matter, CFA
|
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2014
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Managing Director or BlackRock, Inc.
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Edward Rzeszowski
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2014
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Managing Director of BlackRock, Inc.
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Purchase and Sale of Fund
Shares
You may purchase or redeem shares of the Fund each day the New
York Stock Exchange (“NYSE”) is open. To purchase or sell shares you should contact your Financial Intermediary, or, if you hold your
shares through the Fund, you should contact the Fund by phone at (800) 441-7762, by mail (c/o BlackRock Funds, P.O. Box 9819, Providence, Rhode Island
02940-8019), or by the Internet at www.blackrock.com/funds. The Fund’s initial and subsequent investment minimums generally are as follows,
although the Fund may reduce or waive the minimums in some cases:
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Investor A and Investor C
Shares
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Institutional Shares
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Minimum Initial Investment
|
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$1,000 for all accounts except:
· $250
for certain fee-based programs.
· $100 for certain employer-sponsored retirement
plans.
· $50, if establishing an Automatic Investment Plan.
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$2 million for institutions and individuals.
Institutional Shares are available to clients of
registered investment advisers who have $250,000 invested in the Fund.
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Minimum Additional
Investment
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$50 for all accounts (with the exception of certain employer-sponsored retirement plans which may
have a lower minimum).
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No subsequent minimum.
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14
The Fund’s dividends and distributions may be subject to
Federal income taxes and may be taxed as ordinary income or capital gains, unless you are a tax-exempt investor or are investing through a retirement
plan, in which case you may be subject to Federal income tax upon withdrawal from such tax deferred arrangements.
Payments to Broker/Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund through a Financial
Intermediary, the Fund and BlackRock Investments, LLC, the Fund’s distributor, or its affiliates may pay the Financial
Intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by
influencing the Financial Intermediary and your individual financial professional to recommend the Fund over another investment. Ask your
individual financial professional or visit your Financial Intermediary’s website for more
information.
15
Details About the Fund
Included in this prospectus are sections that tell you about
buying and selling shares, management information, shareholder features of the BlackRock Multi-Manager Alternatives Fund (the “Fund”), a
series of BlackRock Funds
SM
(the “Trust”) and your rights as a shareholder.
Investment Objective
The investment objective of the Fund is to seek
total return.
This investment objective is a non-fundamental policy of the Fund
and may not be changed without 30 days’ prior notice to shareholders.
Investment Process
The Fund seeks to achieve its investment objective by allocating
to multiple affiliated and unaffiliated investment managers (“Sub-Advisers”) that employ a variety of alternative investment strategies. Each
of the Sub-Advisers generally provides day-to-day management for a portion of the Fund’s assets. BlackRock Advisors, LLC (“BlackRock”),
is responsible for selecting each Sub-Adviser and for determining portfolio allocations to the various Sub-Advisers.
Each Sub-Adviser may use different investment strategies in
managing Fund assets, acts independently from the others, and uses its own methodology for selecting investments. BlackRock is responsible for
identifying and retaining (subject to approval of the Trust’s Board of Trustees (the “Board”)) the Sub-Advisers for the selected
strategies and for monitoring the services provided by the Sub-Advisers. BlackRock will make a qualitative and quantitative assessment of each
underlying Sub-Adviser’s investment process, risk management techniques and operational infrastructure. BlackRock may take into account a number
of factors when considering a Sub-Adviser’s ability to manage assets using a particular investment strategy or strategies, including but not
limited to the length of the Sub-Adviser’s experience in that strategy; qualitative judgments of the Sub-Adviser’s organizational structure,
professional depth and stability, internal controls and risk management and valuation procedures; and the Sub-Adviser’s capacity to manage assets
in that strategy. BlackRock may focus on Sub-Advisers that emphasize certain alternative investment strategies that BlackRock believes are more likely
to be profitable than others due to its assessment of prevailing market conditions.
BlackRock is responsible for selecting the Fund’s alternative
investment strategies and for determining the amount of Fund assets to allocate to each Sub-Adviser. BlackRock will seek to allocate the Fund’s
assets to maintain exposure to a broad range of markets, national economies and alternative investment strategies. Based upon the number of available
Sub-Advisers pursuing a given alternative investment strategy and BlackRock’s view of the investment potential of such alternative investment
strategy, certain Sub-Advisers selected by BlackRock may be allocated substantially larger portions of the Fund’s assets than other Sub-Advisers.
The strategies employed by the Fund are expected to vary over time, and the expertise of BlackRock in identifying and exploiting new opportunities is
expected to result in a continually evolving set of investment strategies.
BlackRock will assess the Sub-Advisers to determine an
appropriate mix of alternative investment strategies, asset classes, sectors and styles given the prevailing economic and investment environment. Based
on BlackRock’s ongoing evaluation of the Sub-Advisers, BlackRock may adjust allocations among the Sub-Advisers, or make recommendations to
the Board with respect to the hiring, termination or replacement of Sub-Advisers. BlackRock anticipates that the number of and identity of the
Sub-Advisers will vary over time, at BlackRock’s discretion, as a result of allocations and reallocations among existing and new Sub-Advisers
and the performance of each alternative investment strategy. BlackRock currently expects to allocate Fund assets to approximately
5-15 Sub-Advisers.
BlackRock may also manage Fund assets directly to seek to
enhance returns, or to implement various market hedges and to manage the Fund’s cash and short-term instruments. BlackRock may invest a
significant portion of the Fund’s assets in affiliated and unaffiliated equity, money-market and fixed income mutual funds and affiliated
and unaffiliated exchange-traded funds (“ETFs”).
16
BlackRock and the Fund have applied to the Securities and Exchange
Commission (the “SEC”) for an exemptive order from the SEC that, if granted, would permit BlackRock, with respect to the Fund, to appoint and
replace Sub-Advisers, and enter into, amend and terminate sub-advisory agreements with these Sub-Advisers, subject to Board approval but without
shareholder approval (the “Manager of Managers Structure”). The use of the Manager of Managers Structure with respect to the Fund may be
subject to certain conditions set forth in the SEC exemptive order. There can be no assurance that the SEC will grant the Fund’s application for
an exemptive order.
Principal Investment Strategies
The primary strategies that will initially be employed by the Fund
and its Sub-Advisers include: Relative Value, Event Driven, Fundamental Long/Short and Directional Trading. BlackRock also may allocate
the Fund’s assets to additional strategies in the future. There is no assurance that any or all of the strategies discussed in this prospectus
will be used by BlackRock or the Sub-Advisers.
Relative Value Strategies
seek to profit from mispricing
of financial instruments relative to each other or historical norms. These strategies utilize quantitative and qualitative analysis to identify
securities or spreads between securities that deviate from their theoretical fair value and/or historical norms. Additionally, they are engineered to
seek to profit if a particular instrument or spread returns to its theoretical fair value, and intend to generally avoid taking a directional bias with
regard to the price movement of a specific company or market. To concentrate on capturing mispricings, these strategies often attempt to eliminate
exposure to general market risks so that profits may be realized if and when the securities or instruments converge toward their theoretical fair
value. This strategy typically attempts to isolate a specific mispricing by holding both long and short positions in related securities. In many cases,
investment strategies seek to hedge exposure to primary directional risks such as parallel movements in interest rates, currencies and the movement of
broad markets. Relative Value Strategies may include, but are not limited to:
Convertible Arbitrage
Strategies
typically involve the purchase of a convertible debt or preferred equity instrument concurrent with the short sale of, or a short
over-the-counter derivative position in, the common stock of the issuer of such debt instrument.
Fixed Income Arbitrage
Strategies
seek to identify and exploit anomalous (typically based on historical trading ranges) spreads in the prices of functionally equivalent
or substitutable securities.
Volatility Arbitrage
Strategies
generally attempt to exploit anomalies in the pricing of volatilities in related assets. There are several well-defined related
securities and/or asset classes that volatility arbitrage Sub-Advisers monitor to determine when they are out of their historical trading ranges. By
continually monitoring these relationships, the Sub-Advisers can identify when the securities or asset classes trade out of their normal trading
range.
Statistical Arbitrage
Strategies
typically seek to profit from offsetting long and short positions in stocks or groups of related stocks exhibiting pricing
inefficiencies that are identified through the use of mathematical models. The strategy identifies inefficiencies by comparing the historical
statistical relationships between related pairs of securities (e.g. intra-industry or competitor companies). Once identified, the Sub-Advisers will
establish both long and short positions and will often utilize leverage as the identified discrepancies are usually very slight in
nature.
Event Driven Strategies
concentrate on companies that
are subject to corporate events such as mergers, acquisitions, restructurings, spin-offs, shareholder activism, or other special situations that alter
a company’s financial structure or operating strategy. The prices of securities of the companies involved in these events are typically influenced
more by the dynamics of the particular event or situation. Typically, these strategies rely on fundamental research that extends beyond the evaluation
of the issues affecting a single company to include an assessment of the legal and structural issues surrounding the extraordinary event or
transaction. In some cases, such as corporate reorganizations, the relevant Sub-Adviser may actually take an active role in determining the
event’s outcome. The intended goal of event driven strategies is to profit when the price of a security changes to reflect more accurately the
likelihood and potential impact of the occurrence, or non-occurrence, of the extraordinary event. This can be done by taking a long position in a
security or other financial instrument that is believed to be underpriced or a short position in a security or other financial instrument that is
believed to be overpriced. Event Driven Strategies may include, but are not limited to:
Merger Arbitrage Strategies
typically involve taking short and long positions in the stock of a company buying or being bought by another company upon the announcement of an
acquisition offer. The Sub-Advisers will generally buy shares of the target and short shares of the acquirer in a stock for stock transaction, in
expectation of profiting from the price differential between the purchase price of the securities and the value received for the securities as a result
of or in expectation of the consummation of the event.
17
Event Driven Arbitrage
Strategies
typically involve investing in securities of companies facing a major corporate event. The goal is to identify securities with a
favorable risk-reward ratio based on the probability that a particular event will occur. Such events include, but are not limited to, corporate events,
such as restructurings, spin-offs and significant litigation (e.g., tobacco litigation).
Distressed Strategies
seek to
invest in distressed securities and are generally active in the securities of companies that are experiencing financial distress. Typically these
companies will have entered bankruptcy. Bankruptcy allows a company in default to restructure its liabilities. The process can be very opaque, complex
and involve a high degree of uncertainty as investors, creditors and the courts work to define new stakes in the re-emerging (or
liquidating) firm, or as the underlying company potentially works to make operational or structural changes to improve its competitiveness. Distressed
strategies can follow a number of different approaches; however, this strategy commonly seeks to take advantage of discrepancies in the value of an
ownership stake in a company before and after bankruptcy.
Fundamental Long/Short Strategies
involve buying or
selling securities believed to be overpriced or underpriced relative to their potential value. Investment strategies within the fundamental long/short
discipline include long and short equity- or credit-based strategies that emphasize a fundamental valuation framework and equity active value
strategies where an active role is taken to enhance corporate value. Long/short strategies typically involve buying securities, groups of securities,
or overall markets (called “going long”) with the expectation that they will increase in value while simultaneously selling others (called
“going short”) with the expectation that they will decrease in value. These strategies are often categorized by the proportion of the total
portfolio held long vs. held short. When the majority of the portfolio is held long, the portfolio is characterized as “net long.” When the
majority of the portfolio is held short, the portfolio is characterized as “net short.” When the long and short positions are relatively
balanced, the portfolio is characterized as “market-neutral.” Fundamental long/short managers typically employ fundamental analysis, which
evaluates the underlying determinants that affect the price of securities. Many investment strategies within the fundamental long/short discipline
incorporate elements of both fundamental and technical analysis. The actual research process can be based on a bottom-up approach that first examines
the factors affecting a single company or marketplace or a top-down approach that first analyzes the macroeconomic trends affecting a market or
industry. These strategies may use leverage or hedges to seek to enhance returns and/or manage risk, and a Sub-Adviser may invest in many types of long
or short investments. Fundamental Long/Short Strategies may include, but are not limited to:
Credit Strategies
provide a
wide universe of opportunities given the outstanding size and variety of debt instruments and their price opacity relative to the equity market. In
addition, the use of credit default swap instruments allow an alternative means to obtain short exposures to credit, opening up the possibility of
selectively hedging credit exposures, or taking a bearish outlook on certain issues. Sub-Advisers that employ credit strategies often invest in
senior, mezzanine or junior debt, allowing them the potential to invest in the “fulcrum” security of a company — the security within a
company’s capital structure likely to be impacted most favorably or unfavorably by a given development.
Sub-Advisers that employ credit
strategies use a variety of issuer profiles, according to each Sub-Adviser’s respective investment thesis. They may invest in government-backed
debt (sovereigns) to take advantage of macro-level developments or to reduce credit risk. They may invest in various syndicated corporate bonds that
offer a range of liquidity and credit premium profiles. The Sub-Advisers may also purchase private bilateral loans, which can potentially offer
a greater variety of custom terms and conditions, but may exhibit less liquidity. The Sub-Advisers may take exposure in attractive consumer
borrower segments through collateralized credit pools, backed by such credits as mortgages, credit cards, loans, etc., which offer a greater level of
complexity.
Sub-Advisers that use credit strategies
are generally required to judge the financial strength of an issuer, effectively value underlying collateral and understand the potential risks and
rewards of their position in the company’s capital structure in the event of reorganization or default.
Equity Selection Strategies
are generally akin to “stock picking,” where a Sub Adviser uses its expertise, proprietary models and technology to identify equity
securities that the Sub Advisor views to be mispriced relative to its fundamental or “fair” value. The Sub-Advisers normally accomplish this
objective using some combination of two approaches, generally referred to as “top-down” and “bottom-up” processes. A top-down
approach generally considers the potential impact of trends or developments outside of a company on the value of its equity securities. On the other
hand, a Sub-Adviser using a bottom-up approach typically looks within a company, examining its assets/liabilities, operations, managerial decisions or
internal developments that could impact its estimated value.
18
Directional Trading Strategies
seek to profit from changes in macro-level exposures, such as
interest rates, currencies, equities and commodities. This strategy may involve analyzing fundamental macroeconomic
inputs, as well as technical information, such as price to identify investment opportunities across a broad array of asset
classes and
geographies. These
strategies may
also include
model driven trading strategies that use
technical or fundamental inputs in order to
make a trading decision
across a
portfolio of major global asset classes including fixed income, foreign exchange, equities and commodities. Trading
decisions are made systematically using a rules based
investment approach. Directional Trading Strategies may include, but are not
limited to:
Global Macro Strategies
generally involve fundamental, discretionary, directional trading in fixed income, foreign exchange, commodities and equities and currencies.
Sub-Advisers utilizing macro strategies invest in a wide variety of strategies and instruments, often assuming a directional risk posture. Most
Sub-Advisers rely on macro-economic analyses to invest across countries, markets, sectors and companies, and have the flexibility to invest in numerous
financial instruments. Futures, options and other derivative instruments are often used for hedging and speculation and the use of leverage varies
considerably.
Managed Futures Strategies
generally involve speculative trading in the futures markets, options on commodity futures contracts or forward contracts. The Sub-Advisers may
trade portfolios of futures in U.S. and non-U.S. markets in an effort to capture passive risk premiums and/or attempt to profit from anticipated trends
in market prices. Managed futures strategies generally rely on either technical or fundamental analysis (or a combination thereof) in making trading
decisions and attempting to identify price trends. The Sub-Advisers may attempt to structure a diversified portfolio of liquid futures
contracts, including but not limited to stock, index, interest rate, metals, energy and agricultural futures markets.
BlackRock currently intends to allocate assets to the
following Sub-Advisers:
Investment Strategy
|
|
Sub-Adviser
|
|
Fundamental Long/Short
|
|
Benefit Street Partners LLC
|
|
Event Driven
|
|
Carl M. Loeb Advisory Partners L.P.
|
|
Fundamental Long/Short
|
|
Independence Capital Asset Partners, LLC
|
|
Fundamental Long/Short
|
|
LibreMax Capital, LLC
|
|
Fundamental Long/Short
|
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MeehanCombs LP
|
|
Relative Value
|
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Peak6 Advisors LLC
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|
Directional Trading
|
|
QMS Capital Management LP
|
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Relative Value
|
|
Saiers Capital, LLC
|
The investment strategy for each Sub-Adviser is its principal
strategy but the Sub-Advisers may also implement other investment strategies in the portion of assets assigned to them.
BlackRock and the Sub-Advisers implement the various alternative
investment strategies by taking long or short positions in a broad range of asset classes, such as equity securities, fixed- and
floating-rate debt instruments, derivatives, other investment companies, currency- and commodity-related instruments and structured products. Long
positions benefit from an increase in the price of the underlying instrument or asset class, while short positions benefit from a decrease in
that price. The Fund may implement short positions through short sales of any instrument (including ETFs) that the Fund may purchase for
investment or by using options, swaps, futures, forwards, and other derivatives. For example, the Fund may enter into a futures contract
pursuant to which it agrees to sell an asset that it does not currently own at a specified price and time in the future. This gives the Fund a
short position with respect to that asset. The Fund has flexibility in the relative weighting of each asset class and expects to vary the
percentages of assets invested in each asset category from time to time. The Fund may invest in securities and other financial instruments of
companies of any market capitalization. The Fund may invest in securities and other financial instruments available in and which have exposure
to both U.S. and non-U.S. markets, including emerging markets, which can be U.S. dollar-denominated or non-U.S. dollar-denominated and may
be currency hedged or unhedged. The Fund may also invest in bonds of any maturity and in securities and other financial instruments of any
credit rating (including below investment grade securities, commonly known as “junk bonds”). Up to 15% of the Fund’s net
assets may be invested in illiquid investments.
With respect to the Fund’s equity investments, the Fund may
invest in common stock, preferred stock, rights and warrants to purchase common stock, depositary receipts, securities convertible into common and
preferred stock and non-convertible preferred stock. From time to time, the Fund may invest in shares of companies through initial public offerings
(“IPOs”).
19
With respect to the Fund’s fixed income investments, the Fund
may invest in a variety of instruments such as government obligations, corporate bonds and notes, including bonds and notes convertible into equity
securities, mortgage-backed securities, asset-backed securities, floating or variable rate obligations (including senior secured floating rate loans or
debt, and second lien or other subordinated or unsecured floating rate loans or debt), loan assignments and participations, inflation indexed bonds,
municipal obligations, zero coupon debt securities, bank loans, structured products (including, but not limited to, structured notes, credit linked
notes and participation notes, or other instruments evidencing interests in special purpose vehicles, trusts, or other entities that hold or represent
interests in fixed-income securities), and exchange traded notes (“ETNs”). The average portfolio duration of the fixed income portion
of the Fund will vary based on the Sub-Advisers’ and BlackRock’s forecast of interest rates and there are no limits regarding portfolio
duration or average maturity.
The Fund may invest in other pooled investment vehicles, including
other investment companies, ETFs, European registered investment funds (“UCITS”), real estate investment trusts (“REITs”), private
investment funds, and partnership interests, including master limited partnerships (“MLPs”). Unless otherwise indicated or the context
requires otherwise, references to the Fund’s investments and related risk factors in this prospectus and the SAI include investments by any
underlying mutual funds, ETFs or other pooled investment vehicles in which the Fund may invest.
The Fund may invest in derivatives, including, but not limited to,
interest rate swaps, total return swaps, credit default swaps, variance swaps, indexed and inverse floating rate
securities, options, futures, options on futures and swaps and foreign currency transactions (including swaps), for hedging purposes, as well as to
increase the return on its portfolio investments (although BlackRock and the Sub-Advisers are not required to hedge any of the Fund’s positions or
to use derivatives). The Fund may invest in derivative instruments that combine features of these instruments or are developed from time to time.
The Fund expects to utilize contracts for difference, swap agreements and other derivative instruments to maintain
a significant portion of its long and short positions. The Fund may seek to obtain market exposure to the securities in which it
primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as repurchase agreements,
reverse repurchase agreements or dollar rolls). The Fund may (but is not required to) also use forward foreign currency exchange contracts (obligations
to buy or sell a currency at a set rate in the future) for investment purposes or to hedge against movement in the value of non-U.S. currencies.
The pooled investment vehicles in which the Fund may invest may, to varying degrees, also invest in derivatives.
The Fund may seek to provide exposure to the investment returns of
real assets that trade in the commodity markets through investment in commodity-linked derivative instruments and investment vehicles that exclusively
invest in precious metals, which are designed to provide this exposure without direct investment in physical commodities. The Fund may also gain
exposure to commodity markets by investing in BlackRock Cayman Multi-Manager Alternatives Fund, Ltd. (the
“Subsidiary”), a wholly owned subsidiary of the Fund formed in the Cayman Islands, which invests primarily in commodity-related instruments.
The Subsidiary invests primarily in commodity-related instruments. BlackRock is the manager of the Subsidiary. The Subsidiary (unlike the Fund) may
invest without limitation in commodity-related instruments. However, the Subsidiary is otherwise subject to the same fundamental, non-fundamental and
certain other investment restrictions as the Fund. The Fund will limit its investments in the Subsidiary to 25% of its total assets. BlackRock will
advise the Subsidiary and may retain one or more Sub-Advisers to manage the Fund’s assets held in the Subsidiary.
The Subsidiary is managed pursuant to compliance policies and
procedures that are the same, in all material respects, as the policies and procedures adopted by the Trust. As a result, BlackRock, in managing the
Subsidiary’s portfolio, is subject to the same investment policies and restrictions that apply to the management of the Fund, and, in particular,
to the requirements relating to portfolio leverage, liquidity, brokerage, and the timing and method of the valuation of the Subsidiary’s portfolio
investments and shares of the Subsidiary. These policies and restrictions are described in detail in the SAI. The Chief Compliance Officer of the Trust
oversees implementation of the Subsidiary’s policies and procedures, and makes periodic reports to the Board regarding the Subsidiary’s
compliance with its policies and procedures. The Fund and Subsidiary test for compliance with certain investment restrictions on a consolidated basis,
except that with respect to its investments in certain securities that may involve leverage, the Subsidiary complies with asset segregation
requirements to the same extent as the Fund.
BlackRock provides investment management and other services to the
Subsidiary. BlackRock does not receive separate compensation from the Subsidiary for providing it with investment management or administrative
services. However, the Fund pays BlackRock based on the Fund’s assets, including the assets invested in the Subsidiary. The Subsidiary will also
enter into separate contracts for the provision of advisory, sub-advisory, custody, transfer agency, and audit services with the same or with
affiliates of the same service providers that provide those services to the Fund.
The financial statements of the Subsidiary will be consolidated
with the Fund’s financial statements in the Fund’s Annual and Semi-Annual Reports. The Fund’s Annual and Semi-Annual Reports are
distributed to shareholders, and copies of the reports are provided without charge upon request as indicated on the back cover of this prospectus.
Please refer to the SAI for additional information about the organization and management of the Subsidiary.
20
The Fund is non-diversified, which means it may invest in fewer
issuers than a “diversified” fund.
Additional Methods of Investing in Alternative
Strategies
There may be situations where an alternative strategy is accessed
by directly investing in a privately offered fund. In some instances, the means of gaining exposure to an alternative strategy may include purchasing a
structured note or entering into a swap or other contract paying a return approximately equal to the total return of a privately offered fund. In each
case, a counterparty would agree to pay to the Fund a return determined by the return of the privately offered fund, in return for consideration paid
by the Fund equivalent to the cost of purchasing an ownership interest in the privately offered fund. Indirect investment through a swap or similar
contract in a privately offered fund carries with it the credit risk associated with the counterparty. Indirect investments generally are subject to
transaction and other fees, which reduce the value of the Fund’s investment. There can be no assurance that the Fund’s indirect investment in
privately offered funds will have the same or similar results as a direct investment in the privately offered fund, and the Fund’s value may
decrease as a result of such indirect investment. When the Fund makes an indirect investment in a privately offered fund by investing in a structured
note, swap, or other contract intended to pay a return equal to the total return of such privately offered fund, such investment by the Fund may be
subject to additional regulations.
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ABOUT THE PORTFOLIO MANAGEMENT TEAM
OF THE FUND
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The Fund is managed by a team of financial professionals. Mark Everitt, CFA, Albert Matriotti, David Matter, CFA and Edward Rzeszowski are
jointly responsible for setting the overall investment strategy and overseeing the management of the Fund. Please see “Management of the Fund — Portfolio Manager
Information” for additional information on the portfolio management team.
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This section contains a discussion of the general risks of
investing in the Fund. The “Investment Objective and Policies” section in the Statement of Additional Information (the
“SAI”) also includes more information about the Fund, its investments and the related risks. As with any fund, there can be no guarantee
that the Fund will meet its investment objective or that the Fund’s performance will be positive for any period of time. An investment in
the Fund is not a deposit in any bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or
governmental agency.
Principal Risks of Investing in the Fund
Affiliated Fund Risk
— In managing the Fund,
BlackRock will have authority to select and substitute ETFs or mutual funds. BlackRock may be subject to potential conflicts of interest in selecting
ETFs or mutual funds because the fees paid to BlackRock by some ETFs or mutual funds are higher than the fees paid by other ETFs or mutual funds.
However, BlackRock is a fiduciary to the Fund and is legally obligated to act in the Fund’s best interests when selecting ETFs and mutual
funds.
Allocation Risk
— The Fund’s ability to
achieve its investment objective depends upon the Sub-Advisers’ and BlackRock’s skill in determining the Fund’s strategic
allocation to investment strategies and in selecting the best mix of ETFs, mutual funds and direct investments. There is a risk that the
Sub-Advisers’ and BlackRock’s evaluations and assumptions regarding investment strategies, asset classes or ETFs or mutual funds may
be incorrect in view of actual market conditions. In addition, there is no guarantee that the ETFs or mutual funds will achieve their investment
objectives, and the ETFs and mutual funds’ performance may be lower than the performance of the asset class which they were selected to represent.
The ETFs and mutual funds may change their investment objectives or policies without the approval of the Fund. If an ETF or mutual fund were to change
its investment objective or policies, the Fund might be forced to withdraw its investment from the ETF or mutual fund at a disadvantageous time and
price.
Bank Loan Risk
— The market for bank loans may
not be highly liquid and the Fund may have difficulty selling them. These investments expose the Fund to the credit risk of both the financial
institution and the underlying borrower.
Borrowing Risk
— Borrowing may exaggerate
changes in the net asset value of Fund shares and in the return on the Fund’s portfolio. Borrowing will cost the Fund interest expense and other
fees. The costs of borrowing may reduce the Fund’s return. Borrowing may cause the Fund to liquidate positions when it may not be advantageous to
do so to satisfy its obligations.
21
Collateralized Debt Obligations Risk
— The pool
of high yield securities underlying collateralized debt obligations is typically separated into groupings called tranches representing different
degrees of credit quality. The higher quality tranches have greater degrees of protection and pay lower interest rates. The lower tranches, with
greater risk, pay higher interest rates.
Commodities Related Investments Risks
—
Exposure to the commodities markets may subject the Fund to greater volatility than investments in traditional securities. The value of
commodity-linked derivative investments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates,
or sectors affecting a particular industry or commodity, such as drought, floods, weather, embargoes, tariffs and international economic, political and
regulatory developments.
Concentration Risk
— To the extent that the
Fund’s portfolio reflects concentration in the securities of issuers in a particular region, market, industry, group of industries, country, group
of countries, sector or asset class, the Fund may be adversely affected by the performance of those securities, may be subject to increased price
volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that region, market, industry, group
of industries, country, group of countries, sector or asset class.
Convertible Arbitrage Strategies Risk
— This
strategy entails the risk that BlackRock or the Sub-Advisers are incorrect as to the relative valuation of the convertible security and the underlying
equity securities or that factors unrelated to the issuer, such as actions of the Federal Reserve or government agencies, may have unexpected impacts
on the value of the fixed income or equity markets, potentially adversely affecting the Fund’s hedged position. Market events have, at times,
caused hedge funds to sell large amounts of convertible securities, which adversely affected the market price of convertible
securities.
Convertible Securities Risk
— The market value
of a convertible security performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible security
usually falls. In addition, convertible securities are subject to the risk that the issuer will not be able to pay interest or dividends when due, and
their market value may change based on changes in the issuer’s credit rating or the market’s perception of the issuer’s
creditworthiness. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject
to the same types of market and issuer risks that apply to the underlying common stock.
Corporate Loans Risk
— Commercial banks and
other financial institutions or institutional investors make corporate loans to companies that need capital to grow or restructure. Borrowers generally
pay interest on corporate loans at rates that change in response to changes in market interest rates such as the London Interbank Offered Rate
(“LIBOR”) or the prime rates of U.S. banks. As a result, the value of corporate loan investments is generally less exposed to the adverse
effects of shifts in market interest rates than investments that pay a fixed rate of interest. However, because the trading market for certain
corporate loans may be less developed than the secondary market for bonds and notes, the Fund may experience difficulties in selling its corporate
loans. Leading financial institutions often act as agent for a broader group of lenders, generally referred to as a syndicate. The syndicate’s
agent arranges the corporate loans, holds collateral and accepts payments of principal and interest. If the agent develops financial problems, the Fund
may not recover its investment or recovery may be delayed. By investing in a corporate loan, the Fund may become a member of the
syndicate.
The corporate loans in which the Fund invests are subject to the
risk of loss of principal and income. Although borrowers frequently provide collateral to secure repayment of these obligations they do not always do
so. If they do provide collateral, the value of the collateral may not completely cover the borrower’s obligations at the time of a default. If a
borrower files for protection from its creditors under the U.S. bankruptcy laws, these laws may limit the Fund’s rights to its collateral. In
addition, the value of collateral may erode during a bankruptcy case. In the event of a bankruptcy, the holder of a corporate loan may not recover its
principal, may experience a long delay in recovering its investment and may not receive interest during the delay.
Counterparty Risk
— The counterparty to an
over-the-counter derivatives contract or a borrower of the Fund’s securities may be unable or unwilling to make timely principal, interest or
settlement payments, or otherwise to honor its obligations.
Debt Securities Risk
— Debt securities, such
as bonds, involve interest rate risk, credit risk, extension risk, and prepayment risk, among other things.
Interest Rate Risk
— The
market value of bonds and other fixed-income securities changes in response to interest rate changes and other factors. Interest rate risk is
the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The
Fund may be subject to a greater risk of rising interest rates due to the current period of historically low rates. For example, if interest
rates increase by 1%, assuming a current portfolio duration of ten years, and all other factors being equal, the value of the
Fund’s
22
portfolio would be expected to decrease by 10%. The magnitude of these
fluctuations in the market price of bonds and other fixed-income securities is generally greater for those securities with longer maturities.
Fluctuations in the market price of the Fund’s investments will not affect interest income derived from instruments already owned by
the Fund, but will be reflected in the Fund’s net asset value. The Fund may lose money if short-term or long-term interest rates rise
sharply in a manner not anticipated by Fund management. To the extent the Fund invests in debt securities that may be prepaid at the option of
the obligor (such as mortgage-backed securities), the sensitivity of such securities to changes in interest rates may increase (to the detriment
of the Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically,
changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the
net asset value of the Fund to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to
U.S. Government securities. A security backed by the “full faith and credit” of the U.S. Government is guaranteed only as to its
stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed
securities will fluctuate in value when interest rates change.
Credit Risk
— Credit risk
refers to the possibility that the issuer of a debt security (i.e., the borrower) will not be able to make principal and interest payments when
due. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditworthiness may also affect the value of
the Fund’s investment in that issuer. The degree of credit risk depends on the issuer’s financial condition and on the terms of the
securities.
Extension Risk
— When
interest rates rise, certain obligations will be paid off by the obligor more slowly than anticipated, causing the value of these obligations to
fall. Rising interest rates tend to extend the duration of securities, making them more sensitive to changes in interest rates. The value of
longer-term securities generally changes more in response to changes in interest rates than shorter-term securities. As a result, in a period of
rising interest rates, securities may exhibit additional volatility and may lose value.
Prepayment Risk
— When
interest rates fall, certain obligations will be paid off by the obligor more quickly than originally anticipated, and the Fund may have to
invest the proceeds in securities with lower yields. In periods of falling interest rates, the rate of prepayments tends to increase (as does
price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower rates. During such periods, reinvestment of the
prepayment proceeds by the management team will generally be at lower rates of return than the return on the assets that were prepaid.
Prepayment reduces the yield to maturity and the average life of the security.
Derivatives Risk
— Derivatives are volatile and
involve significant risks, including:
Volatility Risk
— The
Fund’s use of derivatives may reduce the Fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a
security, an index or a market to fluctuate significantly in price within a short time period. A risk of the Fund’s use of derivatives is that the
fluctuations in their values may not correlate perfectly with the overall securities markets.
Counterparty Risk
—
Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual
obligation.
Market and Liquidity Risk
—
Some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid
secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close a derivatives position could expose the Fund to
losses and could make derivatives more difficult for the Fund to value accurately. The Fund could also suffer losses related to its derivatives
positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock or the Sub-Advisers may not
be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the Fund’s
derivatives positions to lose value.
Valuation Risk
— Valuation
may be more difficult in times of market turmoil since many investors and market makers may be reluctant to purchase complex instruments or quote
prices for them. Derivatives may also expose the Fund to greater risk and increase its costs. Certain transactions in derivatives involve substantial
leverage risk and may expose the Fund to potential losses that exceed the amount originally invested by the Fund.
Hedging Risk
— When a
derivative is used as a hedge against a position that the Fund holds, any loss generated by the derivative generally should be substantially offset by
gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are
sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Fund’s hedging
transactions will be effective. The use of hedging may invoke the application of the mark-to-market and straddle provisions of the Internal Revenue
Code of 1986, as amended (the “Internal Revenue Code”). If such provisions are applicable, there could be an increase (or decrease) in the
amount of taxable dividends paid by the
23
Fund and may impact whether
dividends paid by the Fund are classified as capital gains or ordinary income. The use of derivatives increases the risk that the Fund will be unable
to close out certain hedged positions to avoid adverse tax consequences.
Tax Risk
— The federal
income tax treatment of a derivative may not be as favorable as a direct investment in an underlying asset and may adversely affect the timing,
character and amount of income the Fund realizes from its investments. As a result, a larger portion of the Fund’s distributions may be
treated as ordinary income rather than capital gains. In addition, certain derivatives are subject to mark-to-market or
straddle provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). If such provisions are
applicable, there could be an increase (or decrease) in the amount of taxable dividends paid by the Fund. In addition, the tax treatment of
certain derivatives, such as swaps, is unsettled and may be subject to future legislation, regulation or administrative pronouncements issued by
the IRS.
Regulatory Risk
— The
U.S. Government is in the process of adopting and implementing regulations governing derivatives markets, including mandatory clearing of
certain derivatives, margin, reporting and registration requirements. The ultimate impact of the regulations remains unclear. Additional US or
other regulations may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or
performance of derivatives. The Dodd-Frank Wall Street Reform Act (the “Reform Act”) substantially
increases regulation of the over-the-counter derivatives market and participants in that market, including imposing clearing and reporting requirements
on transactions involving instruments that fall within the Reform Act’s definition of “swap” and “security-based swap,” which
terms generally include over-the-counter derivatives and imposing registration and potential substantive requirements on certain swap and
security-based swap market participants. In addition, under the Reform Act, the Fund may be subject to additional recordkeeping and reporting
requirements. The Fund engages in over-the-counter (“OTC”) transactions. In general, there is less governmental regulation and supervision of
transactions in the OTC markets (in which option contracts and certain options on swaps are generally traded) than of transactions entered into on
organized exchanges.
Risks Specific to Certain Derivatives Used by the
Fund
Swaps
— Swap agreements are
two-party contracts entered into for periods typically ranging from a few days to more than one year. In a standard
“swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments, which can be adjusted for an interest factor. Swap agreements involve the risk that the party with whom the
Fund has entered into the swap will default on its obligation to pay the Fund and the risk that the Fund will not be able to meet its obligations to
pay the other party to the agreement.
Credit Default Swaps
—
Credit default swaps may have as reference obligations one or more securities that are not currently held by the Fund. The protection “buyer”
may be obligated to pay the protection “seller” an up-front payment or a periodic stream of payments over the term of the contract, provided
generally that no credit event on a reference obligation has occurred. Credit default swaps involve special risks in addition to those mentioned above
because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the
premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of
financial difficulty).
Forward Foreign Currency Exchange
Contracts
— Forward foreign currency exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or
multinational currency unit at a price and future date set at the time of the contract. Forward foreign currency exchange contracts do not eliminate
fluctuations in the value of non-U.S. securities but rather allow the Fund to establish a fixed rate of exchange for a future point in time. This
strategy can have the effect of reducing returns and minimizing opportunities for gain.
Indexed and Inverse Securities
— Indexed and inverse securities provide a potential return based on a particular index of value or interest rates. The Fund’s return on
these securities will be subject to risk with respect to the value of the particular index. These securities are subject to leverage risk and
correlation risk. Certain indexed and inverse securities have greater sensitivity to changes in interest rates or index levels than other securities,
and the Fund’s investment in such instruments may decline significantly in value if interest rates or index levels move in a way Fund management
does not anticipate.
Futures
— Futures are
standardized, exchange-traded contracts that obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of an asset at
a specified future date at a specified price. The primary risks associated with the use of futures contracts and options are (a) the imperfect
correlation between the change in market value of the instruments held by the Fund and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; (d) the investment advisor’s inability to predict correctly the
direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will
default in the performance of its obligations.
24
Options
— An option is an
agreement that, for a premium payment or fee, gives the option holder (the purchaser) the right but not the obligation to buy (a “call
option”) or sell (a “put option”) the underlying asset (or settle for cash an amount based on an underlying asset, rate, or index) at a
specified price (the “exercise price”) during a period of time or on a specified date. Investments
in options are considered speculative. When the Fund purchases an option, it may lose the premium paid for it if the price of the underlying security
or other assets decreased or remained the same (in the case of a call option) or increased or remained the same (in the case of a put option). If a put
or call option purchased by the Fund were permitted to expire without being sold or exercised, its premium would represent a loss to the Fund. To the
extent that the Fund writes or sells an option, if the decline or increase in the underlying asset is significantly below or above the exercise price
of the written option, the Fund could experience a substantial loss.
Directional Trading Strategies Risk
—
Investment decisions and strategies may not produce the returns expected, may cause the Fund’s shares to lose value or may cause the Fund to
underperform other funds with similar investment objectives. The Fund may use quantitative methods to select investments. Securities or other
investments selected using quantitative methods may perform differently from the market as a whole or from their expected performance for many reasons,
including factors used in building the quantitative analytical framework, the weights placed on each factor, and changing sources of market returns,
among others. Any errors or imperfections in BlackRock’s or a Sub-Adviser’s quantitative analyses or models, or in the data on which they are
based, could adversely affect the ability of BlackRock or a Sub-Adviser to use such analyses or models effectively, which in turn could adversely
affect the Fund’s performance. There can be no assurance that these methodologies will help the Fund to achieve its investment
objective.
Distressed Securities Risk
— Distressed
securities are speculative and involve substantial risks in addition to the risks of investing in junk bonds. The Fund will generally not receive
interest payments on the distressed securities and may incur costs to protect its investment. In addition, distressed securities involve the
substantial risk that principal will not be repaid. These securities may present a substantial risk of default or may be in default at the time of
investment. The Fund may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal of or
interest on its portfolio holdings. In any reorganization or liquidation proceeding relating to a portfolio company, the Fund may lose its entire
investment or may be required to accept cash or securities with a value less than its original investment. Distressed securities and any securities
received in an exchange for such securities may be subject to restrictions on resale.
Dollar Rolls Risk
— A dollar roll transaction
involves a sale by the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar security at a
later date at an agreed-upon price. Dollar roll transactions involve the risk that the market value of the securities the Fund is required to purchase
may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom the Fund sells securities becomes insolvent, the
Fund’s right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the adviser’s
ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
Emerging Markets Risk
— The risks of foreign
investments are usually much greater for emerging markets. Investments in emerging markets may be considered speculative. Emerging markets include
those in countries defined as emerging or developing by the World Bank, the International Finance Corporation or the United Nations. Emerging markets
are riskier than more developed markets because they tend to develop unevenly and may never fully develop. They are more likely to experience
hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In addition, many emerging markets have far lower trading
volumes and less liquidity than developed markets. Since these markets are often small, they may be more likely to suffer sharp and frequent price
changes or long-term price depression because of adverse publicity, investor perceptions or the actions of a few large investors. In addition,
traditional measures of investment value used in the United States, such as price to earnings ratios, may not apply to certain small markets. Also,
there may be less publicly available information about issuers in emerging markets than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which
U.S. companies are subject.
Many emerging markets have histories of political instability and
abrupt changes in policies. As a result, their governments are more likely to take actions that are hostile or detrimental to private enterprise or
foreign investment than those of more developed countries, including expropriation of assets, confiscatory taxation, high rates of inflation or
unfavorable diplomatic developments. In the past, governments of such nations have expropriated substantial amounts of private property, and most
claims of the property owners have never been fully settled. There is no assurance that such expropriations will not reoccur. In such an event, it is
possible that the Fund could lose the entire value of its investments in the affected market. Some countries have pervasiveness of corruption and crime
that may
25
hinder investments. Certain emerging markets may also face
other significant internal or external risks, including the risk of war, and ethnic, religious and racial conflicts. In addition, governments in many
emerging market countries participate to a significant degree in their economies and securities markets, which may impair investment and economic
growth. National policies that may limit the Fund’s investment opportunities include restrictions on investment in issuers or industries deemed
sensitive to national interests.
Emerging markets may also have differing legal systems and the
existence or possible imposition of exchange controls, custodial restrictions or other foreign or U.S. governmental laws or restrictions applicable to
such investments. Sometimes, they may lack or be in the relatively early development of legal structures governing private and foreign investments and
private property. Many emerging markets do not have income tax treaties with the United States, and as a result, investments by the Fund may be subject
to higher withholding taxes in such countries. In addition, some countries with emerging markets may impose differential capital gains taxes on foreign
investors.
Practices in relation to settlement of securities transactions in
emerging markets involve higher risks than those in developed markets, in part because the Fund will need to use brokers and counterparties that are
less well capitalized, and custody and registration of assets in some countries may be unreliable. The possibility of fraud, negligence, undue
influence being exerted by the issuer or refusal to recognize ownership exists in some emerging markets, and, along with other factors, could result in
ownership registration being completely lost. The Fund would absorb any loss resulting from such registration problems and may have no successful claim
for compensation. In addition, communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates.
Equity Securities Risk
— Common and preferred
stocks represent equity ownership in a company. Stock markets are volatile. The price of equity securities will fluctuate and can decline and reduce
the value of a portfolio investing in equities. The value of equity securities purchased by the Fund could decline if the financial condition of the
companies the Fund invests in declines or if overall market and economic conditions deteriorate. The value of equity securities
may also decline due to factors that affect a particular industry or industries, such as labor shortages or an increase in production costs and
competitive conditions within an industry. In addition, the value may decline due to general market conditions that are not specifically
related to a company or industry, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes
in interest or currency rates or generally adverse investor sentiment.
Event-Driven Strategies Risk
— The Fund may
invest in event-driven strategies, which entail investing in companies involved, or potentially involved, in significant corporate actions. Such
investments are subject to the risk that the contemplated corporate actions do not occur or do not occur on the predicted schedule, and the risk of
default, among others. Some special situations are sufficiently uncertain that the Fund may lose its entire investment. When utilizing arbitrage
strategies, the Fund may purchase securities at prices only slightly below the anticipated value to be paid or exchanged for such securities in a
merger, exchange offer or cash tender offer, and substantially above the prices at which such securities traded immediately prior to announcement of
the transaction. If there is a perception that the proposed transaction will not be consummated or will be delayed, the market price of the security
may decrease. To the extent that the Fund utilizes activist strategies, it is subject to the risks that such strategies will have an adverse affect on
its investments or that, if the strategy is not successful, the market price of the company’s securities may decrease. The Fund may purchase
securities of a company which is the subject of a proxy contest with the expectation that the price of the company’s securities will increase in
the future. If the proxy contest, or the new management, is not successful, the market price of the company’s securities may
decrease.
Fixed Income Arbitrage Strategies Risk
—
Fixed income arbitrage strategies generally involve analyzing the relationship between the prices of two or more investments. To the extent the price
relationships between such investments remain constant, little or no gain or loss on the investments will occur. Such positions do, however, entail a
substantial risk that the price differential could change unfavorably, causing a loss.
Foreign Securities Risk
— Securities traded in
foreign markets have often (though not always) performed differently from securities traded in the United States. However, such investments often
involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, the Fund is subject
to the risk that because there may be fewer investors on foreign exchanges and a smaller number of securities traded each day, it may be more difficult
for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities
traded in the United States.
Certain Risks of Holding Fund Assets
Outside the United States
— The Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some
foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no
regulatory oversight of their operations. Also, the laws of certain countries limit the Fund’s ability to recover its assets if a
26
foreign bank, depository or issuer
of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in certain
foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its
investments and typically results in a higher operating expense ratio for the Fund than for investment companies invested only in the United
States.
Currency Risk
— Securities
and other instruments in which the Fund invests may be denominated or quoted in currencies other than the U.S. dollar. For this reason, changes in
foreign currency exchange rates can affect the value of the Fund’s portfolio.
Generally, when the U.S. dollar rises in
value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely,
when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth
more U.S. dollars. This risk, generally known as “currency risk,” means that a strong U.S. dollar will reduce returns for U.S. investors
while a weak U.S. dollar will increase those returns.
Foreign Economy Risk
— The
economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross
national product, reinvestment of capital, resources and balance of payments position. Certain foreign economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or
countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. Investments in foreign markets
may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries,
expropriation of assets or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial
restrictions on foreign investments in their capital markets or in certain industries. Any of these actions could severely affect securities prices or
impair the Fund’s ability to purchase or sell foreign securities or transfer the Fund’s assets or income back into the United States, or
otherwise adversely affect the Fund’s operations.
Other potential foreign market risks
include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing legal
judgments in foreign courts and political and social instability. Diplomatic and political developments, including rapid and adverse political changes,
social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of
the Fund’s investments, in non-U.S. countries. These factors are extremely difficult, if not impossible, to predict and take into account with
respect to the Fund’s investments.
Governmental Supervision and
Regulation/Accounting Standards
— Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities
to the same extent as such regulations exist in the United States. They also may not have laws to protect investors that are comparable to U.S.
securities laws. For example, some foreign countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or
sells a company’s securities based on material non-public information about that company. In addition, some countries may have legal systems that
may make it difficult for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments.
Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not
require as much detail as U.S. accounting standards, it may be harder for Fund management to completely and accurately determine a company’s
financial condition.
Settlement Risk
— Settlement
and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement and clearance procedures
and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically associated with the
settlement of U.S. investments.
At times, settlements in certain foreign
countries have not kept pace with the number of securities transactions. These problems may make it difficult for the Fund to carry out transactions.
If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets
may be uninvested with no return earned thereon for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable for any
losses incurred.
European Economic Risk
— The
European financial markets have recently experienced volatility and adverse trends due to concerns about economic downturns in, or rising government
debt levels of several European countries. These events may spread to other countries in Europe. These events may affect the value and liquidity of
certain of the Fund’s investments.
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Responses to the financial problems by
European governments, central banks and others, including austerity measures and reforms, may not work, may result in social unrest and may limit
future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt
could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may
abandon the Euro, the common currency of the European Union, and/ or withdraw from the European Union. The impact of these actions, especially if they
occur in a disorderly fashion, is not clear but could be significant and far reaching.
Fundamental Long/Short Strategies Risk
—
Long/short strategies generally seek to generate capital appreciation through the establishment of both long and short positions in equities or fixed
income, by purchasing undervalued securities and selling overvalued securities to generate returns and to hedge out some portion of general market
risk. If BlackRock’s or a Sub-Adviser’s analysis is incorrect or based on inaccurate information, these investments may result in significant
losses to the Fund. Since a long/short strategy involves identifying securities that are generally undervalued (or, in the case of short positions,
overvalued) by the marketplace, the success of the strategy necessarily depends upon the market eventually recognizing such value in the price of the
security, which may not necessarily occur, or may occur over extended time frames that limit profitability. Positions may undergo significant
short-term declines and experience considerable price volatility during these periods. In addition, long and short positions may or may not be related.
If the long and short positions are not related, it is possible to have investment losses in both the long and short sides of the
portfolio.
Global Macro Strategies Risk
— The
profitability of any macro program depends primarily on the ability of its manager to predict derivative contract price movements to implement
investment theses regarding macroeconomic trends. Such price movements are influenced by, among other things: changes in interest rates; governmental
and economic programs, policies and events; weather and climate conditions; changing supply and demand relationships; changes in balances of payments
and trade; rates of inflation and deflation; currency devaluations and revaluations; and changes in philosophies and emotions of market
participants.
High Portfolio Turnover Risk
— The Fund may
engage in active and frequent trading of its portfolio securities. High portfolio turnover (more than 100%) may result in increased transaction costs
to the Fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of Fund portfolio securities may result in the realization and/or distribution to shareholders of higher capital gains or losses
as compared to a fund with less active trading policies. These effects of higher than normal portfolio turnover may adversely affect Fund
performance.
Indexed and Inverse Securities Risk
— Certain
indexed and inverse securities have greater sensitivity to changes in interest rates or index levels than other securities, and the Fund’s
investment in such instruments may decline significantly in value if interest rates or index levels move in a way Fund management does not
anticipate.
Inflation Indexed Bonds Risk
— The principal
value of an investment is not protected or otherwise guaranteed by virtue of the Fund’s investments in inflation-indexed bonds.
Inflation-indexed bonds are fixed-income securities whose
principal value is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced.
Repayment of the original bond principal upon maturity (as
adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the
adjusted principal value of the bond repaid at maturity may be less than the original principal value.
The value of inflation-indexed bonds is expected to change in
response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation.
If nominal interest rates increase at a faster rate than inflation, real interest rates may rise, leading to a decrease in value of inflation-indexed
bonds. Short-term increases in inflation may lead to a decline in value. Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their principal until maturity.
Periodic adjustments for inflation to the principal amount of an
inflation-indexed bond may give rise to original issue discount, which will be includable in the Fund’s gross income. Due to original issue
discount, the Fund may be required to make annual distributions to shareholders that exceed the cash received, which may cause the Fund to liquidate
certain investments when it is not advantageous to do so. Also, if the principal value of an inflation-indexed bond is adjusted downward due to
deflation, amounts previously distributed in the taxable year may be characterized in some circumstances as a return of
capital.
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Investment in Other Investment Companies Risk
—
As with other investments, investments in other investment companies are subject to market and selection risk. In addition, if the Fund acquires shares
of investment companies, including ones affiliated with the Fund, shareholders bear both their proportionate share of expenses in the Fund (including
management and advisory fees) and, indirectly, the expenses of the investment companies. To the extent the Fund is held by an affiliated fund, the
ability of the Fund itself to hold other investment companies may be limited.
Investment Style Risk
— Because different kinds
of stocks go in and out of favor depending on market conditions, the Fund’s performance may be better or worse than other funds with different
investment styles (e.g., growth vs. value, large cap vs. small cap).
Junk Bonds Risk
— Although junk bonds generally
pay higher rates of interest than investment grade bonds, junk bonds are high risk investments that may cause income and principal losses for the Fund.
The major risks of junk bond investments include:
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Junk bonds may be issued by less creditworthy issuers. Issuers of
junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. In the event of an
issuer’s bankruptcy, claims of other creditors may have priority over the claims of junk bond holders, leaving few or no assets available to repay
junk bond holders.
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Prices of junk bonds are subject to extreme price fluctuations.
Adverse changes in an issuer’s industry and general economic conditions may have a greater impact on the prices of junk bonds than on other higher
rated fixed-income securities.
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Issuers of junk bonds may be unable to meet their interest or
principal payment obligations because of an economic downturn, specific issuer developments, or the unavailability of additional financing.
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Junk bonds frequently have redemption features that permit an
issuer to repurchase the security from the Fund before it matures. If the issuer redeems junk bonds, the Fund may have to invest the proceeds in bonds
with lower yields and may lose income.
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Junk bonds may be less liquid than higher rated fixed-income
securities, even under normal economic conditions. There are fewer dealers in the junk bond market, and there may be significant differences in the
prices quoted for junk bonds by the dealers. Because they are less liquid, judgment may play a greater role in valuing certain of the Fund’s
securities than is the case with securities trading in a more liquid market.
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The Fund may incur expenses to the extent necessary to seek
recovery upon default or to negotiate new terms with a defaulting issuer.
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The credit rating of a high yield security does not necessarily
address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding
the issuer.
Leverage Risk
— Some transactions may give rise
to a form of economic leverage and as a result, the sum of the Fund’s investment exposures may significantly exceed the amount of assets invested
in the Fund, although these exposures may vary over time. These transactions may include, among others, derivatives, and may expose the Fund to greater
risk and increase its costs. As an open-end investment company registered with the SEC, the Fund is subject to the federal securities laws, including
the Investment Company Act, the rules thereunder, and various SEC and SEC staff interpretive positions. In accordance with these laws, rules and
positions, the Fund must “set aside” liquid assets (often referred to as “asset segregation”), or engage in other SEC- or
staff-approved measures, to “cover” open positions with respect to certain kinds of instruments. The use of leverage may cause the Fund to
liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet any required asset segregation
requirements. Increases and decreases in the value of the Fund’s portfolio will be magnified when the Fund uses leverage.
Liquidity Risk
— Liquidity risk exists when
particular investments are difficult to purchase or sell. The Fund’s investments in illiquid securities may reduce the returns of the Fund because
it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Fund’s principal investment
strategies involve derivatives or securities with substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity
risk. Liquid investments may become illiquid after purchase by the Fund, particularly during periods of market turmoil. Illiquid investments may be
harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash
needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain securities, the Fund, due to limitations on
illiquid investments, may be subject to purchase and sale restrictions.
Management and Model Risk
— The Fund’s
ability to achieve its investment objective depends upon BlackRock’s skill in determining the Fund’s strategic allocation to
investment strategies and in selecting the best mix of Sub-Advisers. The value of your investment may decrease if BlackRock’s judgment about
the attractiveness, value or market trends
29
affecting a particular Sub-Adviser or investment
strategy is incorrect. The various investment strategies may not always be complementary, which could adversely affect the performance of the Fund.
Further, there can be no assurance that any allocation among investment strategies can produce a return that exhibits reduced correlation to the
direction of markets generally.
Some Sub-Advisers have little experience managing registered
investment companies which, unlike the private investment funds these Sub-Advisers have been managing, are subject to daily inflows and outflows of
investor cash and are subject to certain legal and tax-related restrictions on their investments and operations. Subject to the overall supervision of
the Fund’s investment program by BlackRock, each Sub-Adviser is responsible, with respect to the portion of the Fund’s assets it manages, for
compliance with the Fund’s investment strategies and applicable law.
Investment decisions and strategies may not produce the returns
expected, may cause the Fund’s shares to lose value or may cause the Fund to underperform other funds with similar investment objectives. The
Sub-Advisers’ investment models may not adequately take into account certain factors and may result in the Fund having a lower return than if the
Sub-Advisers utilized another model or investment strategy. Certain Sub-Advisers may attempt to execute strategies for the Fund using proprietary
quantitative models. Investments selected using these models may perform differently than expected as a result of the factors used in the models, the
weight placed on each factor, changes from the factors’ historical trends, and technical issues in the construction and implementation of the
models (including, for example, data problems and/or software issues). There is no guarantee that a Sub-Adviser’s use of quantitative models will
result in effective investment decisions for the Fund.
Market Risk and Selection Risk
— Market risk is
the risk that one or more markets in which the Fund invests will go down in value, including the possibility that the markets will go down sharply and
unpredictably. Selection risk is the risk that the instruments in which the Fund invests will underperform the markets, the relevant indices or the
securities selected by other funds with similar investment objectives and investment strategies. This means you may lose money.
Master Limited Partnerships Risk
— The common
units of an MLP are listed and traded on U.S. securities exchanges and their value fluctuates predominantly based on prevailing market conditions and
the success of the MLP. Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability annually
to elect directors. In the event of liquidation, common units have preference over subordinated units, but not over debt or preferred units, to the
remaining assets of the MLP.
Merger or Other Event Driven Arbitrage Strategies
Risk
— The Fund may invest in companies involved in (or which are the target of) acquisition attempts or takeover or tender offers or
mergers or companies involved in work-outs, liquidations, demergers, spin-offs, reorganizations, bankruptcies, share buy-backs and other capital market
transactions or “special situations.” The level of analytical sophistication, both financial and legal, necessary for a successful investment
in companies experiencing significant business and financial distress is unusually high. There is no assurance that BlackRock or the Sub-Advisers will
correctly evaluate the nature and magnitude of the various factors that could, for example, affect the prospects for a successful reorganization or
similar action. There exists the risk that the transaction in which such business enterprise is involved either will be unsuccessful, take considerable
time or will result in a distribution of cash or a new security the value of which will be less than the purchase price of the security or other
financial instrument in respect of which such distribution is received. Acquisitions sometimes fail because the U.S. government, European Union or some
other governmental entity does not approve of aspects of a transaction due to anti-trust concerns, tax reasons, subsequent disagreements between the
acquirer or target as to management transition or corporate governance matters or changing market conditions. Similarly, if an anticipated transaction
does not in fact occur, or takes more time than anticipated, the Fund may be required to sell its investment at a loss. As there may be uncertainty
concerning the outcome of transactions involving financially troubled companies in which Fund may invest, there is potential risk of loss by the Fund
of its entire investment in such companies. In some circumstances, investments may be relatively illiquid making it difficult to acquire or dispose of
them at the prices quoted on the various exchanges. Accordingly, the Fund’s ability to respond to market movements may be impaired and
consequently the Fund may experience adverse price movements upon liquidation of its investments. Settlement of transactions may be subject to delay
and administrative uncertainties. An investment in securities of a company involved in bankruptcy or other reorganization and liquidation proceedings
ordinarily remains unpaid unless and until such company successfully reorganizes and/or emerges from bankruptcy, and the Fund may suffer a significant
or total loss on any such investment during the relevant proceedings.
Investing in securities of companies in a special situation or
otherwise in distress requires active monitoring by BlackRock or the Sub-Advisers of such companies and may, at times, require active participation by
BlackRock or the Sub-Advisers in the management or in the bankruptcy or reorganization proceedings of such companies. Such involvement may restrict the
Fund’s ability to trade in the securities of such companies. It may also prevent BlackRock or the Sub-Advisers from focusing on matters relating
to other existing investments or potential future investments of the Fund.
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Mezzanine Securities Risk
— Mezzanine
Securities generally are rated below investment grade and frequently are unrated and present many of the same risks as senior loans, second lien loans
and non-investment grade bonds. However, unlike senior loans and second lien loans, mezzanine securities are not a senior or secondary secured
obligation of the related borrower. They typically are the most subordinated debt obligation in an issuer’s capital structure. Mezzanine
securities also may often be unsecured. Mezzanine securities therefore are subject to the additional risk that the cash flow of the related borrower
and the property securing the loan may be insufficient to repay the scheduled after giving effect to any senior obligations of the related borrower.
Mezzanine securities are also expected to be a highly illiquid investment. Mezzanine securities will be subject to certain additional risks to the
extent that such loans may not be protected by financial covenants or limitations upon additional indebtedness. Investment in mezzanine securities is a
highly specialized investment practice that depends more heavily on independent credit analysis than investments in other types of debt
obligations.
Money Market Securities Risk
— If market
conditions improve while the Fund has invested some or all of its assets in high quality money market securities, this strategy could result in
reducing the potential gain from the market upswing, thus reducing the Fund’s opportunity to achieve its investment objective.
Mortgage- and Asset-Backed Securities Risks
—
Mortgage-backed securities (residential and commercial) and asset-backed securities represent interests in “pools” of mortgages or other
assets, including consumer loans or receivables held in trust. Although asset-backed and commercial mortgage-backed securities (“CMBS”)
generally experience less prepayment than residential mortgage-backed securities, mortgage-backed and asset-backed securities, like traditional
fixed-income securities, are subject to credit, interest rate, prepayment and extension risks.
Small movements in interest rates (both increases and decreases)
may quickly and significantly reduce the value of certain mortgage-backed securities. The Fund’s investments in asset-backed securities are
subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated with the nature of the assets and
the servicing of those assets. These securities also are subject to the risk of default on the underlying mortgages or assets, particularly
during periods of economic downturn. Certain CMBS are issued in several classes with different levels of yield and credit protection. The Fund’s
investments in CMBS with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate,
credit and prepayment risks.
Mortgage-backed securities may be either pass-through securities
or collateralized mortgage obligations (“CMOs”). Pass-through securities represent a right to receive principal and interest payments
collected on a pool of mortgages, which are passed through to security holders. CMOs are created by dividing the principal and interest payments
collected on a pool of mortgages into several revenue streams (tranches) with different priority rights to portions of the underlying mortgage
payments. Certain CMO tranches may represent a right to receive interest only (“IOs”), principal only (“POs”) or an amount that
remains after other floating-rate tranches are paid (an inverse floater). These securities are frequently referred to as “mortgage
derivatives” and may be extremely sensitive to changes in interest rates. Interest rates on inverse floaters, for example, vary inversely with a
short-term floating rate (which may be reset periodically). Interest rates on inverse floaters will decrease when short-term rates increase, and will
increase when short-term rates decrease. These securities have the effect of providing a degree of investment leverage. In response to changes in
market interest rates or other market conditions, the value of an inverse floater may increase or decrease at a multiple of the increase or decrease in
the value of the underlying securities. If the Fund invests in CMO tranches (including CMO tranches issued by government agencies) and interest rates
move in a manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its
investment.
The mortgage market in the United States at times
has experienced difficulties that may adversely affect the performance and market value of certain of the Fund’s mortgage-related investments.
Delinquencies and losses on mortgage loans (including subprime and second-lien mortgage loans) generally have increased and may continue to
increase, and a decline in or flattening of real-estate values (as has been experienced and may continue to be experienced in many housing
markets) may exacerbate such delinquencies and losses. Also, a number of mortgage loan originators have experienced serious financial
difficulties or bankruptcy. Reduced investor demand for mortgage loans and mortgage-related securities and increased investor yield requirements have
caused limited liquidity in the secondary market for mortgage-related securities, which can adversely affect the market value of mortgage-related
securities. It is possible that such limited liquidity in such secondary markets could continue or worsen.
Asset-backed securities entail certain risks not presented by
mortgage-backed securities, including the risk that in certain states it may be difficult to perfect the liens securing the collateral backing certain
asset-backed securities. In addition, certain asset-backed securities are based on loans that are unsecured, which means that there is no collateral to
seize if the underlying borrower defaults. Certain mortgage-backed securities in which the Fund may invest may also provide a degree of investment
leverage, which could cause the Fund to lose all or substantially all of its investment.
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“New Issues” Risk
— “New
issues” are initial public offerings of equity securities. Investments in companies that have recently gone public have the
potential to produce substantial gains for the Fund. However, there is no assurance that the Fund will have access to profitable IPOs and therefore
investors should not rely on these past gains as an indication of future performances. The investment performance of the Fund during periods when it is
unable to invest significantly or at all in IPOs may be lower than during periods when the Fund is able to do so. In addition, as the Fund increases in
size, the impact of IPOs on the Fund’s performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as
investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may
be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the
initial public offering. When an initial public offering is brought to the market, availability may be limited and the Fund may not be able to buy any
shares at the offering price, or, if it is able to buy shares, it may not be able to buy as many shares at the offering price as it would
like.
Non-Diversification Risk
— The Fund is a
non-diversified fund. Because the Fund may invest in securities of a smaller number of issuers, it may be more exposed to the risks associated with and
developments affecting an individual issuer than a fund that invests more widely.
Preferred Securities Risk
— Preferred
securities may pay fixed or adjustable rates of return. Preferred securities are subject to issuer-specific and market risks applicable generally to
equity securities. In addition, a company’s preferred securities generally pay dividends only after the company makes required payments to holders
of its bonds and other debt. For this reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or
perceived changes in the company’s financial condition or prospects. Preferred securities of smaller companies may be more vulnerable to adverse
developments than preferred stock of larger companies.
Real Estate Related Securities Risk
— The main
risk of real estate related securities is that the value of the underlying real estate may go down. Many factors may affect real estate values. These
factors include both the general and local economies, the amount of new construction in a particular area, the laws and regulations (including zoning
and tax laws) affecting real estate and the costs of owning, maintaining and improving real estate. The availability of mortgages and changes in
interest rates may also affect real estate values. If the Fund’s real estate related investments are concentrated in one geographic area or in one
property type, the Fund will be particularly subject to the risks associated with that area or property type.
REIT Investment Risk
— In addition to the risks
facing real estate-related securities, such as a decline in property values due to increasing vacancies, a decline in rents resulting from
unanticipated economic, legal or technological developments or a decline in the price of securities of real estate companies due to a failure of
borrowers to pay their loans or poor management, investments in REITs involve unique risks. REITs may have limited financial resources, may trade less
frequently and in limited volume and may be more volatile than other securities.
Relative Value Strategies Risk
— BlackRock and
the Sub-Advisers utilize, among others, relative value trading strategies which are composed of positions in contracts relating to two or more assets
the prices of which are expected to either converge or diverge and, in theory, mitigate the absolute price risk associated with taking an outright,
unhedged position in respect of a single asset, and may be based upon historical price relationships and intended to neutralize the adverse (and
positive) price effects of macro-economic events and trends. However, relative value strategies are subject to certain risks. The success of
BlackRock’s or the Sub-Advisers’ trading activities depends, among other things, on BlackRock’s or the Sub-Advisers’ ability to
identify unjustified or temporary discrepancies between the fundamental value and the market price of an asset or between the market prices of two or
more assets whose prices are expected to move in relation to each other and to exploit those discrepancies to derive a profit to the extent that
BlackRock and the Sub-Advisers are able to anticipate in which direction the relative values or prices will move to eliminate the identified
discrepancy. For example, a relative value strategy may fail to profit fully or at all or may suffer a loss or a greater loss due to a failure of the
component contract prices to converge or diverge as anticipated. This may occur with respect to prices relating to all or only certain contract
maturities.
Identification and exploitation of the investment opportunities
that may be pursued by BlackRock or the Sub-Advisers involve a high degree of uncertainty. If what BlackRock or the Sub-Advisers perceive as an
unjustified or temporary price or value discrepancy posing an investment opportunity is nothing more than a price differential due to reasons not
likely to disappear within the time horizon of an investment made by the Fund, if BlackRock or the Sub-Advisers fail to anticipate the direction in
which the relative prices or values will move to eliminate a discrepancy, or if BlackRock or the Sub-Advisers have incorrectly evaluated the extent of
the expected spread relationships, so that, for example, the value of the Fund’s long positions appreciates at a slower rate than the value of the
Fund’s short positions in related assets, then the expected returns for the Fund will not materialize, and the Fund may sustain a loss that will
adversely affect the value of the Fund.
The discrepancies that BlackRock or the Sub-Advisers seek to
identify and turn into profit opportunities for the Fund may arise due to a variety of circumstances. Some may be due to uneven flows of information to
the relevant markets, with the market for one asset reflecting the impact of specified items of information before or after the same
32
information has an impact on the market for a related asset.
Others may be the result of regulatory or legal restrictions applicable to one type of asset, but not to a functionally equivalent asset (which occurs,
for example, when regulated financial institutions are prohibited from investing in a particular type of asset, but are free to take, via derivative
arrangements, positions that leave them exposed to the performance of the same asset). A reduction in the volatility and market inefficiencies that
create the opportunities in which BlackRock or the Sub-Advisers may seek to invest, as well as other market factors, will reduce the scope for
BlackRock’s or the Sub-Advisers’ investments and may limit the Fund’s opportunities for profit and adversely affect the value of the
Fund.
Repurchase Agreements and Purchase and Sale Contracts
Risks
— If the other party to a repurchase agreement or purchase and sale contract defaults on its obligation under the agreement, the
Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in
either situation and the market value of the security declines, the Fund may lose money.
Reverse Repurchase Agreements Risk
— Reverse
repurchase agreements involve the sale of securities held by the Fund with an agreement to repurchase the securities at an agreed-upon price, date and
interest payment. Reverse repurchase agreements involve the risk that the other party may fail to return the securities in a timely manner or at all.
The Fund could lose money if it is unable to recover the securities and the value of the collateral held by the Fund, including the value of the
investments made with cash collateral, is less than the value of securities. These events could also trigger adverse tax consequences to the
Fund.
Rights Risk
— The failure to exercise
subscription rights to purchase common stock would result in the dilution of the Fund’s interest in the issuing company. The market for such
rights is not well developed, and, accordingly, the Fund may not always realize full value on the sale of rights.
Risks of Loan Assignments and Participations
—
As the purchaser of an assignment, the Fund typically succeeds to all the rights and obligations of the assigning institution and becomes a lender
under the credit agreement with respect to the debt obligation; however, the Fund may not be able unilaterally to enforce all rights and remedies under
the loan and with regard to any associated collateral. Because assignments may be arranged through private negotiations between potential assignees and
potential assignors, the rights and obligations acquired by the Fund as the purchaser of an assignment may differ from, and be more limited than, those
held by the assigning lender. In addition, if the loan is foreclosed, the Fund could become part owner of any collateral and could bear the costs and
liabilities of owning and disposing of the collateral. The Fund may be required to pass along to a purchaser that buys a loan from the Fund by way of
assignment a portion of any fees to which the Fund is entitled under the loan. In connection with purchasing participations, the Fund generally will
have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the
borrower, and the Fund may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, the
Fund will be subject to the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the
lender selling a participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and
the borrower.
Second Lien Loans Risk
— Second lien loans
generally are subject to similar risks as those associated with investments in senior loans. Because second lien loans are subordinated or unsecured
and thus lower in priority of payment to senior loans, they are subject to the additional risk that the cash flow of the borrower and property securing
the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the borrower. This
risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Second lien
loans generally have greater price volatility than senior loans and may be less liquid. There is also a possibility that originators will not be able
to sell participations in second lien loans, which would create greater credit risk exposure for the holders of such loans. Second lien loans share the
same risks as other below investment grade securities.
Senior Loans Risk
— There is less readily
available, reliable information about most senior loans than is the case for many other types of securities. In addition, there is no minimum rating or
other independent evaluation of a borrower or its securities limiting the Fund’s investments, and BlackRock or a Sub-Adviser relies
primarily on its own evaluation of a borrower’s credit quality rather than on any available independent sources. As a result, the Fund is
particularly dependent on the analytical abilities of BlackRock and the Sub-Advisers.
An economic downturn generally leads to a higher non-payment rate,
and a senior loan may lose significant value before a default occurs. Moreover, any specific collateral used to secure a senior loan may decline in
value or become illiquid, which would adversely affect the senior loan’s value.
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No active trading market may exist for certain senior loans, which
may impair the ability of the Fund to realize full value in the event of the need to sell a senior loan and which may make it difficult to value senior
loans. Adverse market conditions may impair the liquidity of some actively traded senior loans. To the extent that a secondary market does exist for
certain senior loans, the market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. See
“Liquidity Risk.”
Although senior loans in which the Fund will invest generally will
be secured by specific collateral, there can be no assurance that liquidation of such collateral would satisfy the borrower’s obligation in the
event of non-payment of scheduled interest or principal or that such collateral could be readily liquidated. In the event of the bankruptcy of a
borrower, the Fund could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing a senior loan.
If the terms of a senior loan do not require the borrower to pledge additional collateral in the event of a decline in the value of the already pledged
collateral, the Fund will be exposed to the risk that the value of the collateral will not at all times equal or exceed the amount of the
borrower’s obligations under the senior loans. To the extent that a senior loan is collateralized by stock in the borrower or its subsidiaries,
such stock may lose all of its value in the event of the bankruptcy of the borrower. Uncollateralized senior loans involve a greater risk of loss. Some
senior loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate the senior loans to
presently existing or future indebtedness of the borrower or take other action detrimental to lenders, including the Fund. Such court action could
under certain circumstances include invalidation of senior loans.
If a senior loan is acquired through an assignment, the Fund may
not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. If a senior loan is acquired
through a participation, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement against the
borrower, and the Fund may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a
result, the Fund will be exposed to the credit risk of both the borrower and the institution selling the participation.
The senior loans in which the Fund invests may be
rated below investment grade. As a result, the risks associated with certain senior loans are similar to the risks of below investment grade
securities, although senior loans are typically senior and secured in contrast to other below investment grade securities, which are often subordinated
and unsecured. See “Junk Bonds Risk.” The higher standing of senior loans has historically resulted in generally higher recoveries in the
event of a corporate reorganization. In addition, because their interest rates are typically adjusted for changes in short-term interest rates, senior
loans generally are subject to less interest rate risk than other below investment grade securities, which are typically fixed rate.
Short Sales Risk
— Because making short sales
in securities that it does not own exposes the Fund to the risks associated with those securities, such short sales involve speculative exposure risk.
The Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short sale and the date on which
the Fund replaces the security sold short. The Fund will realize a gain if the security declines in price between those dates. As a result, if the Fund
makes short sales in securities that increase in value, it will likely underperform similar funds that do not make short sales in securities they do
not own. There can be no assurance that the Fund will be able to close out a short sale position at any particular time or at an acceptable price.
Although the Fund’s gain is limited to the amount at which it sold a security short, its potential loss is limited only by the maximum attainable
price of the security, less the price at which the security was sold. The Fund may also pay transaction costs and borrowing fees in connection with
short sales.
Small and Mid-Capitalization Company Risk
—
Companies with small or mid-size market capitalizations will normally have more limited product lines, markets and financial resources and will be
dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller
companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by
relatively few securities analysts.
Sovereign Debt Risk
— Sovereign debt
instruments are subject to the risk that a governmental entity may delay or refuse to pay interest or repay principal on its sovereign debt, due, for
example, to cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of the governmental entity’s
debt position in relation to the economy or the failure to put in place economic reforms required by the International Monetary Fund or other
multilateral agencies. If a governmental entity defaults, it may ask for more time in which to pay or for further loans. There is no legal process for
collecting sovereign debt that a government does not pay nor are there bankruptcy proceedings through which all or part of the sovereign debt that a
governmental entity has not repaid may be collected.
Statistical Arbitrage Strategies Risk
— The
success of statistical arbitrage is heavily dependent on the mathematical models used by BlackRock or the Sub-Advisers in seeking to exploit short-term
and long-term relationships among stock prices and volatility. Models that have been formulated on the basis of past market data may not be predictive
of future price movements. BlackRock or the Sub-Advisers may select models that are not well-suited to prevailing market
34
conditions. Furthermore, the effectiveness of such models
tends to deteriorate over time as more traders seek to exploit the same market inefficiencies through the use of similar models. In addition, in the
event of static market conditions, statistical arbitrage strategies are less likely to be able to generate significant profit opportunities from price
divergences between long and short positions than in more volatile environments.
Structured Products Risk
— Holders of
structured products bear risks of the underlying investments, index or reference obligation and are subject to counterparty risk. The Fund may have the
right to receive payments only from the structured product, and generally does not have direct rights against the issuer or the entity that sold the
assets to be securitized. Certain structured products may be thinly traded or have a limited trading market. In addition to the general risks
associated with debt securities discussed herein, structured products carry additional risks, including, but not limited to: the possibility that
distributions from collateral securities will not be adequate to make interest or other payments; the quality of the collateral may decline in value or
default; and the possibility that the structured products are subordinate to other classes. Structured notes are based upon the movement of one or more
factors, including currency exchange rates, interest rates, referenced bonds and stock indices, and changes in interest rates and impact of these
factors may cause significant price fluctuations. Additionally, changes in the reference instrument or security may cause the interest rate on the
structured note to be reduced to zero.
Subsidiary Risk
— By investing in the
Subsidiary, the Fund is indirectly exposed to the risks associated with the Subsidiary’s investments. The commodity-related instruments held by
the Subsidiary are generally similar to those that are permitted to be held by the Fund and are subject to the same risks that apply to similar
investments if held directly by the Fund (see “Commodities Related Investments Risks” above). These risks are described elsewhere in this
prospectus. There can be no assurance that the investment objective of the Subsidiary will be achieved. The Subsidiary is not registered under the
Investment Company Act, and, unless otherwise noted in this prospectus, is not subject to all the investor protections of the Investment Company Act.
However, the Fund wholly owns and controls the Subsidiary, and the Fund and the Subsidiary are both managed by BlackRock, making it unlikely that the
Subsidiary will take action contrary to the interests of the Fund and its shareholders. The Board has oversight responsibility for the investment
activities of the Fund, including its investment in the Subsidiary, and the Fund’s role as sole shareholder of the Subsidiary. The Subsidiary will
be subject to the same investment restrictions and limitations, and follow the same compliance policies and procedures, as the Fund. Changes in the
laws of the United States and/or the Cayman Islands could result in the inability of the Fund and/or the Subsidiary to operate as described in this
prospectus and the SAI and could adversely affect the Fund. For example, the Cayman Islands does not currently impose any income, corporate or capital
gains tax, estate duty, inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman Islands law changes such that the Subsidiary must pay
Cayman Islands taxes, Fund shareholders would likely suffer decreased investment returns.
Supranational Entities Risk
— The Fund may
invest in obligations issued or guaranteed by the International Bank for Reconstruction and Development (the World Bank). The government members, or
“stockholders,” usually make initial capital contributions to the World Bank and in many cases are committed to make additional capital
contributions if the World Bank is unable to repay its borrowings. There is no guarantee that one or more stockholders of the World Bank will continue
to make any necessary additional capital contributions. If such contributions are not made, the entity may be unable to pay interest or repay principal
on its debt securities, and the Fund may lose money on such investments.
U.S. Government Obligations Risk
— Obligations
of U.S. Government agencies, authorities, instrumentalities and sponsored enterprises have historically involved little risk of loss of principal if
held to maturity. However, not all U.S. Government securities are backed by the full faith and credit of the United States. Obligations of certain
agencies, authorities, instrumentalities and sponsored enterprises of the U.S. Government are backed by the full faith and credit of the United States
(e.g., the Government National Mortgage Association); other obligations are backed by the right of the issuer to borrow from the U.S. Treasury (e.g.,
the Federal Home Loan Banks) and others are supported by the discretionary authority of the U.S. Government to purchase an agency’s obligations.
Still others are backed only by the credit of the agency, authority, instrumentality or sponsored enterprise issuing the obligation. No assurance can
be given that the U.S. Government would provide financial support to any of these entities if it is not obligated to do so by law.
Variable and Floating Rate Instrument Risk
—
The absence of an active market for these securities could make it difficult for the Fund to dispose of them if the issuer defaults.
Volatility Arbitrage Strategies Risk
— The
success of volatility arbitrage strategies depends on the ability of BlackRock or the Sub-Advisers to accurately assess the relative value of a
security in relation to its historical trading range. However, even if BlackRock or the Sub-Advisers make an accurate assessment of a security’s
historical trading range, the security may strike a new trading range, resulting in the failure of the volatility arbitrage strategy with respect to
that security. The simultaneous failure of volatility arbitrage strategies among a number of securities may result in significant losses to the
Fund.
35
Warrants Risk
— If the price of the underlying
stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and the Fund loses any amount
it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the
same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying
stock.
When-Issued and Delayed Delivery Securities and Forward
Commitments Risk
— When-issued and delayed delivery securities and forward commitments involve the risk that the security the Fund buys
will lose value prior to its delivery. There also is the risk that the security will not be issued or that the other party to the transaction will not
meet its obligation. If this occurs, the Fund loses both the investment opportunity for the assets it set aside to pay for the security and any gain in
the security’s price.
Zero Coupon Securities Risk
— While interest
payments are not made on such securities, holders of such securities are deemed to have received income (“phantom income”) annually,
notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed
yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit
reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the
zero coupon bond, but at the same time eliminates the holder’s ability to reinvest at higher rates in the future. For this reason, some of these
securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities
that pay interest currently. Longer term zero coupon bonds are more exposed to interest rate risk than shorter term zero coupon bonds. These
investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who
are willing to defer receipt of cash.
The Fund may also be subject to certain other risks associated
with its investments and investment strategies, including:
Expense Risk
— Fund expenses are subject to a
variety of factors, including fluctuations in the Fund’s net assets. Accordingly, actual expenses may be greater or less than those indicated. For
example, to the extent that the Fund’s net assets decrease due to market declines or redemptions, the Fund’s expenses will increase as a
percentage of Fund net assets. During periods of high market volatility, these increases in the Fund’s expense ratio could be
significant.
Municipal Securities Risks
— Municipal
securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers of municipal
securities, and the possibility of future legislative changes which could affect the market for and value of municipal securities. These risks
include:
General Obligation Bonds Risks
— The full faith, credit and taxing power of the municipality that issues a general obligation bond secures payment of interest and repayment of
principal. Timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax
base.
Revenue Bonds Risks
—
Payments of interest and principal on revenue bonds are made only from the revenues generated by a particular facility, class of facilities or the
proceeds of a special tax or other revenue source. These payments depend on the money earned by the particular facility or class of facilities, or the
amount of revenues derived from another source.
Private Activity Bonds Risks
— Municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private
enterprise. The private enterprise pays the principal and interest on the bond, and the issuer does not pledge its full faith, credit and taxing power
for repayment. If the private enterprise defaults on its payments, the Fund may not receive any income or get its money back from the
investment.
Moral Obligation Bonds Risks
— Moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet
its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality.
Municipal Notes Risks
—
Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of, and are secured by, tax collection,
bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Fund may lose
money.
Municipal Lease Obligations Risks
— In a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. The issuer will generally appropriate
municipal funds for that purpose, but is not obligated to do so. Although the issuer does not pledge its unlimited taxing power for payment of the
lease obligation, the lease obligation is secured by the leased property. However, if the issuer does not fulfill its payment obligation it may be
difficult to sell the property and the proceeds of a sale may not cover the Fund’s loss.
Information About the ETFs and Mutual
Funds
The Fund may invest in any of the ETFs or mutual
funds described below. The table sets forth (i) the names of the ETFs and mutual funds, and (ii) brief descriptions of their investment
objectives and principal investment strategies. The list of ETFs and mutual funds is subject to change at the discretion of BlackRock without notice to
shareholders.
36
Prospectuses for any of these ETFs and mutual funds can be
accessed by visiting the EDGAR database on the SEC’s website (www.sec.gov).
ETFs
Fund Name
|
|
|
|
Investment Objectives and
Principal Investment Strategies
|
|
iShares iBoxx $ High Yield Corporate Bond ETF
|
|
|
|
The fund seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate
bonds.
|
|
|
|
|
|
The fund seeks to track the investment results of the Markit iBoxx
®
USD
Liquid High Yield Index (the “Underlying Index”), which is a rules-based index consisting of liquid U.S. dollar-denominated, high yield
corporate bonds for sale in the United States, as determined by the index provider. The Underlying Index is designed to provide a broad representation
of the U.S. dollar-denominated liquid high yield corporate bond market. The Underlying Index is a modified market-value weighted index with a cap on
each issuer of 3%. Bonds in the Underlying Index are selected using a rules-based criteria, as defined by the index provider. There is no limit to the
number of issues in the Underlying Index, but as of December 31, 2012, the Underlying Index included approximately 791 constituents. The Underlying
Index may include large-, mid- or small-capitalization companies, and components primarily include consumer services, financial, industrials, and oil
and gas companies.
|
|
iShares Russell 2000 ETF
|
|
|
|
The fund seeks to track the investment results of an index composed of small-capitalization U.S. equities.
|
|
|
|
|
|
The fund seeks to track the investment results of the Russell 2000
®
Index (the “Underlying Index”), which measures the performance of the small-capitalization sector of the U.S. equity market. The Underlying
Index includes issuers representing approximately 9% of the total market capitalization of all publicly-traded U.S. equity securities. The Underlying
Index is a float-adjusted capitalization-weighted index of equity securities issued by the approximately 2,000 smallest issuers in the Russell
3000
®
Index. As of March 31, 2013, the Underlying Index represented approximately $1.6 trillion of the total market
capitalization of the Russell 3000 Index.
|
|
SPDR Barclays High Yield Bond ETF
|
|
|
|
The fund seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance
of an index that tracks the U.S. high yield corporate bond market.
|
|
|
|
|
|
The fund seeks to track the performance of the Barclays High Yield Very Liquid Index (the
“Underlying Index”). The Underlying Index is designed to measure the performance of publicly issued U.S. dollar denominated high yield
corporate bonds with above-average liquidity. High yield securities are generally rated below investment grade and are commonly referred to as
“junk bonds.” The Underlying Index includes publicly issued U.S. dollar denominated, non-investment grade, fixed-rate, taxable corporate
bonds that have a remaining maturity of at least one year, regardless of optionality, are rated high-yield (Ba1/BB+/BB+ or below) using the middle
rating of Moody’s Investors Service, Inc., Fitch Inc., or Standard & Poor’s, Inc., respectively, and have $500 million or more of
outstanding face value. Only the three largest issues of each issuer with a maximum age of five years can be included in the Underlying Index. In
addition, securities must be registered or issued under Rule 144A of the Securities Act of 1933, as amended. Original issue zero coupon bonds, step-up
coupons, and coupons that change according to a predetermined schedule are also included. The Underlying Index includes only corporate sectors. The
corporate sectors are Industrial, Utility, and Financial Institutions. Excluded from the Underlying Index are non-corporate bonds, structured notes
with embedded swaps or other special features, private placements, bonds with equity-type features (e.g., warrants, convertibility), floating-rate
issues, Eurobonds, defaulted bonds, payment in kind (PIK) securities and emerging market bonds. The Underlying Index is issuer capped at two percent
and the securities in the Underlying Index are updated on the last business day of each month.
|
37
Fund Name
|
|
|
|
Investment Objectives and
Principal Investment Strategies
|
|
SPDR S&P 500 ETF Trust
|
|
|
|
The fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the
S&P 500
®
Index (the “Underlying Index”).
|
|
|
|
|
|
The Underlying Index is composed of five hundred (500) selected stocks, all of which are listed on
national stock exchanges and spans over 25 separate industry groups. As of December 31, 2012, the five largest industry groups represented in the Index
were: Information Technology 19.0%; Financials 15.6%; Health Care 12.0%; Consumer Discretionary 11.5% and Energy 11.0%. Since 1968, the Index has been
a component of the U.S. Commerce Department’s list of Leading Indicators that track key sectors of the U.S. economy.
|
|
[PowerShares QQQ Trust]
|
|
|
|
[The fund seeks to provide investment results that generally correspond to the price and yield performance of the NASDAQ-100
Index
®
(the “Underlying Index”).
|
|
|
|
|
|
The Underlying Index includes 100 of the largest domestic and international nonfinancial companies
listed on the Nasdaq Stock Market based on market capitalization.]
|
EQUITY FUNDS
|
|
|
|
|
|
BlackRock Emerging Markets Long/Short Equity Fund
|
|
|
|
The fund seeks total return over the long term.
|
|
|
|
|
|
Under normal conditions, the fund invests at least 80% of its total assets in global equity instruments and related derivative
instruments issued by, or tied economically to, companies in emerging markets. BlackRock considers an emerging market country to include any country
that is: 1) generally recognized to be an emerging market country by the international financial community, including the World Bank; 2) classified by
the United Nations as a developing country; or 3) included in the MSCI Emerging Markets Index
SM
. BlackRock determines that an investment is
tied economically to an emerging market if such investment satisfies one or more of the following conditions: 1) the issuer’s primary trading
market is in an emerging market; 2) the issuer is organized under the laws of, derives at least 50% of its revenue from, or has at least 50% of its
assets in emerging markets; 3) the investment is included in an index representative of emerging markets; and 4) the investment is exposed to the
economic risks and returns of emerging markets. The fund may invest in securities of issuers of any market capitalization and in securities denominated
in either U.S. dollars or foreign currencies.
|
|
|
|
|
|
The fund pursues its investment objective by taking both long and short positions in a variety of
global equity instruments. The fund expects to maintain long and short positions primarily through the use of swap agreements and other derivative
instruments, and may invest in such instruments without limitation. Although the fund intends to maintain an overall long position in its portfolio
investments, the fund generally expects to maintain significant short positions in equity securities and equity-related instruments. In certain
circumstances, these short positions may approach or reach the size of the overall long position. The use of both long and short positions better
enables the fund to seek to produce returns that are uncorrelated to those available by investing in the market as a whole. A long position arises
where the fund holds a security in its portfolio or maintains a position through a derivative instrument that provides economic exposure similar to
direct ownership of the security. The fund will have a short position where it sells a security it does not own by delivery of a borrowed security or
has entered into a derivative instrument that provides economic exposure similar to a short sale of the security. The fund takes long positions
primarily in securities that BlackRock has identified as attractive and short positions in such securities that BlackRock has identified as overvalued
or poised for underperformance.
|
|
BlackRock Global Long/Short Equity Fund
|
|
|
|
The fund seeks total return over the long term.
|
|
|
|
|
|
Under normal circumstances, fund invests at least 80% of its total assets in equity instruments
and related derivative instruments issued by, or tied economically to, companies located in developed markets. The fund determines that an investment
is tied economically to a developed market if such investment satisfies one or more of the following conditions: 1) the issuer’s primary trading
market is in a developed market; 2) the issuer is organized under the laws of, derives at least 50% of its revenue from, or has at least 50% of its
assets in developed markets; 3) the investment is included in an index representative of developed markets; and 4) the investment is exposed to the
economic risks and returns of developed markets. The fund may invest in securities of issuers of any market capitalization and in securities
denominated in either U.S. dollars or foreign currencies.
|
38
Fund Name
|
|
|
|
Investment Objectives and
Principal Investment Strategies
|
|
BlackRock Global Long/Short Equity Fund (continued)
|
|
|
|
The fund pursues its investment objective by taking both long and short positions in a variety of
developed market equity instruments. The fund expects to maintain long and short positions primarily through the use of swap agreements and other
derivative instruments, and may invest in such instruments without limitation. Although the fund intends to maintain an overall long position in its
portfolio investments, the fund generally expects to maintain significant short positions in equity securities and equity-related instruments. In
certain circumstances, these short positions may approach or reach the size of the overall long position. The use of both long and short positions
better enables the fund to seek to produce returns that have low correlation to those available by investing in the market as a whole. A long position
arises where the fund holds a security in its portfolio or maintains a position through a derivative instrument that provides economic exposure similar
to direct ownership of the security. The fund will have a short position where it sells a security it does not own by delivery of a borrowed security
or has entered into a derivative instrument that provides economic exposure similar to a short sale of the security. The fund looks to identify
overvalued, undervalued or mispriced stocks and other equity instruments through proprietary ranking techniques. The fund takes long positions
primarily in securities that BlackRock has identified as attractive and short positions in such securities that BlackRock has identified as overvalued
or poised for underperformance.
|
FIXED INCOME FUNDS
|
|
|
|
|
|
BlackRock Global Long/Short Credit Fund
|
|
|
|
The fund seeks absolute total returns over a complete market cycle.
|
|
|
|
|
|
The fund seeks to provide absolute total returns over a complete market cycle through diversified long and short exposure to the
global fixed income markets. A complete market cycle for fixed income funds such as the fund is typically three to five years.
|
|
|
|
|
|
Under normal circumstances, the fund invests at least 80% of its total assets in credit-related
instruments, including, but not limited to, U.S. Government and agency securities, foreign government and supranational debt securities, corporate
bonds, including bonds of companies principally engaged in the aircraft or air transportation industries, mortgage-related securities and asset-backed
securities, collateralized debt and loan obligations, including bonds collateralized by aircraft and/or aircraft equipment, emerging market debt
securities, preferred securities, structured products, mezzanine securities, senior secured floating rate and fixed rate loans or debt, second lien or
other subordinated or unsecured floating rate and fixed rate loans or debt, convertible debt securities, and derivatives with similar economic
characteristics. The fund may invest in fixed, variable and floating rate instruments, including participations and assignments, of any duration or
maturity.
|
MONEY MARKET FUND
|
|
|
|
|
|
TempFund
|
|
|
|
The investment objective of the fund is to seek as high a level of current income as is
consistent with liquidity and stability of principal. The fund invests in a broad range of U.S. dollar-denominated money market instruments, including
government, U.S. and foreign bank, commercial obligations and repurchase agreements. The fund invests in a portfolio of securities maturing in 397 days
or less (with certain exceptions) that will have a dollar-weighted average maturity of 60 days or less. The fund may also invest in mortgage- and
asset-backed securities, short-term obligations issued by or on behalf of states, territories and possessions of the United States, the District of
Columbia, and their respective authorities, agencies, instrumentalities and political subdivisions and derivative securities such as beneficial
interests in municipal trust certificates and partnership trusts, variable and floating rate instruments and when-issued and delayed delivery
securities. The fund seeks to maintain a net asset value of $1.00 per share. The securities purchased by the fund are subject to the quality,
diversification and other requirements of Rule 2a-7 under the Investment Company Act, and other rules of the SEC.
|
39
Account Information
How to Choose the Share Class
that Best Suits Your Needs
The Fund currently offers multiple share classes (Investor A,
Investor C and Institutional Shares in this prospectus), each with its own sales charge and expense structure, allowing you to invest in the way that
best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose
your class of shares, you should consider the size of your investment and how long you plan to hold your shares. Either your financial
professional or your selected securities dealer, broker, investment adviser, service provider or industry professional (including BlackRock, The PNC
Financial Services Group, Inc. (“PNC”) and their respective affiliates) (each a “Financial Intermediary”) can help you determine
which share class is best suited to your personal financial goals. Investor A Shares and Investor C Shares are sometimes referred herein
collectively as “Investor Shares.”
For example, if you select Institutional Shares, you will not pay
any sales charge. However, only certain investors may buy Institutional Shares. If you select Investor A Shares, you generally pay a sales charge at
the time of purchase and an ongoing service fee of 0.25% per year. You may be eligible for a sales charge reduction or waiver.
If you select Investor C Shares, you will invest the full amount
of your purchase price, but you will be subject to a distribution fee of 0.75% per year and a service fee of 0.25%
per year under plans adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the “Investment Company Act”).
Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost
you more than paying other types of sales charges. In addition, you may be subject to a deferred sales charge when you sell Investor C Shares within
one year. Classes with lower expenses will have higher net asset values and dividends relative to other share classes.
The Fund’s shares are distributed by BlackRock Investments,
LLC (the “Distributor”), an affiliate of BlackRock.
40
The table below summarizes key features of each of the share
classes of the Fund.
Share Classes at a Glance
1
|
|
|
|
Investor A Shares
|
|
Investor C Shares
2,3
|
|
Institutional Shares
|
|
Availability
|
|
|
|
Generally available through Financial Intermediaries.
|
|
Generally available through Financial Intermediaries.
|
|
Limited to certain investors, including:
·
Current Institutional shareholders that meet certain requirements.
· Certain
employer-sponsored retirement plans.
· Participants in certain programs sponsored by
BlackRock or its affiliates or other Financial Intermediaries.
· Certain employees
of BlackRock or its affiliates.
|
|
Minimum Investment
|
|
|
|
$1,000 for all accounts except:
· $250 for
certain fee-based programs.
· $100 for certain employer-sponsored retirement
plans.
· $50, if establishing an Automatic Investment Plan
(“AIP”).
|
|
$1,000 for all accounts except:
· $250 for
certain fee-based programs.
· $100 for certain employer-sponsored retirement
plans.
· $50, if establishing an AIP.
|
|
$2 million for institutions and individuals.
Institutional Shares are available to clients of registered
investment advisors who have $250,000 invested in the Fund.
|
|
Initial Sales Charge?
|
|
|
|
Yes. Payable at time of purchase. Lower sales charges are available for larger
investments.
|
|
No. Entire purchase price is invested in shares of the Fund.
|
|
No. Entire purchase price is invested in shares of the Fund.
|
|
Deferred Sales Charge?
|
|
|
|
No. (May be charged for purchases of $1 million or more that are redeemed within
18 months.)
|
|
Yes. Payable if you redeem within one year of purchase.
|
|
No.
|
|
Distribution and Service
(12b-1) Fees?
|
|
|
|
No Distribution Fee.
0.25% Annual Service Fee.
|
|
0.75% Annual Distribution Fee. 0.25% Annual Service Fee.
|
|
No.
|
|
Redemption Fees?
|
|
|
|
No.
|
|
No.
|
|
No.
|
|
Conversion to Investor A Shares?
|
|
|
|
N/A
|
|
No.
|
|
No.
|
|
Advantage
|
|
|
|
Makes sense for investors who are eligible to have the sales charge reduced or eliminated or who have a
long-term investment horizon because there are no ongoing distribution fees.
|
|
No up-front sales charge so you start off owning more shares. These shares may make sense for investors who
have a shorter investment horizon relative to Investor A Shares.
|
|
No up-front sales charge so you start off owning more shares. No distribution or service
fee.
|
|
Disadvantage
|
|
|
|
You pay a sales charge up-front, and therefore you start off owning fewer shares.
|
|
You pay ongoing distribution fees each year you own Investor C Shares, which means that over
the long term you can expect higher total fees per share than Investor A Shares and, as a result, lower total performance.
|
|
Limited availability.
|
|
1
|
|
Please see “Details About the Share
Classes” for more information about each share class.
|
|
2
|
|
If you establish a new account directly with the
Fund and do not have a Financial Intermediary associated with your account, you may only invest in Investor A Shares.
Applications without a Financial Intermediary that select Investor C Shares will not be accepted.
|
|
3
|
|
The Fund will not accept a purchase order of
$500,000 or more for Investor C Shares. Your Financial Intermediary may set a lower maximum for Investor C
Shares.
|
41
The following pages will cover the additional details of each
share class, including the Institutional Shares requirements, the sales charge table for Investor A Shares, reduced sales charge information, Investor
B and Investor C Share CDSC information, and sales charge waivers.
More information about existing sales charge reductions and
waivers is available free of charge in a clear and prominent format via hyperlink at www.blackrock.com and in the SAI, which is available on the
website or on request.
Details About the Share
Classes
Investor A Shares — Initial Sales Charge
Option
The following table shows the front-end sales charges that you may
pay if you buy Investor A Shares. The offering price for Investor A Shares includes any front-end sales charge. The front-end sales charge expressed as
a percentage of the offering price may be higher or lower than the charge described below due to rounding. Similarly, any contingent deferred sales
charge paid upon certain redemptions of Investor A Shares expressed as a percentage of the applicable redemption amount may be higher or lower than the
charge described below due to rounding. You may qualify for a reduced front-end sales charge. Purchases of Investor A Shares at certain fixed dollar
levels, known as “breakpoints,” cause a reduction in the front-end sales charge. Once you achieve a breakpoint, you pay that sales charge on
your entire purchase amount (and not just the portion above the breakpoint). If you select Investor A Shares, you will pay a sales charge at the time
of purchase as shown in the following table.
Your Investment
|
|
|
|
Sales Charge
as a % of
Offering Price
|
|
Sales Charge
as a % of Your
Investment
1
|
|
Dealer
Compensation as a % of
Offering Price
|
|
Less than $25,000
|
|
|
|
5.25%
|
|
5.54%
|
|
5.00%
|
|
$25,000 but less than $50,000
|
|
|
|
4.75%
|
|
4.99%
|
|
4.50%
|
|
$50,000 but less than $100,000
|
|
|
|
4.00%
|
|
4.17%
|
|
3.75%
|
|
$100,000 but less than $250,000
|
|
|
|
3.00%
|
|
3.09%
|
|
2.75%
|
|
$250,000 but less than $500,000
|
|
|
|
2.50%
|
|
2.56%
|
|
2.25%
|
|
$500,000 but less than $750,000
|
|
|
|
2.00%
|
|
2.04%
|
|
1.75%
|
|
$750,000 but less than $1,000,000
|
|
|
|
1.50%
|
|
1.52%
|
|
1.25%
|
|
$1,000,000 and over
2
|
|
|
|
0.00%
|
|
0.00%
|
|
—
2
|
|
1
|
|
Rounded to the nearest one-hundredth
percent.
|
|
2
|
|
If you invest $1,000,000 or more in
Investor A Shares, you will not pay an initial sales charge. In that case, BlackRock compensates the Financial Intermediary
from its own resources. However, if you redeem your shares within 18 months after purchase, you may be charged a deferred sales charge of
1.00% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. Such deferred sales charge may be
waived in connection with certain fee-based programs.
|
No initial sales charge applies to Investor A Shares that you buy
through reinvestment of Fund dividends or capital gains.
Sales Charges Reduced or Eliminated for Investor A
Shares
There are several ways in which the sales charge can be reduced or
eliminated. Purchases of Investor A Shares at certain fixed dollar levels, known as “breakpoints,” cause a reduction in the front-end sales
charge (as described above in the “Investor A Shares — Initial Sales Charge Option” section). Additionally, the front-end sales charge
can be reduced or eliminated through one or a combination of the following: a Letter of Intent, the right of accumulation, the reinstatement privilege
(described under “Account Services and Privileges”), or a waiver of the sales charge
(described below).
Reductions or eliminations through a Letter of Intent or the
right of accumulation will apply to the value of all qualifying holdings in shares of mutual funds sponsored and advised by BlackRock or its
affiliates (“BlackRock Funds”) owned by (a) the investor, or (b) the investor’s spouse and any children and a trust, custodial account
or fiduciary account for the benefit of any such individuals. For this purpose, the value of an investor’s holdings means the offering price of
the newly purchased shares (including any applicable sales charge) plus the current value (including any sales charges paid) of all other shares the
investor already holds taken together.
|
Qualifying Holdings
|
|
Investor Shares, Institutional Shares (in most BlackRock Funds)
and investments in the BlackRock CollegeAdvantage 529 Program
|
Qualifying Holdings may include shares held in accounts held at a
Financial Intermediary, including personal accounts, certain retirement accounts, UGMA/UTMA accounts, Joint Tenancy accounts, trust accounts and
Transfer on Death accounts, as well as shares purchased by a trust of which the investor is a beneficiary. For purposes of the Letter
of
42
Intent and right of accumulation, the investor may not combine
with the investor’s other holdings shares held in pension, profit sharing or other employer-sponsored retirement plans if those shares are held in
the name of a nominee or custodian.
In order to receive a reduced sales charge, at the time an
investor purchases shares of the Fund, the investor should inform the Financial Intermediary and/or BlackRock Funds of any other shares of the Fund or
any other BlackRock Fund that qualify for a reduced sales charge. Failure by the investor to notify the Financial Intermediary or BlackRock Funds may
result in the investor not receiving the sales charge reduction to which the investor is otherwise entitled.
The Financial Intermediary or BlackRock Funds may request
documentation — including account statements and records of the original cost of the shares owned by the investor, the investor’s spouse
and/or children showing that the investor qualifies for a reduced sales charge. The investor should retain these records because — depending on
where an account is held or the type of account — the Fund and/or the Financial Intermediary or BlackRock Funds may not be able to maintain this
information.
For more information, see the SAI or contact your Financial
Intermediary.
Letter of Intent
An investor may qualify for a reduced front-end sales charge
immediately by signing a “Letter of Intent” stating the investor’s intention to buy a specified amount of Investor A, Investor C or
Institutional Shares and/or make an investment through the BlackRock CollegeAdvantage 529 Program in one or more BlackRock Funds within the next 13
months that would, if bought all at once, qualify the investor for a reduced sales charge. The initial investment must meet the minimum initial
purchase requirement. The 13-month Letter of Intent period commences on the day that the Letter of Intent is received by the Fund, and the investor
must tell the Fund that later purchases are subject to the Letter of Intent. Purchases submitted prior to the date the Letter of Intent is received by
the Fund are not counted toward the sales charge reduction. During the term of the Letter of Intent, the Fund will hold Investor A Shares representing
up to 5% of the indicated amount in an escrow account for payment of a higher sales load if the full amount indicated in the Letter of Intent is not
purchased. If the full amount indicated is not purchased within the 13-month period, and the investor does not pay the higher sales load within 20
days, the Fund will redeem enough of the Investor A Shares held in escrow to pay the difference.
Right of Accumulation
Investors have a “right of accumulation” under which the
current value of an investor’s existing Investor A and A1, Investor B, B1 and B3, Investor C, C1, C2 and C3, and
Institutional Shares in most BlackRock Funds and the investment in the BlackRock CollegeAdvantage 529 Program by the investor or by or on
behalf of the investor’s spouse and children may be combined with the amount of the current purchase in determining whether an investor qualifies
for a breakpoint and a reduced front-end sales charge. Financial Intermediaries may value current holdings of their customers differently for purposes
of determining whether an investor qualifies for a breakpoint and a reduced front-end sales charge, although customers of the same Financial
Intermediary will be treated similarly. In order to use this right, the investor must alert BlackRock to the existence of any previously purchased
shares.
Other Front-End Sales Charge Waivers
The following persons may also buy Investor A Shares without
paying a sales charge:
|
n
|
|
Certain employer-sponsored retirement plans. For purposes of this
waiver, employer-sponsored retirement plans do not include SEP IRAs, SIMPLE IRAs or SARSEPs;
|
|
n
|
|
Rollovers of current investments through certain
employer-sponsored retirement plans provided the shares are transferred to the same BlackRock Fund as either a direct rollover, or subsequent to
distribution, the rolled-over proceeds are contributed to a BlackRock IRA through an account directly with the Fund; or purchases by IRA programs that
are sponsored by Financial Intermediary firms provided the Financial Intermediary firm has entered into a Class A Net Asset Value agreement with
respect to such program with the Distributor;
|
|
n
|
|
Insurance company separate accounts;
|
|
n
|
|
Registered investment advisers, trust companies and bank trust
departments exercising discretionary investment authority with respect to amounts to be invested in the Fund;
|
|
n
|
|
Persons participating in a fee-based program (such as a wrap
account) under which they pay advisory fees to a broker-dealer or other financial institution;
|
|
n
|
|
Financial Intermediaries who have entered into an agreement with
the Distributor and have been approved by the Distributor to offer Fund shares to self-directed investment brokerage accounts that may or may not
charge a transaction fee;
|
43
|
n
|
|
Persons associated with the Fund, the Fund’s manager, the
Fund’s sub-adviser, transfer agent, Distributor, fund accounting agents, Barclays PLC (“Barclays”) and their respective affiliates (to
the extent permitted by these firms) including: (a) officers, directors and partners; (b) employees and retirees; (c) employees of firms who have
entered into selling agreements to distribute shares of BlackRock Funds; (d) immediate family members of such persons; and (e) any trust,
pension, profit-sharing or other benefit plan for any of the persons set forth in (a) through (d); and
|
|
n
|
|
State sponsored 529 college savings plans.
|
The availability of Investor A Shares sales charge waivers may
depend on the policies, procedures and trading platforms of your Financial Intermediary; consult your financial
adviser.
Investor A Shares at Net Asset Value
If you invest $1,000,000 or more in Investor A
Shares, you will not pay any initial sales charge. However, if you redeem your Investor A Shares within 18 months after purchase, you may
be charged a deferred sales charge of 1.00% of the lesser of the original cost of the shares being redeemed or your redemption proceeds.
For a discussion on waivers, see “Contingent Deferred Sales Charge Waivers.”
If you are eligible to buy both Investor A and Institutional
Shares, you should buy Institutional Shares since Investor A Shares are subject to a front end sales charge and an annual 0.25% service fee, while
Institutional Shares are not. The Distributor normally pays the annual Investor A Shares service fee to dealers as a shareholder servicing fee on a
monthly basis.
Investor C Shares — Deferred Sales Charge
Option
If you select Investor C Shares, you do not pay an initial sales
charge at the time of purchase. However, if you redeem your Investor C Shares within one year after purchase, you may be required to pay a deferred
sales charge of 1.00%. The charge will apply to the lesser of the original cost of shares being redeemed or the proceeds of your redemption. When you
redeem Investor C Shares, the redemption order is processed so that the lowest deferred sales charge is charged. Investor C Shares that are not subject
to the deferred sales charge are redeemed first. In addition, you will not be charged a deferred sales charge when you redeem shares that you acquire
through reinvestment of Fund dividends or capital gains. Any CDSC paid on the redemptions of Investor C Shares expressed as a percentage of the
applicable redemption amount may be higher or lower than the charge described due to rounding.
Investor C Shares do not offer a conversion
privilege.
You will also pay distribution fees of 0.75% and service fees
of 0.25% for Investor C Shares each year. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other types of sales charges. The Distributor uses the money that
it receives from the deferred sales charges and the distribution fees to cover the costs of marketing, advertising and compensating the
Financial Intermediary who assists you in purchasing Fund shares.
The Distributor currently pays dealers a sales concession of 1.00%
of the purchase price of Investor C Shares from its own resources at the time of sale. The Distributor pays the annual Investor C Shares distribution
fee and the annual Investor C Shares service fee as an ongoing concession and as a shareholder servicing fee, respectively, to dealers for Investor C
Shares held for over a year and normally retains the Investor C Shares distribution fee and service fee during the first year after purchase. For
certain employer-sponsored retirement plans, the Distributor will pay the full Investor C Shares distribution fee and service fee to dealers beginning
in the first year after purchase in lieu of paying the sales concession. This may depend on the policies, procedures and trading platforms of your
Financial Intermediary; consult your financial adviser.
Contingent Deferred Sales Charge Waivers
The deferred sales charge relating to Investor A and Investor C
Shares may be reduced or waived in certain circumstances, such as:
|
n
|
|
Redemptions of shares purchased through certain employer-sponsored
retirement plans and rollovers of current investments in the Fund through such plans;
|
|
n
|
|
Exchanges pursuant to the exchange privilege, as described in
“How to Buy, Sell, Exchange and Transfer Shares — How to Exchange Shares or Transfer Your Account”;
|
|
n
|
|
Redemptions made in connection with minimum
required distributions from IRA or 403(b)(7) accounts due to the shareholder reaching the age of 70
1
⁄
2
;
|
|
n
|
|
Certain post-retirement withdrawals from
an IRA or other retirement plan if you are over 59
1
⁄
2
years old and you purchased your shares prior to October 2,
2006;
|
|
n
|
|
Redemptions made with respect to certain retirement plans
sponsored by the Fund, BlackRock or an affiliate;
|
44
|
n
|
|
Redemptions resulting from shareholder death as long as the waiver
request is made within one year of death or, if later, reasonably promptly following completion of probate (including in connection with the
distribution of account assets to a beneficiary of the decedent);
|
|
n
|
|
Withdrawals resulting from shareholder disability (as defined in
the Internal Revenue Code) as long as the disability arose subsequent to the purchase of the shares;
|
|
n
|
|
Involuntary redemptions made of shares in accounts with low
balances;
|
|
n
|
|
Certain redemptions made through the Systematic Withdrawal Plan
offered by the Fund, BlackRock or an affiliate;
|
|
n
|
|
Redemptions related to the payment of BNY Mellon Investment
Servicing Trust Company custodial IRA fees; and
|
|
n
|
|
Redemptions when a shareholder can demonstrate hardship, in the
absolute discretion of the Fund.
|
More information about existing sales charge reductions and
waivers is available free of charge in a clear and prominent format via hyperlink at www.blackrock.com and in the SAI, which is available on the
website or on request.
Institutional Shares
Institutional Shares are not subject to any sales charge. Only
certain investors are eligible to buy Institutional Shares. Your Financial Intermediary can help you determine whether you are eligible to buy
Institutional Shares. The Fund may permit a lower initial investment for certain investors if their purchase, combined with purchases by other
investors received together by the Fund, meets the minimum investment requirement.
Eligible Institutional investors include the
following:
|
n
|
|
Investors who currently own Institutional Shares of the Fund may
make additional purchases of Institutional Shares of the Fund directly from the Fund;
|
|
n
|
|
Institutional and individual retail investors with a minimum
investment of $2 million who purchase directly from
the Fund;
|
|
n
|
|
Certain employer-sponsored retirement plans. For this purpose,
employer-sponsored retirement plans do not include SEP IRAs, SIMPLE IRAs or SARSEPs;
|
|
n
|
|
Investors in selected fee-based programs;
|
|
n
|
|
Clients of registered investment advisers who have $250,000
invested in the Fund;
|
|
n
|
|
Trust department clients of PNC Bank and Bank of America, N.A. and
their affiliates for whom they (i) act in a fiduciary capacity (excluding participant directed employee benefit plans); (ii) otherwise have investment
discretion; or (iii) act as custodian for at least $2 million in assets;
|
|
n
|
|
Unaffiliated banks, thrifts or trust companies that have
agreements with the Distributor;
|
|
n
|
|
Holders of certain Bank of America Corporation
(“BofA Corp.”) sponsored unit investment trusts (“UITs”) who reinvest dividends received from such UITs in shares of the Fund;
and
|
|
n
|
|
Employees, officers and directors/trustees of BlackRock, Inc.,
BlackRock Funds, BofA Corp., PNC, Barclays or their respective affiliates.
|
Distribution and Service
Payments
The Fund has adopted plans (the “Plans”) under Rule
12b-1 of the Investment Company Act that allow the Fund to pay distribution fees for the sale of its shares and shareholder servicing fees
for certain services provided to its shareholders.
Plan Payments
Under the Plans, Investor C Shares pay a distribution fee to the
Distributor, and/or its affiliates including PNC and its affiliates, for distribution and sales support services. The distribution fees may be used to
pay the Distributor for distribution services and to pay the Distributor and affiliates of BlackRock and PNC for sales support services provided in
connection with the sale of Investor C Shares. The distribution fees may also be used to pay Financial Intermediaries for sales support
services and related expenses. All Investor C Shares pay a maximum distribution fee per year that is a percentage of the average daily net asset value
of the Fund attributable to Investor C Shares. Institutional and Investor A Shares do not pay a distribution fee.
Under the Plans, the Fund also pays shareholder servicing fees
(also referred to as shareholder liaison services fees) to Financial Intermediaries for providing support services to their customers who own Investor
A and Investor C Shares of the Fund. The shareholder servicing fee payment is calculated as a percentage of the average daily net asset value of
Investor A and Investor C Shares of the Fund. All Investor A and Investor C Shares pay this shareholder servicing fee. Institutional Shares do not pay
a shareholder servicing fee.
45
In return for the shareholder servicing fee, Financial
Intermediaries (including BlackRock) may provide one or more of the following services to their customers who own Investor A and Investor C
Shares:
|
n
|
|
Responding to customer questions on the services performed by the
Financial Intermediary and investments in Investor A and Investor C Shares;
|
|
n
|
|
Assisting customers in choosing and changing dividend options,
account designations and addresses; and
|
|
n
|
|
Providing other similar shareholder liaison services.
|
The shareholder servicing fees payable pursuant to the Plans are
paid to compensate Financial Intermediaries for the administration and servicing of shareholder accounts and are not costs which are primarily intended
to result in the sale of the Fund’s shares. Because the fees paid by the Fund under the Plans are paid out of Fund assets on an ongoing basis,
over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. In addition, the
distribution fees paid by Investor C Shares may over time cost investors more than the front-end sales charge on Investor A Shares. For more
information on the Plans, including a complete list of services provided thereunder, see the SAI.
Other Payments by the Fund
In addition to, rather than in lieu of, distribution and
shareholder servicing fees that the Fund may pay to a Financial Intermediary pursuant to the Plans and fees the Fund pays to its transfer agent, BNY
Mellon Investment Servicing (US) Inc. (the “Transfer Agent”), BlackRock, on behalf of the Fund, may enter into non-Plan agreements with a
Financial Intermediary pursuant to which the Fund will pay a Financial Intermediary for administrative, networking, recordkeeping, sub-transfer agency
and shareholder services. These non-Plan payments are generally based on either (1) a percentage of the average daily net assets of Fund shareholders
serviced by a Financial Intermediary or (2) a fixed dollar amount for each account serviced by a Financial Intermediary. The aggregate amount of these
payments may be substantial.
Other Payments by BlackRock
The Plans permit BlackRock, the Distributor and their affiliates
to make payments relating to distribution and sales support activities out of their past profits or other sources available to them (and not as an
additional charge to the Fund). From time to time, BlackRock, the Distributor or their affiliates also may pay a portion of the fees for
administrative, networking, recordkeeping, sub-transfer agency and shareholder services described above at its or their own expense and out of its or
their profits. BlackRock, the Distributor and their affiliates may compensate affiliated and unaffiliated Financial Intermediaries for the sale and
distribution of shares of the Fund or for these other services to the Fund and shareholders. These payments would be in addition to the Fund payments
described in this prospectus and may be a fixed dollar amount, may be based on the number of customer accounts maintained by the Financial
Intermediary, or may be based on a percentage of the value of shares sold to, or held by, customers of the Financial Intermediary. The aggregate amount
of these payments by BlackRock, the Distributor and their affiliates may be substantial. Payments by BlackRock may include amounts that are sometimes
referred to as “revenue sharing” payments. In some circumstances, these revenue sharing payments may create an incentive for a Financial
Intermediary, its employees or associated persons to recommend or sell shares of the Fund to you. Please contact your Financial Intermediary for
details about payments it may receive from the Fund or from BlackRock, the Distributor or their affiliates. For more information, see the
SAI.
How to Buy, Sell, Exchange and
Transfer Shares
The chart on the following pages summarizes how to buy, sell,
exchange and transfer shares through your Financial Intermediary. You may also buy, sell, exchange and transfer shares through BlackRock, if your
account is held directly with BlackRock. To learn more about buying, selling, exchanging or transferring shares through
BlackRock, call (800) 441-7762. Because the selection of a mutual fund involves many considerations, your Financial Intermediary may help you with this
decision.
The Fund may reject any purchase order, modify or waive the
minimum initial or subsequent investment requirements for any shareholders and suspend and resume the sale of any share class of the Fund at any time
for any reason.
In addition, the Fund may waive certain requirements regarding the
purchase, sale, exchange or transfer of shares described below.
Under certain circumstances, if no activity occurs in an account
within a time period specified by state law, a shareholder’s shares in the Fund may be transferred to that state.
46
How to Buy Shares
|
|
|
|
Your Choices
|
|
|
|
Important Information for You
to Know
|
|
Initial Purchase
|
|
|
|
First, select the share class appropriate for you
|
|
|
|
Refer to the “Share Classes at a Glance” table in this prospectus (be sure to read this prospectus carefully). When you
place your initial order, you must indicate which share class you select (if you do not specify a share class and do not qualify to purchase
Institutional Shares, you will receive Investor A Shares).
|
|
|
|
|
|
|
|
|
|
Certain factors, such as the amount of your investment, your time frame for investing, and your financial goals, may affect which
share class you choose. Your Financial Intermediary can help you determine which share class is appropriate for you.
|
|
|
|
|
|
|
|
|
|
Class R Shares are available only to certain employer-sponsored retirement
plans.
|
|
|
|
|
|
Next, determine the amount of your investment
|
|
|
|
• Refer to the minimum initial investment in the “Share Classes at a Glance” table of this prospectus. Be sure to note
the maximum investment amounts in Investor C Shares.
|
|
|
|
|
|
|
|
|
|
• See “Account Information — Details About the Share Classes” for information
on a lower initial investment requirement for certain Fund investors if their purchase, combined with purchases by other investors received together by
the Fund, meets the minimum investment requirement.
|
|
|
|
|
|
Have your Financial Intermediary submit your purchase order
|
|
|
|
The price of your shares is based on the next calculation of the Fund’s net asset value after your order is placed. Any purchase
orders placed prior to the close of business on the New York Stock Exchange (the “NYSE”) (generally 4:00 p.m. Eastern time) will be priced at
the net asset value determined that day. Certain Financial Intermediaries, however, may require submission of orders prior to that time. Purchase
orders placed after that time will be priced at the net asset value determined on the next business day.
|
|
|
|
|
|
|
|
|
|
A broker-dealer or financial institution maintaining the account in which you hold shares may charge a separate account, service or
transaction fee on the purchase or sale of Fund shares that would be in addition to the fees and expenses shown in the Fund’s “Fees and
Expenses” table.
|
|
|
|
|
|
|
|
|
|
The Fund may reject any order to buy shares and may suspend the sale of shares at any time. Other
Financial Intermediaries may charge a processing fee to confirm a purchase.
|
|
|
|
|
|
Or contact BlackRock (for accounts held directly with BlackRock)
|
|
|
|
To purchase shares directly from BlackRock, call (800) 441-7762 and request a new account
application. Mail the completed application along with a check payable to “BlackRock Funds” to the Transfer Agent at the address on the
application.
|
|
Add to Your Investment
|
|
|
|
Purchase additional shares
|
|
|
|
For Investor A and Investor C Shares, the minimum investment for additional purchases is generally
$50 for all accounts (with the exception of certain employer-sponsored retirement plans which may have a lower minimum for additional purchases). (The
minimums for additional purchases may be waived under certain circumstances.) Institutional Shares have no minimum for additional
purchases.
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Have your Financial Intermediary submit your purchase order for additional
shares
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To purchase additional shares you may contact your Financial Intermediary. For more details on
purchasing by Internet see below.
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Or contact BlackRock (for accounts held directly with BlackRock)
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Purchase by Telephone:
Call (800) 441-7762 and speak with one of our representatives. The Fund has the right to reject any
telephone request for any reason.
Purchase in Writing:
You may send a written request to BlackRock at the address on the back cover of this
prospectus.
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Purchase by VRU:
Investor Shares may also be purchased by use of the Fund’s automated
voice response unit service (“VRU”) at (800) 441-7762.
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47
How to Buy Shares (continued)
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Your Choices
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Important Information for You
to Know
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Add to Your Investment
(continued)
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Or contact BlackRock (for accounts held directly with BlackRock) (continued)
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Purchase by Internet:
You may purchase your shares and view activity in your account by logging onto the BlackRock website at
www.blackrock.com/funds. Purchases made on the Internet using the Automated Clearing House (“ACH”) will have a trade date that is the day
after the purchase is made.
Certain institutional clients’ purchase orders of Institutional Shares placed by wire prior to the close of business on the NYSE
will be priced at the net asset value determined that day. Contact your Financial Intermediary or BlackRock for further information. The Fund limits
Internet purchases in shares of the Fund to $25,000 per trade. Different maximums may apply to certain institutional investors.
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Please read the On-Line Services Disclosure Statement and User Agreement, the Terms and Conditions page and the Consent to Electronic
Delivery Agreement (if you consent to electronic delivery), before attempting to transact online.
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The Fund employs reasonable procedures to confirm that transactions entered over the Internet are
genuine. By entering into the User Agreement with the Fund in order to open an account through the website, the shareholder waives any right to reclaim
any losses from the Fund or any of its affiliates incurred through fraudulent activity.
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Acquire additional shares by reinvesting dividends and capital gains
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All dividends and capital gains distributions are automatically reinvested without a sales charge.
To make any changes to your dividend and/or capital gains distributions options, please call (800) 441-7762 or contact your Financial Intermediary (if
your account is not held directly with BlackRock).
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Participate in the Automatic Investment Plan (“AIP”)
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BlackRock’s AIP allows you to invest a specific amount on a periodic basis from your checking or savings account into your
investment account.
Refer to the “Account Services and Privileges” section of this prospectus for additional
information.
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How to Pay for Shares
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Making payment for purchases
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Payment for an order must be made in Federal funds or other immediately available funds by the time specified by your Financial
Intermediary, but in no event later than 4:00 p.m. (Eastern time) on the third business day (in the case of Investor Shares) or first business day (in
the case of Institutional Shares) following BlackRock’s receipt of the order. If payment is not received by this time, the order will be canceled
and you and your Financial Intermediary will be responsible for any loss to the Fund.
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For shares purchased directly from the Fund, a check payable to BlackRock Funds which bears the
name of the Fund must accompany a completed purchase application. There is a $20 fee for each purchase check that is returned due to insufficient
funds. The Fund does not accept third-party checks. You may also wire Federal funds to the Fund to purchase shares, but you must call (800) 441-7762
before doing so to confirm the wiring instructions.
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48
How to Sell Shares
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Your Choices
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Important Information for
You to Know
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Full or Partial Redemption of Shares
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Have your Financial Intermediary submit your sales order
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You can make redemption requests through your Financial Intermediary. Shareholders should indicate whether they are redeeming
Investor A, Investor C or Institutional Shares. The price of your shares is based on the next calculation of the
Fund’s net asset value after your order is placed. For your redemption request to be priced at the net asset value on the day of your request, you
must submit your request to your Financial Intermediary prior to that day’s close of business on the NYSE (generally 4:00 p.m. Eastern time).
Certain Financial Intermediaries, however, may require submission of orders prior to that time. Any redemption request placed after that time will be
priced at the net asset value at the close of business on the next business day.
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Financial Intermediaries may charge a fee to process a redemption of shares.
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The Fund may reject an order to sell shares under certain circumstances.
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Selling shares held directly with BlackRock
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Methods of Redeeming
Redeem by Telephone:
You may redeem Investor Shares held directly
with BlackRock by telephone request if certain conditions are met and if the amount being sold is less than (i) $100,000 for payments by check or
(ii) $250,000 for payments through ACH or wire transfer. Certain redemption requests, such as those in excess of these amounts, must be in writing with
a medallion signature guarantee. For Institutional Shares, certain redemption requests may require written instructions with a medallion signature
guarantee. Call (800) 441-7762 for details.
You can obtain a medallion signature guarantee stamp from a bank, securities dealer, securities broker,
credit union, savings and loan association, national securities exchange or registered securities association. A notary public seal will not be
acceptable.
The Fund, its administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such procedures. The Fund may refuse a telephone redemption request if it
believes it is advisable to do so.
During periods of substantial economic or market change, telephone redemptions may be difficult to complete.
Please find alternative redemption methods below.
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Redeem by VRU:
Investor Shares may also be redeemed by use of the Fund’s automated VRU. Payment for Investor
Shares redeemed by VRU may be made for non-retirement accounts in amounts up to $25,000, either through check, ACH or wire.
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Redeem by Internet:
You may redeem in your account, by logging onto the BlackRock website at www.blackrock.com/funds. Proceeds
from Internet redemptions may be sent via check, ACH or wire to the bank account of record. Payment for Investor Shares redeemed by Internet may be
made for non-retirement accounts in amounts up to $25,000, either through check, ACH or wire. Different maximums may apply to investors in
Institutional Shares.
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Redeem in Writing:
You may sell shares held at BlackRock by writing to BlackRock, P.O. Box
9819, Providence, Rhode Island 02940-8019 or for overnight delivery, 4400 Computer Drive, Westborough, Massachusetts 01588. All shareholders on the
account must sign the letter. A medallion signature guarantee will generally be required but may be waived in certain limited circumstances. You can
obtain a medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and loan association, national
securities exchange or registered securities association. A notary public seal will not be acceptable. If you hold stock certificates, return the
certificates with the letter. Proceeds from redemptions may be sent via check, ACH or wire to the bank account of record.
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49
How to Sell Shares (continued)
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Your Choices
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|
|
Important Information for
You to Know
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Full or Partial Redemption of Shares (continued)
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Selling shares held directly with BlackRock (continued)
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Payment of Redemption Proceeds:
Redemption proceeds may be paid by check or, if the Fund has verified banking information on
file, through ACH or by wire transfer.
Payment by Check:
BlackRock will normally mail redemption proceeds within seven days following receipt of a properly completed
request. Shares can be redeemed by telephone and the proceeds sent by check to the shareholder at the address on record. Shareholders will pay $15 for
redemption proceeds sent by check via overnight mail. You are responsible for any additional charges imposed by your bank for this
service.
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Payment by Wire Transfer:
Payment for redeemed shares for which a redemption order is received before 4:00 p.m. (Eastern time)
on a business day is normally made in Federal funds wired to the redeeming shareholder on the next business day, provided that the Fund’s
custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern time) or on a day when the Fund’s custodian
is closed is normally wired in Federal funds on the next business day following redemption on which the Fund’s custodian is open for business. The
Fund reserves the right to wire redemption proceeds within seven days after receiving a redemption order if, in the judgment of the Fund, an earlier
payment could adversely affect the Fund.
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If a shareholder has given authorization for expedited redemption, shares can be redeemed by Federal wire transfer to a single
previously designated bank account. Shareholders will pay $7.50 for redemption proceeds sent by Federal wire transfer. You are responsible for any
additional charges imposed by your bank for this service. No charge for wiring redemption payments with respect to Institutional Shares is imposed by
the Fund.
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The Fund is not responsible for the efficiency of the Federal wire system or the shareholder’s firm or bank. To change the name
of the single, designated bank account to receive wire redemption proceeds, it is necessary to send a written request to the Fund at the address on the
back cover of this prospectus.
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Payment by ACH:
Redemption proceeds may be sent to the shareholder’s bank account (checking or savings) via ACH. Payment
for redeemed shares for which a redemption order is received before 4:00 p.m. (Eastern time) on a business day is normally sent to the redeeming
shareholder the next business day, with receipt at the receiving bank within the next two business days (48-72 hours); provided that the Fund’s
custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern time) or on a day when the Fund’s custodian
is closed is normally sent on the next business day following redemption on which the Fund’s custodian is open for business.
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The Fund reserves the right to send redemption proceeds within seven days after receiving a redemption order if, in the judgment of
the Fund, an earlier payment could adversely affect the Fund. No charge for sending redemption payments via ACH is imposed by the
Fund.
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***
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If you make a redemption request before the Fund has collected payment for the purchase of shares,
the Fund may delay mailing your proceeds. This delay will usually not exceed ten days.
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50
How to Exchange Shares or Transfer Your
Account
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|
Your Choices
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|
|
Important Information for You
to Know
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Exchange Privilege
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Selling shares of one fund to purchase shares of another BlackRock Fund (“exchanging”)
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Investor A, Investor C or Institutional Shares of the Fund are generally exchangeable for shares of the same class of another
BlackRock Fund.
You can exchange $1,000 or more of Investor A or Investor C Shares from one fund into the same class of another fund which offers
that class of shares (you can exchange less than $1,000 of Investor A or Investor C Shares if you already have an account in the fund into which you
are exchanging). Investors who currently own Institutional Shares of the Fund may make exchanges into Institutional Shares of other BlackRock Funds
except for investors holding shares through certain client accounts at Financial Intermediaries that are omnibus with the Fund and do not meet
applicable minimums. There is no required minimum amount with respect to exchanges of Institutional Shares.
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You may only exchange into a share class and fund that are open to new investors or in which you have a current account if the fund
is closed to new investors.
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Some of the BlackRock Funds impose a different deferred sales charge schedule. The CDSC will continue to be measured from the date of
the original purchase. The CDSC schedule applicable to your original purchase will apply to the shares you receive in the exchange and any subsequent
exchange.
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To exercise the exchange privilege, you may contact your Financial Intermediary. Alternatively, if your account is held directly with
BlackRock, you may: (i) call (800) 441-7762 and speak with one of our representatives, (ii) make the exchange via the Internet by accessing your
account online at www.blackrock.com/funds, or (iii) send a written request to the Fund at the address on the back cover of this prospectus. Please
note, if you indicated on your New Account Application that you did not want the Telephone Exchange Privilege, you will not be able to place exchanges
via the telephone until you update this option either in writing or by calling (800) 441-7762. The Fund has the right to reject any telephone request
for any reason.
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Although there is currently no limit on the number of exchanges that you can make, the exchange
privilege may be modified or terminated at any time in the future. The Fund may suspend or terminate your exchange privilege at any time for any
reason, including if the Fund believes, in its sole discretion, that you are engaging in market timing activities. See “Short-Term Trading
Policy” below. For Federal income tax purposes a share exchange is a taxable event and a capital gain or loss may be realized. Please consult your
tax adviser or other Financial Intermediary before making an exchange request.
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Transfer Shares to Another Financial Intermediary
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Transfer to a participating Financial Intermediary
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You may transfer your shares of the Fund only to another Financial Intermediary that has entered into an agreement with the
Distributor. Certain shareholder services may not be available for the transferred shares. All future trading of these assets must be coordinated by
the receiving firm.
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If your account is held directly with BlackRock, you may call (800) 441-7762 with any questions;
otherwise please contact your Financial Intermediary to accomplish the transfer of shares.
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Transfer to a non-participating Financial Intermediary
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You must either:
· Transfer your shares to an account with the Fund; or
· Sell your shares,
paying any applicable deferred sales charge.
If your account is held directly with BlackRock, you may call (800) 441-7762 with any questions;
otherwise please contact your Financial Intermediary to accomplish the transfer of shares.
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51
Account Services and
Privileges
The following table provides examples of account services and
privileges available in your BlackRock account. Certain of these account services and privileges are only available to shareholders of Investor Shares
whose accounts are held directly with BlackRock. If your account is held directly with BlackRock, please call (800) 441-7762 or visit
www.blackrock.com/funds for additional information as well as forms and applications. Otherwise, please contact your Financial Intermediary for
assistance in requesting one or more of the following services and privileges.
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Automatic Investment Plan
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Allows systematic investments on a periodic basis from your checking or savings
account.
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BlackRock’s AIP allows you to invest a specific amount on a periodic basis from your checking
or savings account into your investment account. You may apply for this option upon account opening or by completing the Automatic Investment Plan
application. The minimum investment amount for an automatic investment is $50 per portfolio.
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Dividend Allocation Plan
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Automatically invests your distributions into another BlackRock Fund of your choice pursuant to
your instructions, without any fees or sales charges.
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Dividend and capital gains distributions may be reinvested in your account to purchase additional
shares or paid in cash. Using the Dividend Allocation Plan, you can direct your distributions to your bank account (checking or savings), to purchase
shares of another fund at BlackRock without any fees or sales charges, or by check to a special payee. Please call (800) 441-7762 for details. If
investing in another BlackRock Fund, the receiving fund must be open to new purchases.
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EZ Trader
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Allows an investor to purchase or sell Investor Shares by telephone or over the Internet through
ACH.
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(NOTE: This option is offered to shareholders whose accounts are held directly with BlackRock.
Please speak with your Financial Intermediary if your account is held elsewhere.)
Prior to establishing an EZ Trader account, please contact your
bank to confirm that it is a member of the ACH system. Once confirmed, complete an application, making sure to include the appropriate bank
information, and return the application to the address listed on the form.
Prior to placing a telephone or Internet purchase or sale order, please
call (800) 441-7762 to confirm that your bank information has been updated on your account. Once this is established, you may place your request to
sell shares with the Fund by telephone or Internet. Proceeds will be sent to your pre-designated bank account.
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Systematic Exchange Plan
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This feature can be used by investors to systematically exchange money from one fund to up to four
other funds.
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A minimum of $10,000 in the initial BlackRock Fund is required, and investments in any additional
funds must meet minimum initial investment requirements.
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Systematic Withdrawal Plan (“SWP”)
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This feature can be used by investors who want to receive regular distributions from their
accounts.
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To start an SWP a shareholder must have a current investment of $10,000 or more in a
BlackRock Fund.
Shareholders can elect to receive cash payments of $50 or more at any interval they choose. Shareholders may sign up by completing
the SWP Application Form, which may be obtained from BlackRock. Shareholders should realize that if withdrawals exceed income the invested principal in
their account will be depleted.
To participate in the SWP, shareholders must have their dividends reinvested. Shareholders may change or cancel the
SWP at any time, with a minimum of 24 hours notice. If a shareholder purchases additional Investor A Shares of a fund at the same time he or she
redeems shares through the SWP, that investor may lose money because of the sales charge involved. No CDSC will be assessed on redemptions of Investor
A or Investor C Shares made through the SWP that do not exceed 12% of the account’s net asset value on an annualized basis. For example,
monthly, quarterly, and semi-annual SWP redemptions of Investor A or Investor C Shares will not be subject to the CDSC if they do not exceed 1%,
3% and 6%, respectively, of an account’s net asset value on the redemption date. SWP redemptions of Investor A or Investor C Shares in
excess of this limit will still pay any applicable CDSC.
Ask your Financial Intermediary for details.
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52
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Reinstatement Privilege
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If you redeem Investor A or Institutional Shares, and within 60 days buy new Investor A Shares of
the same or another BlackRock Fund (equal to all or a portion of the redemption amount), you will not pay a sales charge on the new purchase amount.
This right may be exercised once a year and within 60 days of the redemption, provided that the Investor A Share class of that fund is currently open
to new investors or the shareholder has a current account in that closed fund. Shares will be purchased at the net asset value calculated at the close
of trading on the day the request is received. To exercise this privilege, the Fund must receive written notification from the shareholder of record or
the Financial Intermediary of record, at the time of purchase. Investors should consult a tax adviser concerning the tax consequences of exercising
this reinstatement privilege.
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The Fund may:
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n
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Suspend the right of redemption if trading is halted or restricted
on the NYSE or under other emergency conditions described in the Investment Company Act;
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n
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Postpone the date of payment upon redemption if trading is halted
or restricted on the NYSE or under other emergency conditions described in the Investment Company Act or if a redemption request is made before the
Fund has collected payment for the purchase of shares;
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n
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Redeem shares for property other than cash if conditions exist
which make cash payments undesirable in accordance with its rights under the Investment Company Act; and
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n
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Redeem shares involuntarily in certain cases, such as when the
value of a shareholder account falls below a specified level.
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Note on Low Balance Accounts.
Because of the high cost of
maintaining smaller shareholder accounts, BlackRock has set a minimum balance of $500 in each Fund position you hold within your account (“Fund
Minimum”), and may take one of two actions if the balance in the Fund falls below the Fund Minimum.
First, the Fund may redeem the shares in your account (without
charging any deferred sales charge) if the net asset value of your account falls below $250 for any reason, including market fluctuation. You will be
notified that the value of your account is less than $250 before the Fund makes an involuntary redemption. The notification will provide you with a 90
calendar day period to make an additional investment in order to bring the value of your account to at least $250 before the Fund makes an involuntary
redemption or to the Fund Minimum in order not to be assessed an annual low balance fee of $20, as set forth below. This involuntary redemption may not
apply to accounts of certain employer-sponsored retirement plans, selected fee-based programs, accounts established under the Uniform Gifts or
Transfers to Minors Acts, and certain intermediary accounts.
Second, the Fund charges an annual $20 low balance fee on all
fund accounts that have a balance below the Fund Minimum for any reason, including market fluctuation. The low balance fee will be
assessed on Fund accounts in all BlackRock funds, regardless of the Fund’s minimum investment amount. The fee will be deducted
from the fund account only once per calendar year. You will be notified that the value of your account is less than the Fund Minimum
before the fee is imposed. You will then have a 90 calendar day period to make an additional investment to bring the value of your account to the Fund
Minimum before the Fund imposes the low balance fee. This low balance fee does not apply to accounts of certain employer-sponsored retirement plans,
selected fee-based programs, or, accounts established under the Uniform Gifts or Transfers to Minors Acts.
Participation in Fee-Based
Programs
If you participate in certain fee-based programs offered by
BlackRock or an affiliate of BlackRock, or Financial Intermediaries that have agreements with the Distributor, you may be able to buy Institutional
Shares, including by exchange from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain
circumstances. You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have to redeem your shares
held through the program and purchase shares of another class, which may be subject to distribution and service fees. This may be a taxable event and
you will pay any applicable sales charges.
53
Shareholders that participate in a fee-based program generally
have two options at termination. The program can be terminated and the shares liquidated or the program can be terminated and the shares held in an
account. In general, when a shareholder chooses to continue to hold the shares, whatever share class was held in the program can be held after
termination. Shares that have been held for less than specified periods within the program may be subject to a fee upon redemption. Shareholders that
held Investor A or Institutional Shares in the program are eligible to purchase additional shares of the respective share class of the Fund, but may be
subject to upfront sales charges with respect to Investor A Shares. Additional purchases of Institutional Shares are permitted only if you have an
existing position at the time of purchase or are otherwise eligible to purchase Institutional Shares.
Details about these features and the relevant charges are included
in the client agreement for each fee-based program and are available from your Financial Intermediary.
Short-Term Trading Policy
The Board has determined that the interests of long-term
shareholders and the Fund’s ability to manage its investments may be adversely affected when shares are repeatedly bought, sold or exchanged in
response to short-term market fluctuations — also known as “market timing.” The Fund is not designed for market timing organizations or
other entities using programmed or frequent purchases and sales or exchanges. The exchange privilege for Investor Shares and Institutional Shares is
not intended as a vehicle for short-term trading. Excessive purchase and sale or exchange activity may interfere with portfolio management, increase
expenses and taxes and may have an adverse effect on the performance of the Fund and its returns to shareholders. For example, large flows of
cash into and out of the Fund may require the management team to allocate a significant amount of assets to cash or other short-term investments or
sell securities, rather than maintaining such assets in securities selected to achieve the Fund’s investment objective. Frequent trading may cause
the Fund to sell securities at less favorable prices, and transaction costs, such as brokerage commissions, can reduce the Fund’s
performance.
A fund’s investments in non-U.S. securities is
subject to the risk that an investor may seek to take advantage of a delay between the change in value of the fund’s portfolio
securities and the determination of the fund’s net asset value as a result of different closing times of U.S. and non-U.S. markets
by buying or selling fund shares at a price that does not reflect their true value. A similar risk exists for funds that invest in
securities of small capitalization companies, securities of issuers located in emerging markets or high yield securities (junk bonds) that are thinly
traded and therefore may have actual values that differ from their market prices. This short-term arbitrage activity can reduce the return received by
long-term shareholders. The Fund will seek to eliminate these opportunities by using fair value pricing, as described in “Management of the
Fund — Valuation of Fund Investments” below.
The Fund discourages market timing and seeks to prevent frequent
purchases and sales or exchanges of Fund shares that it determines may be detrimental to the Fund or long-term shareholders. The Board has approved the
policies discussed below to seek to deter market timing activity. The Board has not adopted any specific numerical restrictions on purchases, sales and
exchanges of Fund shares because certain legitimate strategies will not result in harm to the Fund or shareholders.
If as a result of its own investigation, information provided by a
Financial Intermediary or other third party, or otherwise, the Fund believes, in its sole discretion, that your short-term trading is excessive or that
you are engaging in market timing activity, it reserves the right to reject any specific purchase or exchange order. If the Fund rejects your purchase
or exchange order, you will not be able to execute that transaction, and the Fund will not be responsible for any losses you therefore may suffer. For
transactions placed directly with the Fund, the Fund may consider the trading history of accounts under common ownership or control for the purpose of
enforcing these policies. Transactions placed through the same Financial Intermediary on an omnibus basis may be deemed part of a group for the purpose
of this policy and may be rejected in whole or in part by the Fund. Certain accounts, such as omnibus accounts and accounts at Financial
Intermediaries, however, include multiple investors and such accounts typically provide the Fund with net purchase or redemption and
exchange requests on any given day where purchases, redemptions and exchanges of shares are netted against one another and the identity of individual
purchasers, redeemers and exchangers whose orders are aggregated may not be known by the Fund. While the Fund monitors for market timing activity, the
Fund may be unable to identify such activities because the netting effect in omnibus accounts often makes it more difficult to locate and eliminate
market timers from the Fund. The Distributor has entered into agreements with respect to Financial Intermediaries that maintain omnibus accounts with
the Transfer Agent pursuant to which such Financial Intermediaries undertake to cooperate with the Distributor in monitoring purchase, exchange and
redemption orders by their customers in order to detect and prevent short-term or excessive trading in the Fund’s shares through such accounts.
Identification of market timers may also be limited by operational systems and technical limitations. In
54
the event that a Financial Intermediary is determined by the
Fund to be engaged in market timing or other improper trading activity, the Fund’s Distributor may terminate such Financial Intermediary’s
agreement with the Distributor, suspend such Financial Intermediary’s trading privileges or take other appropriate actions.
There is no assurance that the methods described above will
prevent market timing or other trading that may be deemed abusive.
The Fund may from time to time use other methods that it believes
are appropriate to deter market timing or other trading activity that may be detrimental to the Fund or long-term shareholders.
55
Management of the Fund
BlackRock and the
Sub-Advisers
BlackRock, the Fund’s investment adviser, manages the
Fund’s investments and its business operations subject to the oversight of the Board of the Fund. BlackRock is an indirect, wholly owned
subsidiary of BlackRock, Inc. While BlackRock is ultimately responsible for the management of the Fund, it is able to draw upon the trading, research
and expertise of its asset management affiliates for portfolio decisions and management with respect to certain portfolio securities. BlackRock will
utilize the knowledge and experience of BlackRock Alternative Advisors (“BAA”), a business unit representing the hedge fund solutions
platform for BlackRock, Inc., in determining the Sub-Advisers in which the Fund may hire or contract with. BAA has established an investment
committee (the “BAA Investment Committee”) consisting of senior personnel of BAA. Generally, the BAA Investment Committee will assist
BlackRock in the assessment of the Sub-Advisers and will perform diligence on the Sub-Advisers.
BlackRock, a registered investment adviser, was organized in 1994
to perform advisory services for investment companies. BlackRock and its affiliates had approximately $4.324 trillion in investment
company and other portfolio assets under management as of December 31, 2013.
The Fund has entered into a management agreement (the
“Management Agreement”) with BlackRock under which BlackRock receives a monthly fee for its services at an annual rate of the average daily
net assets as follows:
Average Daily Net
Assets
|
Rate of
Management Fee
|
|
Not exceeding $1 billion
|
1.95%
|
|
In excess of $1 billion but not more than $3
billion
|
1.83%
|
|
In excess of $3 billion but not more than $5
billion
|
1.76%
|
|
In excess of $5 billion but not more than $10
billion
|
1.70%
|
|
In excess of $10 billion
|
1.66%
|
BlackRock has contractually agreed to waive the management fee
on assets estimated to be attributed to the Fund’s investments in other equity and fixed-income mutual funds managed by BlackRock or its
affiliates. This contractual waiver is in effect until January 1, 2016. The contractual agreement may be terminated upon 90 days notice by a
majority of the non-interested trustees of the Fund or by a vote of a majority of the outstanding voting securities of the
Fund.
BlackRock has agreed to cap net expenses (excluding (i)
interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with generally
accepted accounting principles; (ii) expenses incurred directly or indirectly by the Fund as a result of investments in other investment companies and
pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, the Fund’s investments; and (iv) other
extraordinary expenses (including litigation expenses) not incurred in the ordinary course of the Fund’s business, if any), of each share class of
the Fund at the levels shown below (and in the Fund’s fees and expenses table in the Fund Overview section of this
prospectus). (Items (i), (ii), (iii) and (iv) in the preceding sentence are referred to in this prospectus as “Dividend Expense, Interest Expense,
Acquired Fund Fees and Expenses and certain other Fund expenses.”) To achieve these expense caps, BlackRock has agreed to waive or reimburse fees
or expenses if operating expenses exceed a certain limit.
56
With respect to the Fund, BlackRock has agreed to
contractually waive and/or reimburse fees or expenses in order to limit Total Annual Fund Operating Expenses to the amounts noted in the table
below.
|
Contractual
Caps
1
on Total
Annual Fund Operating Expenses*
(excluding Dividend Expense,
Interest
Expense, Acquired
Fund Fees and Expenses and
certain other Fund expenses)
|
|
Investor A Shares
|
2.60%
|
|
Investor C Shares
|
3.35%
|
|
Institutional Shares
|
2.35%
|
|
*
|
|
As a percentage of average daily net
assets.
|
|
1
|
|
The contractual caps are in effect until
January 1, 2016. The contractual agreement may be terminated upon 90 days notice by a majority of the non-interested trustees of the Fund
or by a vote of a majority of the outstanding voting securities of the Fund.
|
With respect to the contractual agreement described above,
if during the Fund’s fiscal year the operating expenses of a share class, that at any time during the prior two fiscal years received a waiver or
reimbursement from BlackRock, are less than the expense limit for that share class, the share class is required to repay BlackRock up to the lesser of
(a) the amount of fees waived or expenses reimbursed during those prior two fiscal years under the agreement and (b) the amount by which the expense
limit for that share class exceeds the operating expenses of the share class for the current fiscal year, provided that: (1) the Fund has more
than $50 million in assets and (2) BlackRock or an affiliate serves as the Fund’s manager or administrator.
BlackRock has voluntarily agreed to waive its management fees
by the amount of advisory fees the Fund pays to BlackRock indirectly through its investment in affiliated money market
funds.
As stated above, the waivers and reimbursements described
in the table above do not include Interest Expense. A Fund’s Interest Expense is required to be reported as part of operating expenses in such
Fund’s expense table for accounting purposes. The Fund incurs Interest Expense when making certain investments (e.g., tender option bonds) to seek
to enhance the yield and total return of the portfolio. The amount of Interest Expense (if any) will fluctuate with the Fund’s use of those
investments.
Manager of Managers Structure
BlackRock and the Fund have applied to the SEC for
an exemptive order from the SEC that, if granted, would permit BlackRock, with respect to the Fund, to appoint and replace the Sub-Advisers, and
enter into, amend and terminate sub-advisory agreements with these Sub-Advisers, subject to Board approval but without shareholder approval (the
“Manager of Managers Structure”). The use of the Manager of Managers Structure with respect to the Fund may be subject to certain conditions
set forth in the SEC exemptive order. There can be no assurance that the SEC will grant the Fund’s application for an exemptive
order.
The Manager of Managers Structure would enable the Fund to operate
with greater efficiency and without incurring the expense and delays associated with obtaining approvals of a new sub-advisory agreement. The Manager
of Managers Structure would not permit the Fund’s investment management fees to increase without shareholder approval. Subject to the ultimate
responsibility of the Board, BlackRock has the responsibility to oversee the Fund’s Sub-Advisers and to recommend their hiring, termination and
replacement.
Unlike many other mutual funds, the Fund is not associated with
any one portfolio manager, and seeks to benefit from different specialists selected from the Sub-Advisers. Short-term investment performance, by
itself, is not a significant factor in allocating assets to a Sub-Adviser.
Sub-Advisers
The Fund’s investments, other than those selected by
BlackRock, are selected by one or more of the following Sub-Advisers, which act independently of one another.
Benefit Street Partners, LLC
(“Benefit Street
Partners”), 9 West 57
th
Street, Suite 4700, New York, NY 10019, serves as a subadviser to the Fund. Benefit Street
Partners was founded in March 2011 and is housed within the multi-billion dollar debt investment arm of Providence Equity Partners. Benefit
Street primarily invests in technology, media and telecommunication capital structures and takes a more trading oriented long/short credit
approach with a focus on three primary areas: 1) relative value, 2) capital structure arbitrage, and 3) event driven strategies. Total assets
under management by Benefit Street Partners were approximately $987 million as of January 1,
2014.
57
Carl M. Loeb Advisory Partners L.P.
(“Loeb”),
125 Broad Street, 14
th
Floor, New York, NY 10004, serves as a subadviser to the Fund. Loeb has been managing alternative
investments since 1988. The firm currently utilizes a multi strategy approach to investing in event driven situations. The team opportunistically
invests across three broad disciplines; Arbitrage, Credit and Event Driven. Total assets under management by Loeb were approximately $783
million as of December 31, 2013.
Independence Capital Asset Partners, LLC
(“ICAP”), 1400 16
th
Street, Suite 520, Denver, CO 80202, serves as a subadviser to the Fund. Founded in 2004,
ICAP focuses on fundamental equity selection with a particular focus on US mid and large capitalization companies. Total assets under
management by ICAP were approximately $607 million as of December 31, 2013.
LibreMax Capital, LLC
(“LibreMax”),
600 Lexington Avenue, 19
th
Floor, New York, NY 10022, serves as a subadviser to the Fund. LibreMax commenced
operations in October 2010 and focuses on US investments targeting securitized products (such as RMBS, CMBS, ABS and CLOs). Total
assets under management by LibreMax were approximately $2.7 billion as of December 31,
2013.
MeehanCombs LP
(“MeehanCombs”),
660 Steamboat Road, Greenwich, CT 06830, serves as a subadviser to the Fund. MeehanCombs is a long/short credit manager
founded in April 2012. The strategy focuses on liquid credit in the US and Europe, seeking to generate returns through current yield and price
appreciation on the long side. Total assets under management by MeehanCombs were approximately $200 million as of
December 31, 2013.
Peak6 Advisors LLC
(“Peak6”),
141 W. Jackson Blvd., Suite 700, Chicago, IL 60604, serves as a subadviser to the Fund. In January 2006, Peak6, an asset
management business, was spun out of the equity options market-maker, Peak6 Capital Management, which was founded in 1997. Peak6 manages
assets with a relative value strategy, focused on fundamental company research and expressing those investment ideas across the capital
structure of companies and their related derivatives. Total assets under management by Peak6 were approximately $2.168 billion as
of December 31, 2013.
QMS Capital Management LP
(“QMS”),
240 Leigh Farm Rd., Suite 230, Durham, NC 27707, serves as a subadviser to the Fund. QMS began managing assets in 2010. QMS
employs a quantitative, systematic, long-short, global macro investment program. QMS combines lower frequency fundamental economic views with higher
frequency trades driven by market-based signals. Total assets under management by QMS were approximately $422 million as of December 31,
2013.
Saiers Capital, LLC
(
“
Saiers”),
2 Rector Street 3
rd
Floor, New York, NY 10006, serves as a subadviser to the Fund. Saiers was founded in 2007 under the name
“Alphabet Management LLC” and renamed in 2013. The firm currently focuses on volatility relative value trades across multiple
asset classes and geographies. Total assets under management by Saiers were approximately $687 million as of December 31,
2013.
* * *
A discussion of the basis for the Board’s approval of the
Management Agreement with BlackRock and the sub-advisory agreements between BlackRock and the Sub-Advisers will be included in the Fund’s
annual shareholder report for the fiscal year ended August 31, 2014.
From time to time, a manager, analyst, or other employee of
BlackRock or its affiliates may express views regarding a particular asset class, company, security, industry, or market sector. The views expressed by
any such person are the views of only that individual as of the time expressed and do not necessarily represent the views of BlackRock or any other
person within the BlackRock organization. Any such views are subject to change at any time based upon market or other conditions and BlackRock
disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund
are based on numerous factors, may not be relied on as an indication of trading intent on behalf of the Fund.
As discussed above, the Fund intends to gain exposure to
commodities markets by investing in the Subsidiary. BlackRock provides investment management and other services to the Subsidiary. BlackRock does not
receive separate compensation from the Subsidiary for providing it with investment management or administrative services. However, the Fund pays
BlackRock based on the Fund’s assets, including the assets in the Subsidiary.
Legal Proceedings
. On February 21, 2014, a lawsuit was filed in the United States District Court
for the District of New Jersey by Owen Clancy and Jack
Hornstein, purported investors in the BlackRock Global Allocation Fund,
Inc. (“Global Allocation”), against BlackRock, BlackRock Investment Management, LLC and BlackRock International
Limited (collectively, the “Defendants”) for alleged violations of Section 36(b) of the Investment Company Act (the
“Clancy Complaint”). The Clancy Complaint purports to be brought
derivatively on behalf of Global Allocation. The Clancy Complaint alleges that
the Defendants breached their fiduciary duties under the
Investment Company Act by charging
58
excessive investment advisory fees,
and that the investment advisory agreement between Global Allocation and BlackRock is unenforceable under Section
47(b) of the Investment Company Act. The plaintiffs seek injunctive relief, rescission of the investment advisory agreement
and compensatory damages, including repayment to Global Allocation of all allegedly excessive investment advisory fees paid
by Global Allocation from one year prior to the filing of the lawsuit plus lost investment returns on those amounts and
interest. The Defendants believe the claims in the Clancy Complaint are without merit and intend to vigorously defend the
action.
On March 28, 2014, a lawsuit was filed
in the United States District Court for the District of New Jersey by Brendan Foote,
in his capacity as trustee on behalf of the Separate Property TR U/A DTD 10-26-12, a
purported investor in Global Allocation, against BlackRock (the "Foote Complaint"). The
Foote Complaint purports to be brought derivatively on behalf of Global Allocation. The
Foote Complaint alleges that BlackRock breached its fiduciary duties by charging excessive
investment advisory fees, in alleged violation of Section 36(b) of the Investment Company
Act. The plaintiff seeks injunctive and declaratory relief, rescission of the investment
advisory agreement and compensatory damages, including repayment to Global Allocation
of all allegedly excessive investment advisory fees paid by Global Allocation from one
year prior to the filing of the lawsuit. BlackRock believes the claims in the Foote Complaint
are without merit and intends to vigorously defend the action.
Portfolio Manager
Information
Information regarding the portfolio manager of the Fund is set
forth below. Further information regarding the portfolio managers, including other accounts managed, compensation, ownership of Fund
shares, and possible conflicts of interest, is available in the Fund’s SAI.
BlackRock’s portfolio managers have full discretionary
authority over investing the Fund’s assets, including discretion with respect to allocations to Sub-Advisers, and including rebalancing the
Fund’s allocations to the Sub-Advisers.
The Fund is managed by a team of financial professionals. Mark
Everitt, CFA, Albert Matriotti, David Matter, CFA and Edward Rzeszowski are jointly responsible for setting the overall investment strategy and
overseeing the management of the Fund.
Portfolio Manager
|
|
|
|
Primary Role
|
|
Since
|
|
Title and Recent
Biography
|
|
Mark Everitt, CFA
|
|
|
|
Jointly responsible for setting the overall investment strategy and overseeing the
management of the Fund.
|
|
2014
|
|
Managing Director of BlackRock, Inc.; member
of the Investment Committee for BAA; Head of Risk Management for BAA.
|
|
Albert Matriotti
|
|
|
|
Jointly responsible for setting the overall investment strategy and overseeing the
management of the Fund.
|
|
2014
|
|
Managing Director of BlackRock, Inc.; member of
BAA.
|
|
David Matter, CFA
|
|
|
|
Jointly responsible for setting the overall investment strategy and overseeing the
management of the Fund.
|
|
2014
|
|
Managing Director of BlackRock, Inc.; member of the Investment Committee for BAA; member of the Absolute Return Strategies Manager Research group within BAA.
|
|
Edward Rzeszowski
|
|
|
|
Jointly responsible for setting the overall investment strategy and overseeing the
management of the Fund.
|
|
2014
|
|
Managing Director of BlackRock, Inc.; member of the Absolute
Return Strategies Manager Research group within BAA.
|
Prior Performance of the
Comparable Fund
Certain members of the portfolio management team for the Fund are members of
the portfolio
management team
that is responsible
for managing
BlackRock Preferred
Partners LLC (the
“Comparable Fund”), a
closed-end management investment company
that has (i)
investment objectives, policies and strategies substantially similar to those of the Fund and (ii) at least a full calendar
year of operations as of the date of this prospectus. The Comparable Fund is the only account managed by BlackRock that has (i)
investment objectives, policies and strategies substantially similar to those of the Fund and (ii) at least a full calendar
year of operations as of the date of this prospectus.
The Comparable Fund commenced operations on September 1, 2011.
The Comparable Fund is a continuously offered closed-end management investment company that invests in private funds or other
pooled investment vehicles or accounts organized outside the United States (collectively, the “Portfolio Funds”) managed by
third-party investment
59
managers, and the Comparable Fund may
also invest directly in securities (other than those of Portfolio Funds) or other financial
instruments. The Portfolio Funds in which the Comparable Fund may invest include, but
are not limited to, hedge funds organized outside the United States that employ a variety
of alternative investment strategies and invest in a variety of worldwide markets. Such
strategies include, but are not limited to: Relative Value, Event Driven, Fundamental
Long/Short and Directional Trading.
The following table sets forth performance data relating to the
historical performance of a class of shares of the Comparable Fund. The data provided, which is net of all actual fees and expenses of the
Comparable Fund, illustrates the past performance of the portfolio management team in managing a substantially similar account as measured
against the BofA Merrill Lynch 3-Month U.S. Treasury Bill Index and the HFRI FOF Composite Index.
There are regulatory and operational differences between the
Fund and the Comparable Fund and the Portfolio Funds that should be understood in evaluating this performance data. In particular, the Comparable Fund
invests primarily in Portfolio Funds, which are not subject to the limitations on leverage that are applicable to the Fund in making its direct
investments in portfolio securities and which may have utilized substantial leverage at various times included in the performance
data.
Furthermore, the Investment Company Act and SEC staff
interpretations of the Investment Company Act impose more strenuous restrictions on open-end investment companies, such as the Fund, than
are imposed on closed-end investment companies, such as the Comparable Fund, with respect to illiquid securities, senior securities and
leverage. In addition, the Portfolio Funds in which the Comparable Fund may invest are generally not subject to the
diversification requirements, specific tax restrictions and investment limitations imposed by the Investment Company Act or Subchapter M of the
Internal Revenue Code. Finally, the Comparable Fund is not subject to the same types of expenses to which the Fund is subject.
Consequently, the performance results for the Comparable Fund expressed below could have been adversely affected if the Comparable Fund and the
Portfolio Funds had been regulated as open-end management investment companies under the Federal securities laws. The
performance information for the Comparable Fund should not be relied upon as a substitute for the Fund’s performance information or as an
indication of the future performance of the Fund because, among other things, the fees and expenses, the portfolio size and the holdings
comprising the Comparable Fund and the Fund will vary.
Sales charges are not reflected in the returns shown. If they
were, returns would be less than those shown. Share prices and investment returns will fluctuate reflecting market conditions, changes in
currency rates as well as changes in company-specific fundamentals of portfolio securities.
As of 12/31/13 Average Annual Total
Returns
|
|
|
|
1 Year
|
|
Since Inception
(September 1,
2011)
|
|
Comparable Fund
1
|
|
|
|
10.57%
|
|
6.80%
|
|
BofA Merrill Lynch 3-Month U.S. Treasury Bill Index (Reflects no deduction for fees,
expenses or taxes)
|
|
|
|
0.07%
|
|
0.08%
|
|
HFRI FOF Composite Index
|
|
|
|
8.79%
|
|
4.29%
|
|
1
|
|
The Portfolio Funds in
which the Comparable Fund invests employ leverage to a degree greater than the Fund. The greater degree of
leverage would tend to increase performance of the Comparable Fund in rising markets and tend to
decrease it in declining markets, as compared to the performance of the Fund.
|
The investment activities of BlackRock and its affiliates
(including BlackRock, Inc. and PNC and their affiliates, directors, partners, trustees, managing members, officers and employees (collectively, the
“Affiliates”)) in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of
interest that could disadvantage the Fund and its shareholders. BlackRock and its Affiliates provide investment management services to other funds and
discretionary managed accounts that follow an investment program similar to that of the Fund. BlackRock and its Affiliates are involved worldwide with
a broad spectrum of financial services and asset management activities and may engage in the ordinary course of business in activities in which their
interests or the interests of their clients may conflict with those of the Fund. One or more Affiliates act or may act as an investor, investment
banker, research provider, investment manager, financier, advisor, market maker, trader, prime broker, lender, agent and principal, and have other
direct and indirect interests, in securities, currencies and other instruments in which the Fund directly and indirectly invests. Thus, it is likely
that the Fund will have multiple business relationships with and will invest in, engage in transactions with, make voting decisions with respect to, or
obtain services from entities for which an Affiliate performs or seeks to perform investment banking or other services. One or more Affiliates may
engage in proprietary trading and advise accounts and funds that have investment objectives similar to those of the Fund and/or that engage in and
compete for transactions in the same
60
types of securities, currencies and other instruments as the Fund. The trading activities of these Affiliates are carried out without reference to positions held directly or indirectly by the Fund and may result in an Affiliate having positions that are adverse to those of the Fund. No Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Fund. As a result, an Affiliate may compete with the Fund for appropriate investment opportunities. The results of the Fund’s investment activities, therefore, may differ from those of an Affiliate and of other accounts managed by an Affiliate, and it is possible that the Fund could sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. The opposite result is also possible. In addition, the Fund may, from time to time, enter into transactions in which an Affiliate or its other clients have an adverse interest. Furthermore, transactions undertaken by Affiliate-advised clients may adversely impact the Fund. Transactions by one or more Affiliate-advised clients or BlackRock may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Fund. The Fund’s activities may be limited because of regulatory restrictions applicable to one or more Affiliates, and/or their internal policies designed to comply with such restrictions. In
addition, the Fund may invest in securities of companies with which an Affiliate has or is trying to develop investment
banking relationships or in which an Affiliate has significant debt or equity investments. The Fund also may invest in
securities of companies for which an Affiliate provides or may some day provide research coverage. An Affiliate may have
business relationships with and purchase or distribute or sell services or products from or to distributors, consultants or
others who recommend the Fund or who engage in transactions with or for the Fund, and may receive compensation for such
services. The Fund may also make brokerage and other payments to Affiliates in connection with the Fund’s portfolio
investment transactions.
Under a securities lending program approved by the Fund’s
Board, the Fund has retained an Affiliate of BlackRock to serve as the securities lending agent for the Fund to the extent that the Fund participates
in the securities lending program. For these services, the lending agent will receive a fee from the Fund, including a fee based on the returns earned
on the Fund’s investment of the cash received as collateral for the loaned securities. In addition, one or more Affiliates may be among the
entities to which the Fund may lend its portfolio securities under the securities lending program.
The activities of Affiliates may give rise to other conflicts of
interest that could disadvantage the Fund and its shareholders. BlackRock has adopted policies and procedures designed to address these potential
conflicts of interest. See the SAI for further information.
Valuation of Fund
Investments
When you buy shares, you pay the net asset value, plus any
applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The
Fund calculates the net asset value of each class of its shares (generally by using market quotations) each day the NYSE is open as of the close of
business on the NYSE, based on prices at the time of closing. The NYSE generally closes at 4:00 p.m. (Eastern time). The net asset value used in
determining your share price is the next one calculated after your purchase or redemption order is placed.
Generally, Institutional Shares will have the highest net asset
value because that class has the lowest expenses, and Investor A Shares will have a higher net asset value than Investor C Shares. Also, dividends paid
on Investor A and Institutional Shares will generally be higher than dividends paid on Investor C Shares because Investor A and Institutional Shares
have lower expenses.
The Fund’s assets and liabilities are valued primarily on the
basis of market quotations. Equity investments and other instruments for which market quotations are readily available are valued at market value,
which is generally determined using the last reported sale price on the exchange or market on which the security or instrument is primarily
traded at the time of valuation. The Fund values fixed income portfolio securities and non-exchange traded derivatives using market prices provided
directly from one or more broker-dealers, market makers, or independent third-party pricing services which may use matrix pricing and valuation models
to derive values, each in accordance with valuation procedures approved by the Board. Short-term debt securities with remaining maturities of sixty
days or less may be valued on the basis of amortized cost.
Foreign currency exchange rates are generally determined as of the
close of business on the NYSE. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a
result, the Fund’s net asset value may change on days when you will not be able to purchase or redeem the Fund’s shares. Shares of
underlying open-end funds are valued at NAV.
Generally, trading in foreign securities, U.S. government
securities and money market instruments and certain fixed income securities is substantially completed each day at various times prior to the close of
business on the NYSE. The values of such securities used in computing the net asset value of the Fund’s shares are determined as of such
times.
61
When market quotations are not readily available or are not
believed by BlackRock to be reliable, the Fund’s investments are valued at fair value. Fair value determinations are made by BlackRock in
accordance with procedures approved by the Board. BlackRock may conclude that a market quotation is not readily available or is unreliable if a
security or other asset or liability does not have a price source due to its lack of liquidity, if BlackRock believes a market quotation from a
broker-dealer or other source is unreliable, where the security or other asset or other liability is thinly traded (e.g., municipal securities, certain
small cap and emerging growth companies, and certain non-U.S. securities) or where there is a significant event subsequent to the most recent market
quotation. For this purpose, a “significant event” is deemed to occur if BlackRock determines, in its business judgment prior to or at the
time of pricing the Fund’s assets or liabilities, that it is likely that the event will cause a material change to the last closing market price
of one or more assets or liabilities held by the Fund. For instance, significant events may occur between the foreign market close and the close of
business on the NYSE that may not be reflected in the computation of the
Fund’s net assets. If such event occurs, those
instruments may be fair valued. Similarly, foreign securities whose values are affected by volatility that occurs in U.S. markets on a trading day
after the close of foreign securities markets may be fair valued.
For certain foreign securities, a third-party vendor supplies
evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed.
This systematic fair value pricing methodology is designed to correlate the prices of foreign securities following the close of the local markets to
the price that might have prevailed as of the Fund’s pricing time.
Fair value represents a good faith approximation of the value of a
security. The fair value of one or more securities may not, in retrospect, be the price at which those assets could have been sold during the period in
which the particular fair values were used in determining the Fund’s net asset value.
The Fund may accept orders from certain authorized Financial
Intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the intermediary or designee, and the order will
receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later
time, the order will be canceled and the Financial Intermediary could be held liable for any losses.
Dividends, Distributions and
Taxes
BUYING A DIVIDEND
|
|
Unless your investment is in a tax deferred account, you may want to avoid buying shares shortly before the Fund pays a dividend. The reason? If
you buy shares when the Fund has declared but not yet distributed ordinary income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable dividend. Before investing you may want to consult your tax adviser.
|
The Fund will distribute net investment income, if any, and net
realized capital gain, if any, at least annually. The Fund may also pay a special distribution at the end of the calendar year to comply with
Federal tax requirements. Dividends may be reinvested automatically in shares of the Fund at net asset value without a sales charge or may be taken in
cash. If you would like to receive dividends in cash, contact your financial professional, Financial Intermediary or the Fund. Although this cannot be
predicted with any certainty, the Fund anticipates that a significant amount of its dividends, if any, will consist of capital gains.
Capital gains may be taxable to you at different rates depending on how long the Fund held the assets sold.
You will pay tax on dividends from the Fund whether you receive
them in cash or additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold
your shares and any gain on the transaction may be subject to tax. Certain dividend income received by the Fund, including dividends received from
qualifying foreign corporations, and long-term capital gains are eligible for taxation at a maximum rate of 15% for individuals with incomes below
$400,000 ($450,000 if married filing jointly) and 20% for individuals with any income in excess of those amounts that is long-term capital gain. To the
extent the Fund makes any distributions derived from long-term capital gains and qualifying dividend income, such distributions will be eligible for
taxation at the reduced rate.
A 3.8% Medicare tax is imposed on the net investment income (which
includes, but is not limited to, interest, dividends and net gain from investments) of U.S. individuals with income exceeding $200,000, or $250,000 if
married and filing jointly, and of trusts and estates.
62
If you are neither a tax resident nor a citizen of the United
States or if you are a foreign entity, the Fund’s ordinary income dividends (which include distributions of net short-term capital gain) will
generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies. Although under now-expired provisions, certain
distributions reported by the Fund as either interest related dividends or short-term capital gain dividends and paid to a foreign shareholder
were eligible for an exemption from U.S. withholding tax, there can be no assurance that such provisions will be
reenacted.
A 30% withholding tax will be imposed on U.S.-source dividends,
interest and other income items paid after June 30, 2014, and proceeds from the sale of property producing U.S.-source dividends and interest paid
after December 31, 2016, to (i) foreign financial institutions including non-U.S. investment funds unless they agree to collect and disclose to the IRS
information regarding their direct and indirect U.S. account holders and (ii) certain other foreign entities, unless they certify certain information
regarding their direct and indirect U.S. owners. To avoid withholding, foreign financial institutions will need to (i) enter into agreements with the
IRS that state that they will provide the IRS information, including the names, addresses and taxpayer identification numbers of direct and indirect
U.S. account
holders, comply with due diligence procedures with respect
to the identification of U.S. accounts, report to the IRS certain information with respect to U.S. accounts maintained, agree to withhold tax on
certain payments made to non-compliant foreign financial institutions or to account holders who fail to provide the required information, and determine
certain other information as to their account holders, or (ii) in the event that an applicable intergovernmental agreement and implementing legislation
are adopted, provide local revenue authorities with similar account holder information. Other foreign entities will need to either provide the name,
address, and taxpayer identification number of each substantial U.S. owner or certifications of no substantial U.S. ownership unless certain exceptions
apply.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such
taxes.
You may be able to claim a credit or take a deduction for foreign
taxes paid by the Fund if certain requirements are met.
By law, your dividends and redemption proceeds will be subject to
a 28% withholding tax if you have not provided a taxpayer identification number or social security number or the number you have provided is
incorrect.
The Subsidiary will not be subject to Federal income tax. It will,
however, be considered a controlled foreign corporation, and the Fund will be required to include as income annually amounts earned by the Subsidiary
during that year. Gains from the sales of investments by the Subsidiary will not be eligible for capital gains treatment but instead will be treated as
ordinary income when included in income by the Fund. Furthermore, the Fund will distribute net investment income, if any, and net realized capital
gain, if any, at least annually, on such Subsidiary income, whether or not the Subsidiary makes a distribution to the Fund during the taxable
year.
This Section summarizes some of the consequences under current
Federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax
consequences of an investment in the Fund under all applicable tax laws.
The Fund had not commenced operations as of the date of this
Prospectus. As a result, no financial performance information is available.
63
General Information
Electronic Access to Annual Reports, Semi-Annual Reports and
Prospectuses
Electronic copies of most financial reports and prospectuses are
available on BlackRock’s website. Shareholders can sign up for e-mail notifications of annual and semi-annual reports and prospectuses by
enrolling in the Fund’s electronic delivery program. To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks
or Brokerages:
Please contact your Financial Intermediary. Please note that not all investment advisers, banks or brokerages may offer this
service.
Shareholders Who Hold Accounts Directly With
BlackRock:
|
n
|
|
Access the BlackRock website at
http://www.blackrock.com/edelivery; and
|
Delivery of Shareholder Documents
The Fund delivers only one copy of shareholder documents,
including prospectuses, shareholder reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is known as
“householding” and is intended to eliminate duplicate mailings and reduce expenses. Mailings of your shareholder documents may be householded
indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your
household, please contact the Fund at (800) 441-7762.
Anti-Money Laundering Requirements
The Fund is subject to the USA PATRIOT Act (the “Patriot
Act”). The Patriot Act is intended to prevent the use of the U.S. financial system in furtherance of money laundering, terrorism or other illicit
activities. Pursuant to requirements under the Patriot Act, the Fund is required to obtain sufficient information from shareholders to
enable it to form a reasonable belief that it knows the true identity of its shareholders. This information will be used to verify the identity of
investors or, in some cases, the status of Financial Intermediaries. Such information may be verified using third-party sources. This
information will be used only for compliance with the Patriot Act or other applicable laws, regulations and rules in connection with money laundering,
terrorism or economic sanctions.
The Fund reserves the right to reject purchase orders from persons
who have not submitted information sufficient to allow the Fund to verify their identity. The Fund also reserves the right to redeem any amounts in the
Fund from persons whose identity it is unable to verify on a timely basis. It is the Fund’s policy to cooperate fully with appropriate regulators
in any investigations conducted with respect to potential money laundering, terrorism or other illicit activities.
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current
and former fund investors and individual clients (collectively, “Clients”) and to safeguarding their nonpublic personal information. The
following information is provided to help you understand what personal information BlackRock collects, how we protect that information and why in
certain cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules or
regulations require BlackRock to provide you with additional or different privacy-related rights beyond what is set forth below, then BlackRock will
comply with those specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from
and about you from different sources, including the following: (i) information we receive from you or, if applicable, your Financial Intermediary, on
applications, forms or other documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from
a consumer reporting agency; and (iv) from visits to our website.
64
BlackRock does not sell or disclose to nonaffiliated third parties
any nonpublic personal information about its Clients, except as permitted by law, or as is necessary to respond to regulatory requests or to service
Client accounts. These nonaffiliated third parties are required to protect the confidentiality and security of this information and to use it only for
its intended purpose.
We may share information with our affiliates to service your
account or to provide you with information about other BlackRock products or services that may be of interest to you. In addition, BlackRock restricts
access to nonpublic personal information about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock
maintains physical, electronic and procedural safeguards that are designed to protect the nonpublic personal information of its Clients, including
procedures relating to the proper storage and disposal of such information.
Statement of Additional
Information
If you would like further information about the Fund, including
how it invests, please see the SAI.
For a discussion of the Fund’s policies and procedures
regarding the selective disclosure of its portfolio holdings, please see the SAI. The Fund makes its top ten holdings available on a monthly basis at
www.blackrock.com generally within 5 business days after the end of the month to which the information applies.
65
This glossary contains an explanation of some of the common terms
used in this prospectus. For additional information about the Fund, please see the SAI.
Acquired Fund Fees and Expenses
— fees and
expenses charged by other investment companies in which the Fund invests a portion of its assets.
Annual Fund Operating Expenses
— expenses that
cover the costs of operating the Fund.
BofA Merrill Lynch 3-Month U.S. Treasury Bill
Index
— an unmanaged index that tracks 3-month U.S. Treasury securities.
Distribution Fees
— fees used to support the
Fund’s marketing and distribution efforts, such as compensating Financial Intermediaries, advertising and promotion.
Management Fee
— a fee paid to BlackRock for
managing the Fund.
Other Expenses
— include accounting, transfer
agency, custody, professional fees and registration fees.
Service Fees
— fees used to compensate
Financial Intermediaries for certain shareholder servicing activities.
Shareholder Fees
— these fees include sales
charges that you may pay when you buy or sell shares of the Fund.
66
For More Information
Fund and Service Providers
FUND
BlackRock Funds
SM
BlackRock Multi-Manager Alternatives Fund
100 Bellevue Parkway
Wilmington, Delaware 19809
Written Correspondence:
P.O.
Box 9819
Providence, Rhode Island 02940-8019
Overnight
Mail:
4400 Computer Drive
Westborough, Massachusetts 01588
(800) 441-7762
MANAGER
BlackRock Advisors, LLC
100 Bellevue
Parkway
Wilmington, Delaware 19809
SUB-ADVISERS
Benefit Street Partners
LLC
9 West 57
th
Street
Suite 4700
New York, New York 10019
Carl M. Loeb Advisory Partners
L.P.
125 Broad Street
14
th
Floor
New York, New York 10004
Independence Capital Asset Partners,
LLC
1400 16
th
Street
Suite 520
Denver, Colorado 80202
LibreMax Capital, LLC
600 Lexington Avenue
19
th
Floor
New York, New York 10022
MeehanCombs LP
660
Steamboat Road
Greenwich, Connecticut 06830
Peak6 Advisors LLC
141 W. Jackson Blvd.
Suite 700
Chicago, Illinois 60604
QMS Capital Management LP
240 Leigh Farm Rd.
Suite 230
Durham, North Carolina 27707
Saiers Capital, LLC
2 Rector Street
3
rd
Floor
New York, New York 10006
ADMINISTRATOR
BlackRock Advisors, LLC
100
Bellevue Parkway
Wilmington, Delaware 19809
TRANSFER AGENT
BNY Mellon Investment
Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
[ ]
ACCOUNTING SERVICES
PROVIDER
BNY Mellon Investment Servicing (US)
Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
DISTRIBUTOR
BlackRock Investments, LLC
40 East
52nd Street
New York, New York 10022
CUSTODIAN
The Bank of New York
Mellon
One Wall Street
New York, New York 10286
COUNSEL
Sidley Austin LLP
787 Seventh
Avenue
New York, New York 10019-6018
Additional Information
For more information:
This prospectus contains important
information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference.
More information about the Fund is available at no charge upon request. This information includes:
Annual/Semi-Annual Reports
These reports contain additional
information about each of the Fund’s investments. The annual report describes the Fund’s performance, lists portfolio holdings, and discusses
recent market conditions, economic trends and Fund investment strategies that significantly affected the Fund’s performance for the last fiscal
year.
Statement of Additional Information
A Statement of Additional
Information (“SAI”), dated [ ], 2014, has been filed with the Securities and Exchange Commission
(“SEC”). The SAI, which includes additional information about the Fund, may be obtained free of charge, along with the Fund’s annual and
semi-annual reports, by calling (800) 441-7762. The SAI, as supplemented from time to time, is incorporated by reference into this
prospectus.
BlackRock Investor Services
Representatives are available to
discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8:00 a.m. to 6:00 p.m. (Eastern
time), on any business day.
Call: (800) 441-7762.
Purchases and Redemptions
Call your Financial Intermediary or
BlackRock Investor Services at (800) 441-7762.
World Wide Web
General Fund information and
specific Fund performance, including the SAI and annual/semi-annual reports, can be accessed free of charge at www.blackrock.com/prospectus. Mutual
fund prospectuses and literature can also be requested via this website.
Written Correspondence
BlackRock Funds
SM
P.O. Box 9819
Providence, Rhode Island 02940-8019
Overnight Mail
BlackRock Funds
SM
4400 Computer Drive
Westborough, Massachusetts 01588
Internal Wholesalers/Broker Dealer Support
Available on any business day
to support investment professionals.
Call: (800) 882-0052.
Portfolio Characteristics and Holdings
A description of the Fund’s
policies and procedures related to disclosure of portfolio characteristics and holdings is available in the SAI.
For information about portfolio
holdings and characteristics, BlackRock fund shareholders and prospective investors may call (800) 882-0052.
Securities and Exchange Commission
You may also view and copy public
information about the Fund, including the SAI, by visiting the EDGAR database on the SEC’s website (http://www.sec.gov) or the SEC’s Public
Reference Room in Washington, D.C. Copies of this information can be obtained, for a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing to the Public Reference Room of the SEC, Washington, D.C. 20549. Information about obtaining documents on
the SEC’s website without charge may be obtained by calling (800) SEC-0330.
You should rely only on the
information contained in this prospectus. No one is authorized to provide you with information that is different from information contained in this
prospectus.
The Securities and Exchange
Commission and the Commodity Futures Trading Commission have not approved or disapproved these securities or passed upon the adequacy of
this prospectus. Any representation to the contrary is a criminal offense.
INVESTMENT COMPANY ACT FILE NO.
811-05742
©
BlackRock Advisors, LLC
STATEMENT OF ADDITIONAL
INFORMATION
BlackRock Funds
SM
BlackRock Multi-Manager Alternatives
Fund
100 Bellevue Parkway, Wilmington, Delaware 19809 • Phone
No. (800) 441-7762
This Statement of Additional
Information of BlackRock Multi-Manager Alternatives Fund (the “Fund”), a series of BlackRock Funds
SM
(the “Trust”), is
not a prospectus and should be read in conjunction with the Prospectus of the Fund, dated
[ ], 2014, which has been filed with the Securities and Exchange
Commission (the “Commission”) and can be obtained, without charge, by calling (800) 441-7762 or by writing to the Fund at the above address.
The Fund’s Prospectus is incorporated by reference into this Statement of Additional Information, and Part I of this Statement of Additional
Information and the portions of Part II of this Statement of Additional Information that relate to the Fund have been incorporated by reference into
the Fund’s Prospectus. The portions of Part II of this Statement of Additional Information that do not relate to the Fund do not form a part of
the Fund’s Statement of Additional Information, have not been incorporated by reference into the Fund’s Prospectus and should not be relied
upon by investors in the Fund.
References to the Investment
Company Act of 1940, as amended (the “Investment Company Act”), or other applicable law, will include any rules promulgated thereunder and
any guidance, interpretations or modifications by the Commission, Commission staff or other authority with appropriate jurisdiction, including court
interpretations, and exemptive, no-action or other relief or permission from the Commission, Commission staff or other authority.
BlackRock Advisors, LLC — Manager
BlackRock Investments,
LLC — Distributor
Class
|
|
|
|
Ticker Symbol
|
|
Investor A Shares
|
|
|
|
BMMAX
|
|
Investor C Shares
|
|
|
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BMMCX
|
|
Institutional Shares
|
|
|
|
BMMNX
|
The date of this Statement of Additional Information is
[ ], 2014
|
|
Page
|
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PART I
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I-1
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I-5
|
|
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I-7
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|
I-20
|
|
|
I-25
|
|
|
I-25
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I-26
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I-26
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I-27
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|
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PART II
|
|
|
Investment Risks and Considerations
|
II-1
|
|
Management and Other Service Arrangements
|
II-62
|
|
Selective Disclosure of Portfolio Holdings
|
II-64
|
|
Purchase of Shares
|
II-73
|
|
Redemption of Shares
|
II-86
|
|
Shareholder Services
|
II-89
|
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Pricing of Shares
|
II-93
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Portfolio Transactions and Brokerage
|
II-95
|
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Dividends and Taxes
|
II-100
|
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Performance Data
|
II-106
|
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Proxy Voting Policies and Procedures
|
II-108
|
|
General Information
|
II-108
|
|
Appendix A — Description of Bond Ratings
|
A-1
|
|
Appendix B — Proxy Voting Policy
|
B-1
|
PART I: INFORMATION ABOUT BLACKROCK MULTI-MANAGER
ALTERNATIVES FUND
Part I of this Statement of
Additional Information (“SAI”) sets forth information about BlackRock Multi-Manager Alternatives Fund (the “Fund”), a series of
BlackRock Funds
SM
(the “Trust”). It includes information about the Trust’s Board of Trustees (the “Board”), the
management services provided to the Fund, performance data for the Fund, and information about other fees paid by and services provided to the Fund.
This Part I should be read in conjunction with the Fund’s Prospectus and those portions of Part II of this SAI that pertain to the
Fund.
I. Investment Objective and
Policies
Please see the section
“Details About the Fund — How the Fund Invests” in the Fund’s Prospectus for information about the Fund’s investment objective
and policies.
Set forth below is a listing of
some of the types of investments and investment strategies that the Fund may use, and the risks and considerations associated with those investments
and investment strategies. Please see the Part II of this SAI for further information on these investments and investment strategies. Information
contained in Part II about the risks and considerations associated with investments and/or investment strategies applies only to the extent the Fund
makes each type of investment or uses each investment strategy. Information that does not apply to the Fund does not form a part of the Fund’s SAI
and should not be relied on by investors in the Fund.
Only information that is clearly
identified as applicable to the Fund is considered to form a part of the Fund’s SAI.
|
144A Securities
|
x
|
|
Asset-Backed Securities
|
x
|
|
Asset-Based Securities
|
x
|
|
Precious Metal-Related Securities
|
x
|
|
Bank Loans
|
x
|
|
Borrowing and Leverage
|
x
|
|
Cash Flows; Expenses
|
x
|
|
Cash Management
|
x
|
|
Collateralized Debt Obligations
|
x
|
|
Collateralized Loan Obligations
|
x
|
|
Collateralized Bond Obligations
|
x
|
|
Commercial Paper
|
x
|
|
Commodity-Linked Derivative Instruments and Hybrid Instruments
|
x
|
|
Qualifying Hybrid Instruments
|
x
|
|
Hybrid Instruments Without Principal Protection
|
x
|
|
Limitations on Leverage
|
x
|
|
Counterparty Risk
|
x
|
|
Convertible Securities
|
x
|
|
Debt Securities
|
x
|
|
Depositary Receipts (ADRs, EDRs and GDRs)
|
x
|
|
Derivatives
|
x
|
|
Hedging
|
x
|
|
Indexed and Inverse Securities
|
x
|
|
Swap Agreements
|
x
|
|
Interest Rate Swaps, Caps and Floors
|
x
|
|
Credit Default Swap Agreements and Similar Instruments
|
x
|
|
Contracts for Difference
|
x
|
|
Credit Linked Securities
|
x
|
|
Interest Rate Transactions and Swaptions
|
x
|
|
Total Return Swap Agreements
|
x
|
|
Types of Options
|
x
|
|
Options on Securities and Securities Indices
|
x
|
|
Call Options
|
x
|
|
Put Options
|
x
|
|
Options on Government National Mortgage Association (“GNMA”) Certificates
|
x
|
I-1
|
Risks Associated with Options
|
x
|
|
Futures
|
x
|
|
Risks Associated with Futures
|
x
|
|
Foreign Exchange Transactions
|
x
|
|
Forward Foreign Exchange Transactions
|
x
|
|
Currency Futures
|
x
|
|
Currency Options
|
x
|
|
Currency Swaps
|
x
|
|
Limitations on Currency Transactions
|
x
|
|
Risk Factors Hedging Foreign Currency Risk
|
x
|
|
Risk Factors in Derivatives
|
x
|
|
Credit Risk
|
x
|
|
Currency Risk
|
x
|
|
Leverage Risk
|
x
|
|
Liquidity Risk
|
x
|
|
Correlation Risk
|
x
|
|
Index Risk
|
x
|
|
Counterparty Risk
|
x
|
|
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives
|
x
|
|
Distressed Securities
|
x
|
|
Dollar Rolls
|
x
|
|
Equity Securities
|
x
|
|
Exchange Traded Notes (“ETNs”)
|
x
|
|
Foreign Investment Risks
|
x
|
|
Foreign Market Risk
|
x
|
|
Foreign Economy Risk
|
x
|
|
Currency Risk and Exchange Risk
|
x
|
|
Governmental Supervision and Regulation/Accounting Standards
|
x
|
|
Certain Risks of Holding Fund Assets Outside the United States
|
x
|
|
Publicly Available Information
|
x
|
|
Settlement Risk
|
x
|
|
Funding Agreements
|
x
|
|
Guarantees
|
x
|
|
Illiquid or Restricted Securities
|
x
|
|
Inflation-Indexed Bonds
|
x
|
|
Inflation Risk
|
x
|
|
Information Concerning the Indices
|
|
|
Standard & Poor’s 500 Index
|
|
|
Russell Indexes
|
|
|
MSCI Indexes
|
|
|
Initial Public Offering (“IPO”) Risk
|
x
|
|
Investment Grade Debt Obligations
|
x
|
|
Investment in Emerging Markets
|
x
|
|
Brady Bonds
|
x
|
|
Investment in Other Investment Companies
|
x
|
|
Exchange Traded Funds
|
x
|
|
Junk Bonds
|
x
|
|
Lease Obligations
|
x
|
|
Life Settlement Investments
|
x
|
|
Liquidity Management
|
x
|
|
Master Limited Partnerships
|
x
|
|
Merger Transaction Risk
|
x
|
|
Mezzanine Investments
|
x
|
|
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks
|
x
|
I-2
|
Money Market Securities
|
x
|
|
Mortgage-Related Securities
|
x
|
|
Mortgage-Backed Securities
|
x
|
|
Collateralized Mortgage Obligations (“CMOs”)
|
x
|
|
Adjustable Rate Mortgage Securities
|
x
|
|
CMO Residuals
|
x
|
|
Stripped Mortgage-Backed Securities
|
x
|
|
Tiered Index Bonds
|
x
|
|
TBA Commitments
|
x
|
|
Municipal Investments
|
x
|
|
Description of Municipal Bonds
|
x
|
|
General Obligation Bonds
|
x
|
|
Revenue Bonds
|
x
|
|
Private Activity Bonds (“PABs”)
|
x
|
|
Moral Obligation Bonds
|
x
|
|
Municipal Notes
|
x
|
|
Municipal Commercial Paper
|
x
|
|
Municipal Lease Obligations
|
x
|
|
Tender Option Bonds
|
x
|
|
Yields
|
x
|
|
Variable Rate Demand Obligations (“VRDOs”) and Participating VRDOs
|
x
|
|
Transactions in Financial Futures Contracts
|
x
|
|
Call Rights
|
x
|
|
Municipal Interest Rate Swap Transactions
|
x
|
|
Insured Municipal Bonds
|
x
|
|
Build America Bonds
|
x
|
|
Net
Interest Margin (NIM) Securities
|
x
|
|
Participation Notes
|
x
|
|
Pay-in-Kind Bonds
|
x
|
|
Portfolio Turnover Rates
|
x
|
|
Preferred Stock
|
x
|
|
Real Estate Related Securities
|
x
|
|
Real Estate Investment Trusts (“REITS”)
|
x
|
|
Repurchase Agreements and Purchase and Sale Contracts
|
x
|
|
Reverse Repurchase Agreements
|
x
|
|
Rights Offerings and Warrants to Purchase
|
x
|
|
Securities Lending
|
x
|
|
Securities of Smaller or Emerging Growth Companies
|
x
|
|
Short Sales
|
x
|
|
Sovereign Debt
|
x
|
|
Standby Commitment Agreements
|
x
|
|
Stripped Securities
|
x
|
|
Structured Notes
|
x
|
|
Supranational Entities
|
x
|
|
Tax
Exempt Derivatives
|
x
|
|
Tax
Exempt Preferred Shares
|
x
|
|
Taxability Risk
|
x
|
|
Trust Preferred Securities
|
x
|
|
U.S. Government Obligations
|
x
|
|
Utility Industries
|
x
|
|
When Issued Securities, Delayed Delivery Securities and Forward Commitments
|
x
|
|
Yields and Ratings
|
x
|
|
Zero Coupon Securities
|
x
|
I-3
Investments in the Subsidiary
The Fund may invest up to 25% of
its total assets in the shares of its wholly-owned and controlled subsidiary, BlackRock Cayman Multi-Manager Alternatives Fund,
Ltd. (the “Subsidiary”). Investments in the Subsidiary are expected to provide the Fund with exposure to the commodity markets within
the limitations of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) and recent Internal Revenue Service (the
“IRS”) revenue rulings, as discussed below. The Subsidiary is advised by the Manager. The Subsidiary (unlike the Fund) may invest without
limitation in commodity-related instruments. However, the Subsidiary is otherwise subject to the same fundamental, non-fundamental and certain other
investment restrictions as the Fund, including the timing and method of the valuation of the Subsidiary’s portfolio investments and shares of the
Subsidiary. The Subsidiary is managed pursuant to compliance policies and procedures that are the same, in all material respects, as the policies and
procedures adopted by the Trust. The Subsidiary is a company organized under the laws of the Cayman Islands, and is overseen by its own board of
directors, which is comprised of Paul L. Audet and Henry Gabbay, each a member of the Trust’s Board of Trustees. The Fund is the sole shareholder
of the Subsidiary, and shares of the Subsidiary will not be sold or offered to other investors.
The Subsidiary invests primarily
in commodity-related instruments. Although the Fund may enter into these commodity-related instruments directly, the Fund will likely gain exposure to
these commodity-related instruments indirectly by investing in the Subsidiary. To the extent that BlackRock believes that these commodity-related
instruments provide suitable exposure to the commodities market, the Fund’s investment in the Subsidiary will likely increase. The Subsidiary may
also hold cash and invest in other instruments, including fixed income securities, either as investments or to serve as margin or collateral for the
Subsidiary’s derivative positions.
The Manager and the Sub-Advisers
manage the assets of the Subsidiary, but receive no additional compensation for doing so. BlackRock also provides certain administrative services for
the Subsidiary, but receives no additional compensation for doing so. The Subsidiary will also enter into separate contracts for the provision of
advisory, sub-advisory, custody, transfer agency, and accounting agent services with the same or with affiliates of the same service providers that
provide those services to the Fund.
The financial statements of the
Subsidiary will be consolidated with the Fund’s financial statements in the Fund’s Annual and Semi-Annual Reports. The Fund’s Annual and
Semi-Annual Reports are distributed to shareholders. Copies of the Fund’s Annual Report are provided without charge upon request as indicated on
the front cover of this Statement of Additional Information.
The Subsidiary is not registered
under the Investment Company Act, and, unless otherwise noted in the Fund’s prospectus or this Statement of Additional Information, is not subject
to all the investor protections of the Investment Company Act. However, the Fund wholly owns and controls the Subsidiary, and the Fund and the
Subsidiary are both managed by BlackRock, making it unlikely that the Subsidiary will take action contrary to the interests of the Fund and its
shareholders. The Trust’s Board of Trustees has oversight responsibility for the investment activities of the Fund, including its investment in
the Subsidiary, and the Fund’s role as sole shareholder of the Subsidiary. As noted above, the Subsidiary will be subject to the same investment
restrictions and limitations as the Fund. The Subsidiary is managed pursuant to compliance policies and procedures that are the same, in all material
respects, as the policies and procedures adopted by the Trust. In addition, changes in the laws of the United States and/or the Cayman Islands could
result in the inability of the Fund and/or the Subsidiary to operate as described in the Fund’s prospectus and this Statement of Additional
Information and could adversely affect the Fund. For example, the Cayman Islands does not currently impose any income, corporate or capital gains tax,
estate duty, inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman Islands law changes such that the Subsidiary must pay Cayman
Islands taxes, Fund shareholders would likely suffer decreased investment returns.
The Fund, as a “regulated
investment company” under the tax rules, is required to realize at least 90 percent of its annual gross income from investment-related sources,
specifically from dividends, interest, proceeds from securities lending, gains from the sales of stocks, securities and foreign currencies, other
income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such
stock, securities or currencies, or certain types of publicly traded partnerships (referred to as qualifying income). Direct investments by a regulated
investment company in commodity-related instruments generally do not, under published IRS rulings, produce qualifying income. However, in a series of
private letter rulings, the IRS has indicated that income derived by a regulated investment company from a wholly-owned subsidiary
invested
I-4
in commodity and financial
futures and option contracts, forward contracts, swaps on commodities or commodities indexes, commodity-linked notes, other commodity-linked
investments and fixed income securities serving as collateral for the contracts would constitute qualifying income. The IRS has indicated that the
granting of additional private letter rulings is currently suspended, pending further internal discussion. As a result of the moratorium, the Fund does
not expect to request at this time such a private letter ruling. There is a risk that the IRS could assert that the annual net profit realized by the
Subsidiary and imputed for income tax purposes to the Fund will not be considered “qualifying income” for purposes of the Fund remaining
qualified as a regulated investment company for U.S. federal income tax purposes.
The Subsidiary will not be subject
to Federal income tax. It will, however, be considered a controlled foreign corporation, and the Fund will be required to include as income annually
amounts earned by the Subsidiary during that year. Furthermore, the Fund will distribute net investment income, if any, and net realized capital gain,
if any, at least annually, on such Subsidiary income, whether or not the Subsidiary makes a distribution to the Fund during the taxable
year.
Regulation Regarding
Derivatives
Effective December 31,
2012, the Commodity Futures Trading Commission (“CFTC”) adopted certain regulatory changes that subject registered investment
companies and advisers to registered investment companies to regulation by the CFTC if a fund invests more than a prescribed level of its
liquidation value in CFTC-regulated futures, options and swaps (“CFTC Derivatives”), or if the fund markets itself as providing
investment exposure to such instruments. Due to the Fund’s potential use of CFTC Derivatives above the prescribed levels,
the Fund will be considered a “commodity pool” under the Commodity Exchange Act. Accordingly, the investment adviser of the
Fund has registered as a “commodity pool operator” and is subject to CFTC regulation with respect to the Fund.
II. Investment
Restrictions
The Fund has adopted restrictions
and policies relating to the investment of the Fund’s assets and its activities. Certain of the restrictions are fundamental policies of the Fund
and may not be changed without the approval of the holders of a majority of the Fund’s outstanding voting securities (which for this purpose and
under the Investment Company Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares).
Under these fundamental investment
restrictions, the Fund may not:
1. Concentrate its investments in a particular industry, as that term is used in the Investment Company
Act.
2. Borrow money, except as permitted under the Investment Company Act.
3. Issue senior securities to the extent such issuance would violate the Investment Company Act.
4. Purchase or hold real estate, except the Fund may purchase and hold securities or other instruments that are secured by,
or linked to, real estate or interests therein, securities of real estate investment trusts, mortgage-related securities and securities of issuers
engaged in the real estate business, and the Fund may purchase and hold real estate as a result of the ownership of securities or other
instruments.
5. 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 or as otherwise permitted by applicable law.
6. Purchase or sell commodities or commodity contracts, except as permitted by the Investment Company Act.
7. Make loans to the extent prohibited by the Investment Company Act.
Notations Regarding the Fund’s Fundamental
Investment Restrictions
The following notations are not
considered to be part of the Fund’s fundamental investment restrictions and are subject to change without shareholder approval.
With respect to the fundamental
policy relating to concentration set forth in (1) above, the Investment Company Act does not define what constitutes “concentration” in an
industry. The Commission staff has taken the position that investment of 25% or more of a fund’s total assets in one or more issuers conducting
their principal activities in the same industry or group of industries constitutes concentration. It is possible that interpretations
of
I-5
concentration
could change in the future. The policy in (1) above will be interpreted to refer to concentration as that term may be interpreted
from time to time. The policy also will be interpreted to permit investment without limit in the following: securities of the
U.S. government and its agencies or instrumentalities; securities of state, territory, possession or municipal governments and
their authorities, agencies, instrumentalities or political subdivisions; and repurchase agreements collateralized by any such
obligations. Accordingly, issuers of the foregoing securities will not be considered to be members of any industry. There also
will be no limit on investment in issuers domiciled in a single jurisdiction or country. Finance companies will be considered
to be in the industries of their parents if their activities are primarily related to financing the activities of the parents.
Each foreign government will be considered to be a member of a separate industry. With respect to the Fund’s industry classifications,
the Fund currently utilizes any one or more of the industry sub-classifications used by one or more widely recognized market indexes
or rating group indexes, and/or as defined by Fund management. The policy also will be interpreted to give broad authority to
the Fund as to how to classify issuers within or among industries. The Fund may invest in underlying funds that may concentrate
their assets in one or more industries. The Fund will consider the concentration of the underlying funds in determining compliance
with the Fund’s concentration policy.
With respect to the fundamental
policy relating to borrowing money set forth in (2) above, the Investment Company Act permits the Fund to borrow money in amounts of up to one-third of
the Fund’s total assets from banks for any purpose, and to borrow up to 5% of the Fund’s total assets from banks or other lenders for
temporary purposes. (The Fund’s total assets include the amounts being borrowed.) To limit the risks attendant to borrowing, the Investment
Company Act requires the Fund to maintain at all times an “asset coverage” of at least 300% of the amount of its borrowings. Asset coverage
means the ratio that the value of the Fund’s total assets (including amounts borrowed), minus liabilities other than borrowings, bears to the
aggregate amount of all borrowings. Borrowing money to increase portfolio holdings is known as “leveraging.” Certain trading practices and
investments, such as reverse repurchase agreements, may be considered to be borrowings or involve leverage and thus are subject to the Investment
Company Act restrictions. In accordance with Commission staff guidance and interpretations, when the Fund engages in such transactions, the Fund
instead of maintaining asset coverage of at least 300%, may segregate or earmark liquid assets, or enter into an offsetting position, in an amount at
least equal to the Fund’s exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Commission). The
policy in (2) above will be interpreted to permit the Fund to engage in trading practices and investments that may be considered to be borrowing or to
involve leverage to the extent permitted by the Investment Company Act and to permit the Fund to segregate or earmark liquid assets or enter into
offsetting positions in accordance with the Investment Company Act. Short-term credits necessary for the settlement of securities transactions and
arrangements with respect to securities lending will not be considered to be borrowings under the policy. Practices and investments that may involve
leverage but are not considered to be borrowings are not subject to the policy.
With respect to the fundamental
policy relating to underwriting set forth in (5) above, the Investment Company Act does not prohibit the Fund from engaging in the underwriting
business or from underwriting the securities of other issuers; in fact, in the case of diversified funds, the Investment Company Act permits the Fund
to have underwriting commitments of up to 25% of its assets under certain circumstances. Those circumstances currently are that the amount of the
Fund’s underwriting commitments, when added to the value of the Fund’s investments in issuers where the Fund owns more than 10% of the
outstanding voting securities of those issuers, cannot exceed the 25% cap. A fund engaging in transactions involving the acquisition or disposition of
portfolio securities may be considered to be an underwriter under the Securities Act of 1933, as amended (the “Securities Act”). Although it
is not believed that the application of the Securities Act provisions described above would cause the Fund to be engaged in the business of
underwriting, the policy in (5) above will be interpreted not to prevent the Fund from engaging in transactions involving the acquisition or
disposition of portfolio securities, regardless of whether the Fund may be considered to be an underwriter under the Securities Act or is otherwise
engaged in the underwriting business to the extent permitted by applicable law.
With respect to the fundamental
policy relating to lending set forth in (7) above, the Investment Company Act does not prohibit the fund from making loans (including lending its
securities); however, Commission staff interpretations currently prohibit funds from lending more than one-third of their total assets (including
lending its securities), except through the purchase of debt obligations or the use of repurchase agreements. In addition, collateral arrangements with
respect to options, forward currency and futures transactions and other derivative instruments (as applicable), as well as delays in the settlement of
securities transactions, will not be considered loans.
I-6
Under its non-fundamental
investment restrictions, which may be changed by the board without shareholder approval, the Fund may not:
a. Purchase securities of other investment companies, except to the extent permitted by the Investment Company Act. As a
matter of policy, however, the Fund will not purchase shares of any registered open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the “fund of funds” provisions) of the Investment Company Act, at any time the Fund has knowledge
that its shares are purchased by another investment company investor in reliance on the provisions of subparagraph (G) of Section
12(d)(1).
b. Make short sales of securities or maintain a short position, except to the extent permitted by the Fund’s Prospectus
and Statement of Additional Information, as amended from time to time, and applicable law.
Unless otherwise indicated, all
limitations under the Fund’s fundamental or non-fundamental investment restrictions apply only at the time that a transaction is undertaken. Any
change in the percentage of the Fund’s assets invested in certain securities or other instruments resulting from market fluctuations or other
changes in the Fund’s total assets will not require the Fund to dispose of an investment until BlackRock Advisors, LLC (“BlackRock” or
the “Manager”) determines that it is practicable to sell or close out the investment without undue market or tax
consequences.
III. Information on Trustees and
Officers
The Board consists of
fifteen individuals (each, a “Trustee”), thirteen of whom are not “interested persons” of the Trust as
defined in the Investment Company Act (the “Independent Trustees”). The registered investment companies advised by BlackRock or its
affiliates (the “BlackRock-advised Funds”) are organized into one complex of closed-end funds (the “Closed-End Complex”), two
complexes of open-end funds (the “Equity-Liquidity Complex” and the “Equity-Bond Complex”) and one complex of exchange-traded funds
(each, a “BlackRock Fund Complex”). The Trust is included in the BlackRock Fund Complex referred to as the Equity-Liquidity Complex. The
Trustees also oversee as board members the operations of the other open-end registered investment companies included in the Equity-Liquidity
Complex.
The Board has overall
responsibility for the oversight of the Trust and the Fund. The Co-Chairs of the Board are Independent Trustees, and the Chair of each Board committee
(each, a “Committee”) is an Independent Trustee. The Board has five standing Committees: an Audit Committee, a Governance and Nominating
Committee, a Compliance Committee, a Performance Oversight and Contract Committee and an Executive Committee. The role of the Co-Chairs of the Board is
to preside at all meetings of the Board, and to act as a liaison with service providers, officers, attorneys, and other Trustees generally between
meetings. The Chair of each Committee performs a similar role with respect to the Committee. The Co-Chairs of the Board or the Chair of a Committee may
also perform such other functions as may be delegated by the Board or the Committee from time to time. The Independent Trustees meet regularly outside
the presence of Fund management, in executive session or with other service providers to the Fund. The Board has regular meetings five times a year,
and may hold special meetings if required before its next regular meeting. Each Committee meets regularly to conduct the oversight functions delegated
to that Committee by the Board and reports its findings to the Board. The Board and each standing Committee conduct annual assessments of their
oversight function and structure. The Board has determined that the Board’s leadership structure is appropriate because it allows the Board to
exercise independent judgment over management and to allocate areas of responsibility among Committees and the full Board to enhance effective
oversight.
The Board has engaged the Manager
to manage the Fund on a day-to-day basis. The Board is responsible for overseeing the Manager, other service providers, the operations of the Fund and
associated risk in accordance with the provisions of the Investment Company Act, state law, other applicable laws, the Trust’s charter, and the
Fund’s investment objective and strategies. The Board reviews, on an ongoing basis, the Fund’s performance, operations, and investment
strategies and techniques. The Board also conducts reviews of the Manager and its role in running the operations of the Fund.
Day-to-day risk management with
respect to the Fund is the responsibility of the Manager or of sub-advisers or other service providers (depending on the nature of the risk), subject
to the supervision of the Manager. The Fund is subject to a number of risks, including investment, compliance, operational and valuation risks, among
others. While there are a number of risk management functions performed by the Manager and the sub-advisers or other service providers, as applicable,
it is not possible to eliminate all of the risks applicable to the Fund. Risk
I-7
oversight forms part of the
Board’s general oversight of the Fund and is addressed as part of various Board and Committee activities. The Board, directly or through a
Committee, also reviews reports from, among others, management, the independent registered public accounting firm for the Fund, sub-advisers, and
internal auditors for the investment adviser or its affiliates, as appropriate, regarding risks faced by the Fund and management’s or the service
provider’s risk functions. The Committee system facilitates the timely and efficient consideration of matters by the Trustees, and facilitates
effective oversight of compliance with legal and regulatory requirements and of the Fund’s activities and associated risks. The Board has
appointed a Chief Compliance Officer, who oversees the implementation and testing of the Fund’s compliance program and reports to the Board
regarding compliance matters for the Fund and its service providers. The Independent Trustees have engaged independent legal counsel to assist them in
performing their oversight responsibilities.
The members of the Audit
Committee (the “Audit Committee”) are Kenneth L. Urish (Chair), Frank J. Fabozzi, Herbert I. London, Robert C. Robb, Jr. and Frederick W.
Winter, all of whom are Independent Trustees. The principal responsibilities of the Audit Committee are to approve, and recommend to the full Board for
approval, the selection, retention, termination and compensation of the Trust’s independent registered public accounting firm (the
“Independent Registered Public Accounting Firm”) and to oversee the Independent Registered Public Accounting Firm’s work. The Audit
Committee’s responsibilities include, without limitation, to (1) evaluate the qualifications and independence of the Independent Registered Public
Accounting Firm; (2) approve all audit engagement terms and fees for the Fund; (3) review the conduct and results of each independent audit of the
Fund’s annual financial statements; (4) review any issues raised by the Independent Registered Public Accounting Firm or Fund management regarding
the accounting or financial reporting policies and practices of the Fund and the internal controls of the Fund and certain service providers; (5)
oversee the performance of the Fund’s Independent Registered Public Accounting Firm; (6) review and discuss with management and the Fund’s
Independent Registered Public Accounting Firm the performance and findings of the Fund’s internal auditors; (7) discuss with Fund management its
policies regarding risk assessment and risk management as such matters relate to the Fund’s financial reporting and controls; (8) resolve any
disagreements between Fund management and the Independent Registered Public Accounting Firm regarding financial reporting; and (9) undertake such other
duties and responsibilities as may from time to time be delegated by the Board to the Audit Committee. The Board has adopted a written charter for the
Audit Committee. During the twelve months August 31, 2013, the Audit Committee met four times.
The members of the Governance and
Nominating Committee (the “Governance Committee”) are Dr. Matina S. Horner (Chair), Herbert I. London, Cynthia A. Montgomery, Robert C. Robb,
Jr. and Toby Rosenblatt, all of whom are Independent Trustees. The principal responsibilities of the Governance Committee are to (1) identify
individuals qualified to serve as Independent Trustees of the Trust and recommend Independent Trustee nominees for election by shareholders or
appointment by the Board; (2) advise the Board with respect to Board composition, procedures and committees (other than the Audit
Committee); (3) oversee periodic self-assessments of the Board and committees of the Board (other than the Audit Committee); (4) review
and make recommendations regarding Independent Trustee compensation; (5) monitor corporate governance matters and develop appropriate
recommendations to the Board; (6) act as the administrative committee with respect to Board policies and procedures, committee policies and
procedures (other than the Audit Committee) and codes of ethics as they relate to Independent Trustees; and (7) undertake such other duties and
responsibilities as may from time to time be delegated by the Board to the Governance Committee. The Governance Committee may consider nominations
for the office of Trustee made by Fund shareholders as it deems appropriate. Fund shareholders who wish to recommend a nominee should send nominations
to the Secretary of the Trust that include biographical information and set forth the qualifications of the proposed nominee. The Board has adopted a
written charter for the Governance Committee. During the twelve months ended August 31, 2013, the Governance Committee met
four times.
The members of the Compliance
Committee (the “Compliance Committee”) are Joseph P. Platt (Chair), Rodney D. Johnson, Ian A. MacKinnon and Cynthia A. Montgomery, all of
whom are Independent Trustees. The Compliance Committee’s purpose is to assist the Board in fulfilling its responsibility to oversee regulatory
and fiduciary compliance matters involving the Trust, the fund-related activities of BlackRock and any sub-adviser and the Trust’s
third-party service providers. The Compliance Committee’s responsibilities include, without limitation, to (1) oversee the compliance policies and
procedures of the Trust and its service providers and recommend changes or additions to such policies and procedures; (2) review information on and,
where appropriate, recommend policies concerning, the Trust’s compliance with applicable law; (3) review reports from, oversee the annual
performance review of, and make certain recommendations regarding the Trust’s Chief Compliance Officer (the
“CCO”),
I-8
including determining the
amount and structure of the CCO’s compensation and recommending such amount and structure to the full Board for approval and ratification; and (4)
undertake such other duties and responsibilities as may from time to time be delegated by the Board to the Compliance Committee. The Board has
adopted a written charter for the Compliance Committee. During the twelve months ended August 31, 2013, the Compliance Committee met
four times.
The members of the Performance
Oversight and Contract Committee (the “Performance Oversight Committee”) are David O. Beim (Chair), Frank J. Fabozzi, Ronald W. Forbes, Ian
A. MacKinnon, Toby Rosenblatt and Frederick W. Winter, all of whom are Independent Trustees. The Performance Oversight Committee’s purpose is to
assist the Board in fulfilling its responsibility to oversee the Fund’s investment performance relative to its agreed-upon performance objectives
and to assist the Independent Trustees in their consideration of investment advisory agreements. The Performance Oversight Committee’s
responsibilities include, without limitation, to (1) review information on, and make recommendations to the full Board in respect of, the Fund’s
investment objective, policies and practices; (2) review information on the Fund’s investment performance; (3) review information on appropriate
benchmarks and competitive universes and unusual or exceptional investment matters; (4) review personnel and other resources devoted to management of
the Fund and evaluate the nature and quality of information furnished to the Performance Oversight Committee; (5) recommend any required action
regarding changes in fundamental and non-fundamental investment policies and restrictions, Fund mergers or liquidations; (6) request and review
information on the nature, extent and quality of services provided to the shareholders; (7) make recommendations to the Board concerning the approval
or renewal of investment advisory agreements; and (8) undertake such other duties and responsibilities as may from time to time be delegated by the
Board to the Performance Oversight Committee. The Board has adopted a written charter for the Performance Oversight Committee. During the twelve months
ended August 31, 2013, the Performance Oversight Committee met four times.
The members of the Executive
Committee are Ronald W. Forbes and Rodney D. Johnson, both of whom are Independent Trustees, and Paul L. Audet, who serves as an interested Trustee.
The principal responsibilities of the Executive Committee are to (1) act on routine matters between meetings of the Board; (2) act on such matters as
may require urgent action between meetings of the Board; and (3) exercise such other authority as may from time to time be delegated to the Executive
Committee by the Board. The Board has adopted a written charter for the Executive Committee. During the twelve months ended August 31,
2013, the Executive Committee held two formal meetings.
The Governance Committee has
adopted a statement of policy that describes the experience, qualifications, skills and attributes that are necessary and desirable for potential
Independent Trustee candidates (the “Statement of Policy”). The Board believes that each Independent Trustee satisfied, at the time he or she
was initially elected or appointed a Trustee, and continues to satisfy, the standards contemplated by the Statement of Policy. Furthermore, in
determining that a particular Trustee was and continues to be qualified to serve as a Trustee, the Board has considered a variety of criteria, none of
which, in isolation, was controlling. The Board believes that, collectively, the Trustees have balanced and diverse experience, skills, attributes and
qualifications, which allow the Board to operate effectively in governing the Trust and protecting the interests of shareholders. Among the attributes
common to all Trustees are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively
with the Fund’s investment adviser, sub-advisers, other service providers, counsel and independent auditors, and to exercise effective business
judgment in the performance of their duties as Trustees.
Each Trustee’s ability to
perform his or her duties effectively is evidenced by his or her educational background or professional training; business, consulting, public service
or academic positions; experience from service as a board member of the Trust and the other funds in the BlackRock Fund Complex (and any predecessor
funds), other investment funds, public companies, or non-profit entities or other organizations; ongoing commitment to and participation in
Board and Committee meetings, as well as his or her leadership of standing and ad hoc committees throughout the years; or other relevant life
experiences.
I-9
The table below discusses some of
the experiences, qualifications and skills of each of the Trustees that support the conclusion that each Trustee should serve (or continue to serve) on
the Board.
Trustees
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Experience, Qualifications and
Skills
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Independent Trustees
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David O. Beim
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David O. Beim has served for over 16 years on the boards of registered investment companies, most recently as a member
of the boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy Merrill Lynch Investment Managers, L.P.
(“MLIM”) funds. Mr. Beim has served as a professor of finance and economics at the Columbia University Graduate School of Business since 1991
and has taught courses on corporate finance, international banking and emerging financial markets. The Board benefits from the perspective and
background gained by his almost 20 years of academic experience. He has published numerous articles and books on a range of topics, including, among
others, banking and finance. In addition, Mr. Beim spent 25 years in investment banking, including starting and running the investment banking business
at Bankers Trust Company.
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Frank J. Fabozzi
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Frank J. Fabozzi recently joined as a member of the boards of the funds in the Equity-Liquidity Complex. Dr. Fabozzi has
served for over [25] years on the boards of registered investment companies, most recently as a member of the boards of the funds in the
Closed-End Complex and its predecessor funds. Dr. Fabozzi holds the designation of Chartered Financial Analyst and Certified Public Accountant.
Dr. Fabozzi was inducted into the Fixed Income Analysts Society’s Hall of Fame and is the 2007 recipient of the C. Stewart Sheppard Award
given by the CFA Institute. The Board benefits from Dr. Fabozzi’s experiences as a professor and author in the field of finance. Dr.
Fabozzi’s experience as a Professor in the Practice of Finance and Becton Fellow at the Yale University School of Management and as
editor of the Journal of Portfolio Management demonstrate his wealth of expertise in the investment management and structured finance areas. Dr.
Fabozzi has authored and edited numerous books and research papers on topics in management and financial econometrics, and his writings have
focused on fixed income securities and portfolio management, many of which are considered standard references in the investment
management industry. Dr. Fabozzi’s long-standing service on the boards of the funds in the Closed-End Complex also provides him with an
understanding of the Fund, its operations, and the business and regulatory issues facing the Fund.
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Ronald W. Forbes
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Ronald W. Forbes has served for more than 30 years on the boards of registered investment companies, most recently as a member of the
boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy MLIM funds. This length of service provides Mr.
Forbes with direct knowledge of the operation of the Fund and the business and regulatory issues facing the Fund. He currently serves as professor
emeritus at the School of Business at the State University of New York at Albany, and has served as a professor of finance thereof since 1989. Mr.
Forbes’ experience as a professor of finance provides valuable background for his service on the boards. Mr. Forbes has also served as a member of
the task force on municipal securities markets for the Twentieth Century Fund.
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Dr.
Matina S. Horner
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Dr. Matina S. Horner has served for over 10 years on the boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. The Board benefits
from her prior service as Executive Vice President of Teachers Insurance and Annuity Association and
College Retirement Equities Fund, which provided Dr. Horner with management and corporate governance experience. In addition, Dr. Horner
served as a professor in the Department of Psychology at Harvard University and served as President of Radcliffe College for 17 years. Dr. Horner also
served on various public, private and non-profit boards.
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I-10
Trustees
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Experience, Qualifications and
Skills
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Rodney D. Johnson
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Rodney D. Johnson has served for over 20 years on the boards of registered investment companies, most recently as a member of the
boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. He has over 25 years of experience
as a financial advisor covering a range of engagements, which has broadened his knowledge of and experience with the investment management business.
Prior to founding Fairmount Capital Advisors, Inc., Mr. Johnson served as Chief Financial Officer of Temple University for two years. He
served as Director of Finance and Managing Director, in addition to a variety of other roles, for the City of Philadelphia, and has extensive
experience in municipal finance. Mr. Johnson was also a tenured associate professor of finance at Temple University and a research economist with the
Federal Reserve Bank of Philadelphia.
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Herbert I. London
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Herbert I. London has served for over 20 years on the boards of registered investment companies, most recently as a member of the
boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy MLIM funds. Dr. London’s experience as
president of the Hudson Institute, an internationally recognized think tank and public policy research organization in Washington
D.C., from 1997 to 2011, and in various positions at New York University provide both background and perspective on financial,
economic and global issues, which enhance his service on the Board. He has authored several books and numerous articles, which have appeared in major
newspapers and journals throughout the United States.
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Ian
A. MacKinnon
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|
|
Ian A. MacKinnon joined as a member of the boards of the funds in the Equity-Liquidity Complex in 2012. Mr. MacKinnon spent over 25 years in fixed income investing. He served over 20 years as a portfolio manager at
The Vanguard
Group and was managing director and head of the Vanguard Fixed Income Group. The Board benefits from the perspective
and experience he has gained over 25 years in portfolio management and his expertise in the fixed income markets. Mr.
MacKinnon has also served as a board member of the Municipal Securities Rulemaking Board.
|
|
|
|
|
|
|
|
Cynthia A. Montgomery
|
|
|
|
Cynthia A. Montgomery has served for over 20 years on the boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy MLIM funds. The Board benefits from
Ms. Montgomery’s more than 20 years of academic experience as a professor at Harvard Business School where she taught courses on corporate
strategy and corporate governance. Ms. Montgomery also has business management and corporate governance experience through her service on the corporate
boards of a variety of public companies. She has also authored numerous articles and books on these topics.
|
|
|
|
|
|
|
|
Joseph P. Platt
|
|
|
|
Joseph P. Platt has served for over 15 years on the boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. Mr. Platt currently
serves as general partner at Thorn Partners, LP, a private investment company. Prior to his joining Thorn Partners, LP, he was an owner, director and
executive vice president with Johnson and Higgins, an insurance broker and employee benefits consultant. He has over 25 years experience in the areas
of insurance, compensation and benefits. Mr. Platt also serves on the boards of public, private and non-profit companies.
|
|
|
|
|
|
|
|
Robert C. Robb, Jr.
|
|
|
|
Robert C. Robb, Jr. has served for over 15 years on the boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. Mr. Robb has over 30
years of experience in management consulting and has worked with many companies and business associations located throughout the United States. Mr.
Robb brings to the Board a wealth of practical business experience across a range of industries.
|
I-11
Trustees
|
|
|
|
Experience, Qualifications and
Skills
|
|
Toby
Rosenblatt
|
|
|
|
Toby Rosenblatt has served for over 20 years on the boards of registered investment companies, most recently as a member of the
boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. He has served as president and
general partner of Founders Investments, Ltd., a private investment limited partnership, since 1999, providing him with relevant experience with the
issues faced by investment management firms and their clients. Mr. Rosenblatt has been active in the civic arena and has served as a trustee of a
number of community and educational organizations for over 30 years.
|
|
|
|
|
|
|
|
Kenneth L. Urish
|
|
|
|
Kenneth L. Urish has served for over 15 years on the boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. He has over 30 years
of experience in public accounting. Mr. Urish has served as a managing member of an accounting and consulting firm. Mr. Urish has been determined by
the Audit Committee to be an audit committee financial expert, as such term is defined in the applicable Commission rules.
|
|
|
|
|
|
|
|
Frederick W. Winter
|
|
|
|
Frederick W. Winter has served for over 15 years on the boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. The Board benefits
from Mr. Winter’s years of academic experience, having served as a professor and dean emeritus of the Joseph M. Katz Graduate School of Business
at the University of Pittsburgh since 2005, and dean thereof from 1997 to 2005. He is widely regarded as a specialist in marketing strategy, marketing
management, business-to-business marketing and services marketing. He has also served as a consultant to more than 50 different
firms.
|
|
|
|
|
|
|
|
Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
Paul
L. Audet
|
|
|
|
Paul L. Audet has a wealth of experience in the investment management industry, including more than 15 years with
BlackRock and over 30 years in finance and asset management. His expertise in finance is demonstrated by his positions as Chief Financial Officer of
BlackRock and head of BlackRock’s Global Cash Management business. Mr. Audet currently is a member of BlackRock’s Global Operating and
Corporate Risk Management Committees, the BlackRock Alternative Investors Executive Committee and the Investment Committee for the Private Equity Fund
of Funds. Prior to joining BlackRock, Mr. Audet was the Senior Vice President of Finance at PNC Bank Corp. and Chief Financial Officer of the
investment management and mutual fund processing businesses and head of PNC’s Mergers and Acquisitions unit.
|
|
|
|
|
|
|
|
Henry Gabbay
|
|
|
|
Henry Gabbay’s many years of experience in finance provide the Board with a wealth of practical business knowledge and
leadership. In particular, Mr. Gabbay’s experience as a Consultant for and Managing Director of BlackRock, Inc., Chief
Administrative Officer of BlackRock and President of BlackRock Funds provides the Fund with greater insight into the analysis and
evaluation of both its existing investment portfolio and potential future investments as well as enhanced oversight of its investment decisions and
investment valuation processes. In addition, Mr. Gabbay’s former positions as Chief Administrative Officer of BlackRock and as Treasurer of
certain closed-end funds in the BlackRock fund complex provide the Board with direct knowledge of the operations of the Fund and its investment
adviser. Mr. Gabbay’s previous service on and long standing relationship with the Board also provide him with a specific understanding of the
Fund, its operations, and the business and regulatory issues facing the Fund.
|
I-12
Biographical Information
Certain biographical and other
information relating to the Trustees of the Trust is set forth below, including their address and year of birth, principal occupations for at
least the last five years, length of time served, total number of registered investment companies and investment portfolios overseen in the
BlackRock-advised Funds and any currently held public company and investment company directorships.
Name, Address and
Year of
Birth
|
|
Position(s)
Held with
the
Trust
|
|
Length of
Time
Served
2
|
|
Principal
Occupation(s)
During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(“RICs”)
Consisting of
Investment
Portfolios
(“Portfolios”)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
Independent Trustees
1
|
|
|
|
David O. Beim
3
55 East 52nd Street
New York, NY 10055
1940
|
|
Trustee
|
|
2007
to present
|
|
Professor of Professional Practice at the Columbia University Graduate School of Business since 1991; Trustee, Phillips Exeter
Academy from 2002 to 2012; Chairman, Wave Hill, Inc. (public garden and cultural center) from 1990 to
2006.
|
|
33 RICs consisting of 155 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank J. Fabozzi
55 East 52nd Street
New York, NY 10055
1948
|
|
Trustee
|
|
2014 to present
|
|
Editor of and Consultant for The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business
School since 2011; Professor in the Practice of Finance and Becton Fellow, Yale University School of Management from 2006 to 2011;
Adjunct Professor of Finance and Becton Fellow, Yale University from 1994 to 2006.
|
|
115 RICs consisting of 237 Portfolios
|
|
None
|
|
|
|
Ronald W. Forbes
4
55 East 52nd Street
New York, NY 10055
1940
|
|
Trustee
|
|
2007
to present
|
|
Professor Emeritus of Finance, School of Business, State University of New York at Albany since 2000.
|
|
33 RICs consisting of 155 Portfolios
|
|
None
|
|
|
|
Dr. Matina S. Horner
5
55 East 52nd Street
New York, NY 10055
1939
|
|
Trustee
|
|
2004
to present
|
|
Executive Vice President, Teachers Insurance and Annuity Association and College Retirement Equities Fund from 1989 to
2003.
|
|
33 RICs consisting of 155 Portfolios
|
|
NSTAR (electric and gas utility)
|
|
|
|
Rodney D. Johnson
4
55 East 52nd Street
New York, NY 10055
1941
|
|
Trustee
|
|
2007
to present
|
|
President, Fairmount Capital Advisors, Inc. from 1987 to 2013; Member of the Archdiocesan Investment Committee
of the Archdiocese of Philadelphia from 2004 to 2012; Director, The Committee of Seventy (civic) from 2006 to
2012; Director, Fox Chase Cancer Center from 2004 to 2011.
|
|
33 RICs consisting of 155 Portfolios
|
|
None
|
I-13
Name, Address and
Year of
Birth
|
|
Position(s)
Held with
the
Trust
|
|
Length of
Time
Served
2
|
|
Principal
Occupation(s)
During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(“RICs”)
Consisting of
Investment
Portfolios
(“Portfolios”)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
|
|
Herbert I. London
55 East 52nd Street
New York, NY 10055
1939
|
|
Trustee
|
|
2007
to present
|
|
Professor Emeritus, New York University since 2005; President, London Center for Policy Research since 2012; John M.
Olin Professor of Humanities, New York University from 1993 to 2005 and Professor thereof from 1980 to 2005; President Emeritus, Hudson
Institute (policy research organization) from 2011 to 2012, President thereof from 1997 to 2011 and Trustee from 1980 to 2012; Chairman of the
Board of Trustees for Grantham University since 2006; Director, InnoCentive, Inc. (global internet service) since 2005; Director, Cerego, LLC
(educational software) since 2005; Director, Cybersettle (online adjudication) since 2009; Director, AIMS Worldwide, Inc. (marketing) from 2007
to 2012.
|
|
33 RICs consisting of 155 Portfolios
|
|
AIMS
Worldwide, Inc. (marketing)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian A. MacKinnon
55 East
52nd Street
New York, NY 10055
1948
|
|
Trustee
|
|
2012 to present
|
|
Director, Kennett Capital, Inc.
(investments) since 2006; Director, Free Library of Philadelphia from 1998 to 2008.
|
|
33 RICs consisting of 155 Portfolios
|
|
None
|
|
|
|
Cynthia A. Montgomery
55 East 52nd Street
New York, NY 10055
1952
|
|
Trustee
|
|
2007 to present
|
|
Professor, Harvard Business School since 1989; Director, McLean Hospital from 2005 to 2012; Director, Harvard Business School
Publishing from 2005 to 2010.
|
|
33 RICs consisting of 155 Portfolios
|
|
Newell Rubbermaid, Inc. (manufacturing)
|
|
|
|
Joseph P. Platt
6
55 East 52nd Street
New York, NY 10055
1947
|
|
Trustee
|
|
2007 to present
|
|
Director, Jones and Brown (Canadian insurance broker) since 1998; General Partner, Thorn Partners, LP (private investments) since 1998;
Director, WQED Multi-Media (public broadcasting not-for-profit) since 2001; Director, The West Penn Allegheny Health System (a
not-for-profit health system) from 2008 to 2013; Partner, Amarna Corporation, LLC (private investment company) from 2002 to
2008.
|
|
33 RICs consisting of 155 Portfolios
|
|
Greenlight Capital Re, Ltd. (reinsurance company)
|
|
|
|
Robert C. Robb, Jr.
55 East 52nd Street
New York, NY 10055
1945
|
|
Trustee
|
|
2007 to present
|
|
Partner, Lewis, Eckert, Robb and Company (management and financial consulting firm) since 1981.
|
|
33 RICs consisting of 155 Portfolios
|
|
None
|
I-14
Name, Address and
Year of
Birth
|
|
Position(s)
Held with
the
Trust
|
|
Length of
Time
Served
2
|
|
Principal
Occupation(s)
During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(“RICs”)
Consisting of
Investment
Portfolios
(“Portfolios”)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
Toby Rosenblatt
55 East 52nd Street
New York, NY 10055
1938
|
|
Trustee
|
|
2005 to present
|
|
President, Founders Investments Ltd. (private investments) since 1999; Director, Forward Management, LLC since 2007; Director, College Access
Foundation of California (philanthropic foundation) since 2009; Director, A.P. Pharma, Inc. (specialty pharmaceuticals) from 1983 to 2011;
Director, The James Irvine Foundation (philanthropic foundation) from 1998 to 2008.
|
|
33 RICs consisting of 155 Portfolios
|
|
None
|
|
|
|
Kenneth L. Urish
7
55 East 52nd Street
New York, NY 10055
1951
|
|
Trustee
|
|
2007 to present
|
|
Managing Partner, Urish Popeck & Co., LLC (certified public accountants and consultants) since 1976; Immediate past-Chairman of the
Professional Ethics Committee of the Pennsylvania Institute of Certified Public Accountants and Committee Member thereof since 2007; Member of
External Advisory Board, The Pennsylvania State University Accounting Department since 2001; Principal, UP Strategic Wealth Investment Advisors, LLC
since 2013; Trustee, The Holy Family Institute from 2001 to 2010; President and Trustee, Pittsburgh Catholic Publishing Associates from 2003 to
2008; Director, Inter-Tel from 2006 to 2007.
|
|
33 RICs consisting of 155 Portfolios
|
|
None
|
|
|
|
Frederick W. Winter
55 East 52nd Street
New York, NY 10055
1945
|
|
Trustee
|
|
2007 to present
|
|
Director, Alkon Corporation (pneumatics) since 1992; Professor and Dean Emeritus of the Joseph M. Katz School of Business,
University of Pittsburgh from 2005 to 2013 and Dean thereof from 1997 to 2005; Director, Tippman Sports (recreation) since
2005; Director, Indotronix International (IT services) from 2004 to 2008.
|
|
33 RICs consisting of 155 Portfolios
|
|
None
|
I-15
Name, Address and
Year of
Birth
|
|
Position(s)
Held with
the
Trust
|
|
Length of
Time
Served
2
|
|
Principal
Occupation(s)
During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(“RICs”)
Consisting of
Investment
Portfolios
(“Portfolios”)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
Interested Trustees
1,8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
55 East 52nd Street
New York, NY 10055
1953
|
|
Trustee
|
|
2011 to present
|
|
Senior Managing Director of BlackRock, Inc. and Head of U.S. Mutual Funds since 2011; Chair of the U.S. Mutual Funds Committee reporting to
the Global Executive Committee since 2011; Head of BlackRock’s Real Estate business from 2008 to 2011; Member of BlackRock’s Global Operating
and Corporate Risk Management Committees and of the BlackRock Alternative Investors Executive Committee and Investment Committee for the Private Equity
Fund of Funds business since 2008; Head of BlackRock’s Global Cash Management business from 2005 to 2010; Acting Chief Financial Officer of
BlackRock from 2007 to 2008; Chief Financial Officer of BlackRock from 1998 to 2005.
|
|
144 RICs consisting of 330 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry Gabbay
55 East 52nd Street
New York, NY 10055
1947
|
|
Trustee
|
|
2007 to present
|
|
Consultant, BlackRock, Inc. from 2007 to 2008; Managing Director, BlackRock, Inc. from 1989 to 2007; Chief Administrative Officer, BlackRock
Advisors, LLC from 1998 to 2007; President of BlackRock Funds and BlackRock Allocation Target Shares (formerly, BlackRock Bond Allocation Target
Shares) from 2005 to 2007 and Treasurer of certain closed-end funds in the BlackRock fund complex from 1989 to 2006.
|
|
144 RICs consisting of 330 Portfolios
|
|
None
|
|
1
|
|
Trustees serve until their resignation, removal or
death, or until December 31 of the year in which they turn 72. The Board has approved extensions in the terms of Trustees who turn 72 prior to
December 31, 2013.
|
|
2
|
|
Following the combination of MLIM and
BlackRock, Inc. in September 2006, the various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated
into three new fund boards in 2007. As a result, although the chart shows certain Independent Trustees as joining the Trust’s
Board in 2007, those Independent Trustees first became members of the boards of other legacy MLIM or legacy BlackRock funds
as follows: David O. Beim, 1998; Ronald W. Forbes, 1977; Dr. Matina S. Horner, 2004; Rodney D. Johnson, 1995; Herbert I.
London, 1987; Cynthia A. Montgomery, 1994; Joseph P. Platt, 1999; Robert C. Robb, Jr., 1999; Toby Rosenblatt, 2005; Kenneth
L. Urish, 1999; and Frederick W. Winter, 1999.
|
|
3
|
|
Chair of the Performance Oversight Committee.
|
|
4
|
|
Co-Chair of the Board of Trustees.
|
|
5
|
|
Chair of the Governance Committee.
|
|
6
|
|
Chair of the Compliance Committee.
|
|
7
|
|
Chair of the Audit Committee.
|
|
8
|
|
Mr. Audet is an “interested person,”
as defined in the Investment Company Act, of the Trust based on his position with BlackRock, Inc. and its affiliates. Mr.
Gabbay is an “interested person” of the Trust based on his former positions with BlackRock, Inc. and its affiliates,
as well as his ownership of BlackRock, Inc. and The PNC Financial Services Group, Inc. securities.
|
I-16
Certain biographical and other
information relating to the officers of the Trust is set forth below, including address and year of birth, principal occupations for at least the last
five years, length of time served, total number of registered investment companies and investment portfolios overseen in the BlackRock-advised Funds
and any currently held public company and investment company directorships.
Name, Address and
Year of
Birth
|
|
|
|
Position(s)
Held with
the
Trust
|
|
Length of
Time
Served
1
|
|
Principal
Occupation(s)
During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(“RICs”)
Consisting of
Investment
Portfolios
(“Portfolios”)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
|
|
John Perlowski
55 East 52nd Street
New York, NY 10055
1964
|
|
|
|
President and Chief Executive Officer
|
|
2010
to present
|
|
Managing Director of BlackRock, Inc. since 2009; Global Head of BlackRock Fund Administration since 2009; Managing Director and Chief
Operating Officer of the Global Product Group at Goldman Sachs Asset Management, L.P. from 2003 to 2009; Treasurer of Goldman Sachs Mutual Funds from
2003 to 2009 and Senior Vice President thereof from 2007 to 2009;
Director of Goldman Sachs Offshore Funds from 2002 to 2009; Director of Family
Resource Network (charitable foundation) since 2009.
|
|
144 RICs consisting of 330 Portfolios
|
|
None
|
|
|
|
Richard Hoerner, CFA
55 East 52nd Street
New York, NY 10055
1958
|
|
|
|
Vice
President
|
|
2009
to present
|
|
Managing Director of BlackRock, Inc. since 2000; Head of the Global Cash Group since 2013; Co-head of the
Global Cash and Securities Lending Group from 2010 to 2013; Member of the Cash Management Group Executive Committee since
2005.
|
|
144 RICs consisting of 330 Portfolios
|
|
None
|
|
|
|
Brendan Kyne
55 East 52nd Street
New York, NY 10055
1977
|
|
|
|
Vice
President
|
|
2009
to present
|
|
Managing Director of BlackRock, Inc. since 2010; Director of BlackRock, Inc. from 2008 to 2009; Head of Product Development and
Management for BlackRock’s U.S. Retail Group since 2009 and Co-head thereof from 2007 to 2009; Vice President of BlackRock, Inc. from 2005 to
2008.
|
|
144 RICs consisting of 330 Portfolios
|
|
None
|
|
|
|
Neal J. Andrews
55 East 52nd Street
New York, NY 10055
1966
|
|
|
|
Chief Financial Officer and Assistant Treasurer
|
|
2007
to present
|
|
Managing Director of BlackRock, Inc. since 2006; Senior Vice President and Line of Business Head of Fund Accounting and
Administration at PNC Global Investment Servicing (U.S.) Inc. from 1992 to 2006.
|
|
144 RICs consisting of 330 Portfolios
|
|
None
|
|
|
|
Jay M. Fife
55 East 52nd Street
New York, NY 10055
1970
|
|
|
|
Treasurer
|
|
2007
to present
|
|
Managing Director of BlackRock, Inc. since 2007; Director of BlackRock, Inc. in 2006; Assistant Treasurer of MLIM and Fund Asset
Management, L.P. advised funds from 2005 to 2006; Director of MLIM Fund Services Group from 2001 to 2006.
|
|
144 RICs consisting of 330 Portfolios
|
|
None
|
I-17
Name, Address and
Year of
Birth
|
|
|
|
Position(s)
Held with
the
Trust
|
|
Length of
Time
Served
1
|
|
Principal
Occupation(s)
During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(“RICs”)
Consisting of
Investment
Portfolios
(“Portfolios”)
Overseen
|
|
Public
Company and
Investment
Company
Directorships
|
|
|
|
Brian P. Kindelan
55 East 52nd Street
New York, NY 10055
1959
|
|
|
|
Chief
Compliance
Officer and
Anti-Money
Laundering
Officer
|
|
2007
to present
|
|
Chief Compliance Officer of the BlackRock-advised Funds since 2007; Managing Director and Senior Counsel, BlackRock,
Inc. since 2005.
|
|
144 RICs consisting of 330 Portfolios
|
|
None
|
|
|
|
Benjamin Archibald
55 East 52nd Street
New York, NY 10055
1975
|
|
|
|
Secretary
|
|
2012
to present
|
|
Managing Director of BlackRock, Inc. since 2014; Director of BlackRock, Inc. from 2010 to 2013; Assistant
Secretary of the Trust from 2010 to 2012; General Counsel and Chief Operating Officer of Uhuru Capital Management from 2009 to 2010;
Executive Director and Counsel of Goldman Sachs Asset Management from 2005 to 2009.
|
|
62 RICs consisting of 248 Portfolios
|
|
None
|
|
1
|
|
Officers of the Trust serve at the pleasure of the
Board.
|
I-18
Share Ownership
Information relating to each
Trustee’s share ownership all BlackRock-advised Funds that are overseen by the respective Trustee (“Supervised Funds”) as of December
31, 2013 is set forth in the chart below. As of the date of this SAI, the Trustees owned no shares of the Fund.
Name of Trustee
|
|
|
|
Aggregate Dollar Range
of Equity
Securities in
Supervised Funds
|
|
Interested Trustees:
|
|
|
|
|
|
Paul L. Audet
|
|
|
|
Over $100,000
|
|
Henry Gabbay
|
|
|
|
Over $100,000
|
|
Independent Trustees:
|
|
|
|
|
|
David O. Beim
|
|
|
|
Over $100,000
|
|
Frank J. Fabozzi
|
|
|
|
Over $100,000
|
|
Ronald W. Forbes
|
|
|
|
Over $100,000
|
|
Dr. Matina S. Horner
|
|
|
|
Over $100,000
|
|
Rodney D. Johnson
|
|
|
|
Over $100,000
|
|
Herbert I. London
|
|
|
|
$50,001–$100,000
|
|
Ian A. MacKinnon
|
|
|
|
Over $100,000
|
|
Cynthia A Montgomery
|
|
|
|
Over $100,000
|
|
Joseph P. Platt
|
|
|
|
Over $100,000
|
|
Robert C. Robb, Jr.
|
|
|
|
Over $100,000
|
|
Toby Rosenblatt
|
|
|
|
Over $100,000
|
|
Kenneth L. Urish
|
|
|
|
Over $100,000
|
|
Frederick W. Winter
|
|
|
|
Over $100,000
|
As of March 3,
2014, the Trustees and officers of the Trust as a group owned an aggregate of less than 1% of the outstanding shares of the Fund. As of
December 31, 2013, none of the Independent Trustees or their immediate family members owned beneficially or of record any securities of
affiliates of the Manager.
Compensation of Trustees
Each Trustee who is an Independent
Trustee is paid as compensation an annual retainer of $275,000 per year for his or her services as a board member
of the BlackRock-advised Funds in the Equity-Liquidity Complex, including the Trust, and a $5,000 board meeting fee to be
paid for each in-person board meeting attended (a $2,500 board meeting fee for telephonic attendance at regular
board meetings), for up to five board meetings held in a calendar year (compensation for meetings in excess of this number
to be determined on a case-by-case basis), together with out of pocket expenses in accordance with a board policy on travel and other
business expenses relating to attendance at meetings. Each Independent Trustee receives $10,000 per year for each standing Committee on which he or
she serves for up to two standing Committee assignments but is not paid this amount for serving on a Committee which he or she chairs.
The Co-Chairs of the Boards are each paid an additional annual retainer of $60,000. The Chair of
the Audit Committees is paid an additional annual retainer of $40,000 and the Chairs of the Compliance Committees, Governance Committees
and Performance Oversight Committees are each paid an additional annual retainer of $30,000.
Mr. Gabbay is an interested
Trustee of the Trust and serves as an interested board member of the other funds which comprise the Equity-Liquidity, the Equity-Bond and the
Closed-End Complexes. Mr. Gabbay receives as compensation for his services as a board member of each of these three BlackRock Fund Complexes, (i) an
annual retainer of $550,000 paid quarterly in arrears, allocated to the BlackRock-advised Funds in these three BlackRock Fund Complexes,
including the Trust, and (ii) with respect to each of the two open-end BlackRock Fund Complexes, a board meeting fee of $3,750 (with respect to
meetings of the Equity-Liquidity Complex) and $18,750 (with respect to meetings of the Equity-Bond Complex) to be paid for attendance at each board
meeting for up to five board meetings held in a calendar year by each such BlackRock Fund Complex (compensation for meetings in excess of this
number to be determined on a case-by-case basis). Mr. Gabbay will also be reimbursed for out of pocket expenses in accordance with a board policy on
travel and other business expenses relating to attendance at meetings.
I-19
Mr. Gabbay’s compensation
for serving on the boards of funds in these three BlackRock Fund Complexes (including the Trust) is equal to 75% of each board member retainer
and, as applicable, of each board meeting fee (without regard to additional fees paid to board and committee chairs)
received by the independent board members serving on such boards. The Board of the Trust or the board of any other BlackRock advised Fund may modify
the board members’ compensation from time to time depending on market conditions and Mr. Gabbay’s compensation would be impacted by those
modifications.
The following table sets forth the
compensation the Fund expects to pay the Trustees for the fiscal period of service ending August 31, 2014 and the aggregate compensation
paid to them by all BlackRock-advised Funds for the calendar year ended December 31, 2013.
Name
|
|
|
|
Compensation
from the
Fund
|
|
Estimated Annual
Benefits
upon
Retirement
|
|
Aggregate
Compensation
from
the Fund and Other
BlackRock-Advised
Funds
1
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David O. Beim
2
|
|
|
|
$
|
923
|
|
|
None
|
|
$
|
340,000
|
|
|
Frank J. Fabozzi
|
|
|
|
$
|
[ ]
|
|
|
None
|
|
$
|
320,000
|
|
|
Ronald W. Forbes
3
|
|
|
|
$
|
1,013
|
|
|
None
|
|
$
|
388,750
|
|
|
Dr. Matina S. Horner
4
|
|
|
|
$
|
923
|
|
|
None
|
|
$
|
340,000
|
|
|
Rodney D. Johnson
3
|
|
|
|
$
|
1,013
|
|
|
None
|
|
$
|
388,750
|
|
|
Herbert I. London
|
|
|
|
$
|
900
|
|
|
None
|
|
$
|
315,000
|
|
|
Ian A. MacKinnon
|
|
|
|
$
|
900
|
|
|
None
|
|
$
|
320,000
|
|
|
Cynthia A. Montgomery
|
|
|
|
$
|
900
|
|
|
None
|
|
$
|
320,000
|
|
|
Joseph P. Platt
5
|
|
|
|
$
|
923
|
|
|
None
|
|
$
|
356,250
|
|
|
Robert C. Robb, Jr.
|
|
|
|
$
|
900
|
|
|
None
|
|
$
|
320,000
|
|
|
Toby Rosenblatt
|
|
|
|
$
|
900
|
|
|
None
|
|
$
|
321,250
|
|
|
Kenneth L. Urish
6
|
|
|
|
$
|
946
|
|
|
None
|
|
$
|
347,500
|
|
|
Frederick W. Winter
|
|
|
|
$
|
900
|
|
|
None
|
|
$
|
320,000
|
|
|
Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
|
|
|
|
None
|
|
None
|
|
None
|
|
Henry Gabbay
|
|
|
|
$
|
641
|
|
|
None
|
|
$
|
661,563
|
|
|
1
|
|
For the number of RICs and Portfolios from which
each Trustee receives compensation, see the Biographical Information chart beginning on page I-13.
|
|
2
|
|
Chair of the Performance Oversight Committee.
|
|
4
|
|
Chair of the Governance Committee.
|
|
5
|
|
Chair of the Compliance Committee.
|
|
6
|
|
Chair of the Audit Committee.
|
IV. Management, Advisory and Other
Service Arrangements
Management Agreement
The Trust, on behalf of the Fund,
entered into a management agreement with BlackRock pursuant to which BlackRock is entitled to fees for the services it provides (the “Management
Agreement”).
As of the date of this SAI, the
Fund has not made any payments to BlackRock for management services.
BlackRock has agreed, under the
Management Agreement, subject to the supervision of the Board, to provide the Fund with investment research, advice, management and supervision;
furnish a continuous investment program for the Fund’s portfolio of securities and other investments consistent with the Fund’s investment
objective, policies and restrictions; and place orders pursuant to its investment determinations. BlackRock is responsible for identifying and
retaining (subject to approval of the Board) Sub-Advisers for the Fund’s selected strategies and for monitoring the services provided by the
Sub-Advisers. In addition, BlackRock may delegate certain of its investment advisory functions under the Management Agreement to one or more of its
affiliates to the extent permitted by applicable law. BlackRock reviews a number of quantitative and qualitative factors as part of its process for
selecting and monitoring subadvisers. BlackRock has entered into subadvisory arrangements, as described below.
I-20
Manager of Managers Structure
Unlike many other mutual funds,
the Fund is not associated with any one portfolio manager, and seeks to benefit from different specialists selected from unaffiliated and affiliated
Sub-Advisers. Subject to the ultimate responsibility of the Board, BlackRock has the responsibility to oversee the Fund’s Sub-Advisers and to
recommend their hiring, termination and replacement. BlackRock and the Fund have applied to the SEC for an exemptive order from the SEC that, if
granted, would permit BlackRock, with respect to the Fund, to appoint and replace Sub-Advisers, and enter into, amend and terminate sub-advisory
agreements with Sub-Advisers, subject to Board approval but without shareholder approval (the “Manager of Managers Structure”). The use of
the Manager of Managers Structure with respect to the Fund may be subject to certain conditions set forth in the SEC exemptive order. There can be no
assurance that the SEC will grant the Fund’s application for an exemptive order.
The Manager of Managers Structure
would enable the Fund to operate with greater efficiency and without incurring the expense and delays associated with obtaining approvals of a new
subadvisory (or trading) agreement. The Manager of Managers Structure would not permit the Fund’s investment management fees to increase without
shareholder approval.
Sub-Advisers
Pursuant to separate subadvisory
agreements (each, a “Subadvisory Agreement”), the following Sub-Advisers independently select the investments for the portions of the Fund
allocated to them and are responsible for the day-to-day management of the Fund’s assets allocated to them. Pursuant to each Subadvisory
Agreement, BlackRock pays each Sub-Adviser for providing services to BlackRock with respect to the Fund a monthly fee at an annual rate equal to a
percentage of the Fund’s assets allocated to them.
Benefit Street
Partners LLC, 9 West 57
th
Street, Suite 4700, New York, NY 10019, serves as a Sub-Adviser to the
Fund.
Carl M. Loeb Advisory Partners
L.P., 125 Broad Street, 14
th
Floor, New York, NY 10004, serves as a Sub-Adviser to the Fund.
Independence Capital Asset
Partners, LLC, 1400 16
th
Street, Suite 520, Denver, CO 80202, serves as a Sub-Adviser to the
Fund.
LibreMax Capital, LLC,
600 Lexington Avenue, 19
th
Floor, New York, NY 10022, serves as a Sub-Adviser to the
Fund.
MeehanCombs LP,
660 Steamboat Road, Greenwich, CT 06830, serves as a Sub-Adviser to the Fund.
Peak6 Advisors LLC,
141 W. Jackson Blvd., Suite 700, Chicago, IL 60604, serves as a Sub-Adviser to the Fund.
QMS Capital Management LP,
240 Leigh Farm Rd., Suite 230, Durham, NC 27707, serves as a Sub-Adviser to the Fund.
Saiers Capital, LLC,
2 Rector Street 3
rd
Floor, New York, NY 10006, serves as a Sub-Adviser to the Fund.
BlackRock has entered into
separate subadvisory agreements with each of BlackRock International Limited, BlackRock Asset Management North Asia Limited and BlackRock
(Singapore) Limited (collectively, the “Affiliated Sub-Advisers”) with respect to the Fund. BlackRock pays each of the Affiliated
Sub-Advisers for providing services to BlackRock with respect to the Fund a monthly fee at an annual rate equal to a percentage of the Fund’s
assets allocated to them. BlackRock does not currently allocate any Fund assets to any of the Affiliated Sub-Advisers.
As of the date of this SAI,
BlackRock has not made any payments to any Sub-Adviser for management services.
Administration Agreement
BlackRock (the
“Administrator”) serves as the Fund’s administrator pursuant to an administration agreement (the “Administration
Agreement”). BlackRock has agreed to maintain office facilities for the Fund; furnish the Fund with clerical, bookkeeping and
administrative services; oversee the determination and publication of the Fund’s net asset value; oversee the preparation and filing of
Federal, state and local income tax returns; prepare certain
I-21
reports required by
regulatory authorities; calculate various contractual expenses; determine the amount of dividends and distributions available for payment by the
Fund to its shareholders; prepare and arrange for the printing of dividend notices to shareholders; and provide Fund service providers with such
information as is required to effect the payment of dividends and distributions; and serve as liaison with the Trust’s officers,
independent accountants, legal counsel, custodian, accounting agent and transfer and dividend disbursing agent in establishing the accounting
policies of the Fund and monitoring financial and shareholder accounting services. The Administrator may from time to time voluntarily
waive administration fees with respect to the Fund and may voluntarily reimburse the Fund for expenses.
Under the Administration
Agreement, the Trust pays to BlackRock on behalf of the Fund a fee, computed daily and payable monthly, at an aggregate annual rate of
0.05% of the first $500 million of the Fund’s average daily net assets, 0.04% of the next $500 million of the Fund’s
average daily net assets and 0.03% of the average daily net assets of the Fund in excess of $1
billion.
The Administration Agreement
provides that BlackRock will not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or the Fund in
connection with the performance of the Administration Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties or from reckless disregard of its duties and obligations thereunder. In addition, the Trust will
indemnify BlackRock and its affiliates against any loss arising in connection with its provision of services
under the Administration Agreement, except that neither BlackRock nor its affiliates shall be indemnified against any loss arising
out of willful misfeasance, bad faith, gross negligence or reckless disregard of its duties under the Administration
Agreement.
As of the date of this SAI, the
Fund has not made any payments to the Administrator for administration services.
The Trust and its service
providers may engage third party plan administrators who provide trustee, administrative and recordkeeping services for certain employee benefit,
profit-sharing and retirement plans as agent for the Trust with respect to such plans, for the purpose of accepting orders for the purchase and
redemption of shares of the Fund.
In addition, pursuant to a
shareholders’ administrative services agreement (the “Shareholders’ Administrative Services Agreement”), BlackRock provides certain
shareholder liaison services in connection with the Trust’s investor service center. The Fund reimburses BlackRock for its costs in
maintaining the service center, which costs include, among other things, employee salaries, leasehold expenses, and other out-of-pocket
expenses.
As of the date of this SAI, the
Fund has not made any payments to BlackRock pursuant to the Shareholders’ Administrative Services Agreement.
Information Regarding the Portfolio
Managers
The following people serve as
portfolio managers to the fund:
BlackRock: Mark Everitt,
CFA, Albert Matriotti, David Matter, CFA and Edward Rzeszowski
I-22
Other Funds and Accounts Managed
The following table sets forth
information about funds and accounts other than the Fund for which the Fund’s portfolio managers are jointly and primarily responsible for the
day-to-day portfolio management as of December 31, 2013.
|
|
|
Number of Other Accounts Managed
and Assets by Account Type
|
|
Number of Accounts and Assets for
Which Management Fee is Performance-Based
|
Name of Portfolio
Manager
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
Mark Everitt, CFA
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
Albert Matriotti
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
David Matter, CFA
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
$[ ]
|
|
Edward Rzeszowski
|
|
1
|
|
3
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
$65.35 Million
|
|
$109.1 Million
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
Portfolio Manager Compensation
Overview
The discussion below describes
the portfolio manager’s compensation as of January 31, 2014.
BlackRock’s financial
arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior
management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of
factors. The principal components of compensation include a base salary, a performance-based discretionary bonus, participation in various
benefits programs and one or more of the incentive compensation programs established by BlackRock.
Base compensation.
Generally, portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive
Compensation
Discretionary incentive
compensation is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio manager’s group
within BlackRock, the investment performance, including risk-adjusted returns, of the firm’s assets under management or supervision by that
portfolio manager, and the individual’s performance and contribution to the overall performance of these portfolios and BlackRock. Among
other things, BlackRock’s Chief Investment Officers make a subjective determination with respect to each portfolio manager’s
compensation based on the performance of the Fund and other accounts managed by each portfolio manager. Performance of multi-asset class
funds is generally measured on a pre-tax basis over various time periods including 1-, 3- and 5- year periods, as applicable. With respect to
the portfolio manager, the benchmark for the Fund and other accounts is the HFRI Fund of Funds Composite Index.
Distribution of
Discretionary Incentive Compensation.
Discretionary incentive compensation is distributed to portfolio managers in a combination of cash and
BlackRock, Inc. restricted stock units which vest ratably over a number of years. For some portfolio managers, discretionary incentive
compensation is also distributed in deferred cash awards that notionally track the returns of select BlackRock investment products they manage
and that vest ratably over a number of years. The BlackRock, Inc. restricted stock units, upon vesting, will be settled in BlackRock,
Inc. common stock. Typically, the cash portion of the discretionary incentive compensation, when combined with base salary, represents more than
60% of total compensation for the portfolio managers. Paying a portion of discretionary incentive compensation in BlackRock, Inc. stock puts
compensation earned by a portfolio manager for a given year “at risk” based on BlackRock’s ability to sustain and improve its
performance over future periods. Providing a portion of discretionary incentive compensation in deferred cash awards that notionally track
the BlackRock investment products they manage provides direct alignment with investment product results.
Long-Term Incentive Plan
Awards —
From time to time long-term incentive equity awards are granted to certain key employees to aid in retention, align their
interests with long-term shareholder interests and motivate performance. Equity awards are generally granted in the form of BlackRock, Inc.
restricted stock units that, once
I-23
vested, settle in BlackRock, Inc. common stock. Mr. Rzeszowski does not have
unvested long-term incentive awards.
Deferred Compensation
Program —
A portion of the compensation paid to eligible United States-based BlackRock employees may be voluntarily deferred at their
election for defined periods of time into an account that tracks the performance of certain of the firm’s investment products. Any
portfolio manager who is either a managing director or director at BlackRock is eligible to participate in the deferred compensation
program.
Other compensation
benefits.
In addition to base compensation and discretionary incentive compensation, portfolio managers may be eligible to receive or
participate in one or more of the following:
Incentive Savings Plans
—
BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to participate, including
a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution
components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per
year, and a company retirement contribution equal to 3-5% of eligible compensation up to the Internal Revenue Service limit ($255,000 for
2013). The RSP offers a range of investment options, including registered investment companies and collective investment funds managed by the
firm. BlackRock contributions follow the investment direction set by participants for their own contributions or, absent participant investment
direction, are invested into a target date fund that corresponds to, or is closest to, the year in which the participant attains age 65. The
ESPP allows for investment in BlackRock common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual
participation in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value
on the purchase date. All of the eligible portfolio managers are eligible to participate in these plans.
Fund Ownership
The Fund has not yet made its
shares available for sale; therefore the portfolio managers owned no shares of the Fund as of the date of this SAI.
Portfolio Manager Potential Material Conflicts of
Interest
BlackRock has built a
professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential
incentives that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of investment
opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to
ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment management and advisory
services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable law, make investment recommendations to
other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to BlackRock, or in which portfolio
managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition,
BlackRock, its affiliates and significant shareholders and any officer, director, shareholder or employee may or may not have an interest
in the securities whose purchase and sale BlackRock recommends to the Fund. BlackRock, or any of its affiliates or significant shareholders, or
any officer, director, shareholder, employee or any member of their families may take different actions than those recommended to the Fund by
BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of
companies of which any of BlackRock’s (or its affiliates’ or significant shareholders’) officers, directors or employees are
directors or officers, or companies as to which BlackRock or any of its affiliates or significant shareholders or the officers, directors
and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio managers also
may manage accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that Mr.
Rzeszowski may be managing hedge fund and/or long only accounts, or may be part of a team managing hedge fund and/or long only accounts,
subject to incentive fees. Mr. Rzeszowski may therefore be entitled to receive a portion of any incentive fees earned on such
accounts.
As a fiduciary, BlackRock owes
a duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the
trades must be allocated in a manner consistent with
I-24
its fiduciary duties. BlackRock attempts to allocate investments in a fair and
equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted policies that
are intended to ensure reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate
investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
Custodian and Transfer Agent
The Bank of New York
Mellon serves as the custodian for the Fund (the “Custodian”). On a monthly basis, the Custodian nets the Fund’s daily positive and
negative cash balances and calculates a credit (“custody credit”) or a charge based on that net amount. The custodian fees, including the
amount of any overdraft charges, may be reduced by that amount of such custody credits, and any unused credits at the end of a given month may be
carried forward to a subsequent month. Any such credits unused by the end of the Fund’s fiscal year will not expire. Net debits at the end of a
given month are added to the Fund’s custody bill and paid by the Fund.
BNY Mellon Investment
Servicing (US) Inc. serves as the transfer and dividend disbursement agent for the Fund.
Credit Agreement
The Trust,
on behalf of the Fund, along with certain other funds managed by the Manager and its
affiliates (“Participating Funds”), is a party to a 364-day, $800 million credit
agreement with a group of lenders, which is renewed annually (the “Credit Agreement”).
Excluding commitments designated for a certain individual fund, other Participating Funds,
including the Fund, can borrow up to an aggregate commitment amount of $500 million,
subject to asset coverage and other limitations as specified in the agreement. The Fund
may borrow under the Credit Agreement to meet shareholder redemptions and for other lawful
purposes. The Fund may not borrow under the Credit Agreement for leverage. The Fund may
borrow up to the maximum amount allowable under the Fund’s current Prospectus and
Statement of Additional Information, subject to various other legal, regulatory or contractual
limits. Borrowing results in interest expense and other fees and expenses for the Fund
which may impact net Fund expenses borne by remaining shareholders of the Fund. The costs
of borrowing may reduce the Fund’s return. The Fund is charged its pro rata share
of upfront fees and commitment fees on the aggregate commitment amount based on its net
assets. If the Fund borrows pursuant to the Credit Agreement, the Fund is charged interest
at a variable rate.
V. Information on Sales Charges and
Distribution Related Expenses
BlackRock Investments, LLC acts as
the Fund’s sole distributor. As of the date of this SAI, the Fund has not made any payments pursuant to its Distribution Plan.
VI. Computation of Offering Price Per
Share
An illustration of the computation
of the offering price for the Investor A Shares of the Fund based on a hypothetical investment of $10,000 is set forth below.
Computation of Offering Price Per
Share:
|
|
|
|
Investor A
Shares
|
|
Net Assets
|
|
|
|
$
|
10,000
|
|
|
Number of Shares Outstanding
|
|
|
|
|
1,000
|
|
|
Net Asset Value Per Share (net assets divided by number of shares outstanding)
|
|
|
|
$
|
10
|
|
|
Sales Charge (5.25% of offering price; 5.54% of net asset value per
share)
1
|
|
|
|
|
0.55
|
|
|
Offering Price
|
|
|
|
$
|
10.55
|
|
|
1
|
|
Rounded to the nearest one-hundredth percent;
assumes maximum sales charge is applicable.
|
The offering price for the
Fund’s other share classes is equal to the share class’ net asset value computed as set forth above for Investor A Shares. Though not subject
to a sales charge, certain share classes may be subject to a CDSC on redemption. For more information on the purchasing and valuation of shares, please
see “Purchase of Shares” and “Pricing of Shares” in Part II of this SAI.
I-25
VII. Portfolio Transactions and
Brokerage
See “Portfolio Transactions
and Brokerage” in Part II of this SAI for more information.
The Fund conducts its
securities lending pursuant to an exemptive order from the Commission permitting it to lend portfolio securities to borrowers affiliated with
the Fund and to retain an affiliate of the Fund as lending agent. To the extent that the Fund engages in securities lending, BlackRock
Investment Management, LLC (“BIM”), an affiliate of the Manager, acts as securities lending agent for the Fund, subject to the overall
supervision of the Manager. BIM administers the lending program in accordance with guidelines approved by the Fund’s Board. Pursuant
to the current securities lending agreement, BIM may lend securities only when the difference between the borrower rebate rate and the risk free
rate exceeds a certain level (such securities, the “specials only securities”).
The Fund retains a portion of
securities lending income and remit a remaining portion to BIM as compensation for its services as securities lending agent. Securities lending
income is equal to the total of income earned from the reinvestment of cash collateral (and excludes collateral investment expenses as defined
below), and any fees or other payments to and from borrowers of securities. As securities lending agent, BIM bears all operational costs
directly related to securities lending. The Fund is responsible for expenses in connection with the investment of cash collateral received
for securities on loan in a private investment company managed by an affiliate of the Manager, however, BIM has agreed to cap the collateral
investment expenses the Fund bears to an annual rate of 0.04% of the daily net assets of such private investment company (the “collateral
investment expenses”). In addition, in accordance with the exemptive order, the investment adviser to the private investment company will
not charge any advisory fees with respect to shares purchased by the Fund. Such shares also will not be subject to a sales load,
redemption fee, distribution fee or service fee.
Pursuant to the current
securities lending agreement, the Fund retains 80% of securities lending income (which excludes collateral investment
expenses).
In addition, commencing the
business day following the date that the aggregate securities lending income earned across the Equity-Liquidity Complex in a calendar year
exceeds the aggregate securities lending income earned across the Equity-Liquidity Complex through the lending of specials only securities in
the calendar year 2013, the Fund, pursuant to the current securities lending agreement, will receive for the remainder of that calendar year
securities lending income in an amount equal to 85% of securities lending income (which excludes collateral investment
expenses).
As of the date of this SAI, the
Fund has not paid any brokerage commissions or securities lending agent fees.
VIII. Additional
Information
Independent Registered
Public Accounting Firm.
[ ], with offices located at [ ], serves and the Fund’s independent registered public accounting
firm.
The Trust was organized as a
Massachusetts business trust on December 22, 1988, and is registered under the Investment Company Act as an open end management investment company. The
Fund is non-diversified. The Trust is authorized to issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share,
which may be divided into different series and classes.
Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held personally liable as partners for the obligations of the trust. However, the
Trust’s Declaration of Trust provides that shareholders shall not be subject to any personal liability in connection with the assets of the Trust
for the acts or obligations of the Trust, and that every note, bond, contract, order or other undertaking made by the Trust shall contain a provision
to the effect that the shareholders are not personally liable thereunder. The Declaration of Trust provides for indemnification out of the Trust
property of any shareholder held personally liable solely by reason of his being or having been a shareholder and not because of his acts or omissions
or some other reason. The Declaration of Trust also provides that the Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust, and shall satisfy any judgment thereon.
The Declaration of Trust further
provides that all persons having any claim against the Trustees or Trust shall look solely to the trust property for payment; that no Trustee of the
Trust shall be personally liable for or on account
I-26
of any contract, debt, tort,
claim, damage, judgment or decree arising out of or connected with the administration or preservation of the Trust property or the conduct of any
business of the Trust; and that no Trustee shall be personally liable to any person for any action or failure to act except by reason of such
Trustee’s own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a Trustee is entitled to be indemnified against all liabilities and expenses reasonably incurred by such Trustee in
connection with the defense or disposition of any proceeding in which he may be involved or with which he may be threatened by reason of his being or
having been a Trustee, and that the Trust will indemnify officers, representatives and employees of the Trust to the same extent that trustees are
entitled to indemnification.
Principal Shareholders
As of February
[ ], 2014, the Fund has no outstanding shares.
None.
I-27
P
ART
II
Throughout this Statement of Additional Information
(“SAI”), each BlackRock-advised fund may be referred to as a “Fund” or collectively with others as the
“Funds.” Certain Funds may also be referred to as “Municipal Funds” if they invest certain of their assets
in municipal investments described below.
Each Fund is organized either as a Maryland corporation,
a Massachusetts business trust or a Delaware statutory trust. In each jurisdiction, nomenclature varies. For ease and clarity of
presentation, shares of common stock and shares of beneficial interest are referred to herein as “shares” or “Common
Stock,” holders of shares of Common Stock are referred to as “shareholders,” the trustees or directors of each
Fund are referred to as “Directors,” BlackRock Advisors, LLC or its affiliates is the investment adviser or manager
of each Fund and is referred to herein as the “Manager” or “BlackRock,” and the investment advisory agreement
or management agreement applicable to each Fund is referred to as the “Management Agreement.” Each Fund’s Articles
of Incorporation or Declaration of Trust, together with all amendments thereto, is referred to as its “charter.” The
Investment Company Act of 1940, as amended, is referred to herein as the “Investment Company Act.” The Securities Act
of 1933, as amended, is referred to herein as the “Securities Act.” The Securities and Exchange Commission is referred
to herein as the “Commission” or the “SEC.”
Certain Funds are “feeder” funds (each,
a “Feeder Fund”) that invest all or a portion of their assets in a corresponding “master” portfolio (each,
a “Master Portfolio”) of a master limited liability company (each, a “Master LLC”), a mutual fund that
has the same objective and strategies as the Feeder Fund. All investments are generally made at the level of the Master Portfolio.
This structure is sometimes called a “master/feeder” structure. A Feeder Fund’s investment results will correspond
directly to the investment results of the underlying Master Portfolio in which it invests. For simplicity, this SAI uses the term
“Fund” to include both a Feeder Fund and its Master Portfolio.
In addition to containing information about the
Funds, Part II of this SAI contains general information about all funds in the BlackRock-advised fund complex. Certain information
contained herein may not be relevant to a particular Fund.
I
NVESTMENT
R
ISKS
AND
C
ONSIDERATIONS
Set forth below are descriptions of some of the
types of investments and investment strategies that one or more of the Funds may use, and the risks and considerations associated
with those investments and investment strategies. Please see each Fund’s Prospectus and the “Investment Objectives
and Policies” section of Part I of this SAI for further information on each Fund’s investment policies and risks. Information
contained in this section about the risks and considerations associated with a Fund’s investments and/or investment strategies
applies only to those Funds specifically identified in Part I of the SAI as making each type of investment or using each investment
strategy (each, a “Covered Fund”). Information that does not apply to a Covered Fund does not form a part of that Covered
Fund’s Statement of Additional Information and should not be relied on by investors in that Covered Fund. Only information
that is clearly identified as applicable to a Covered Fund is considered to form a part of that Covered Fund’s Statement
of Additional Information.
144A Securities
. A Fund may purchase
securities that can be offered and sold only to “qualified institutional buyers” under Rule 144A under the Securities
Act. The Directors have determined to treat as liquid Rule 144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies and procedures adopted by the Fund’s Directors.
The Directors have adopted guidelines and delegated to the Manager the daily function of determining and monitoring liquidity of
144A securities. The Directors, however, will retain sufficient oversight and will ultimately be responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market for securities sold and offered under Rule 144A will
continue to develop, the Directors will carefully monitor a Fund’s investments in these securities. This investment practice
could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these securities.
Asset-Backed Securities.
Asset-backed
securities are securities backed by home equity loans, installment sale contracts, credit card receivables or other assets.
Asset-backed securities are “pass-through” securities, meaning that principal and interest payments —
net of expenses — made by the borrower on the underlying assets (such as credit
card receivables) are passed through to a Fund.
The value of asset-backed securities, like that of traditional fixed income securities, typically increases when interest rates
fall and decreases when interest rates rise. However, asset-backed securities differ from traditional fixed income securities because
of their potential for prepayment. The price paid by a Fund for its asset-backed securities, the yield the Fund expects to receive
from such securities and the average life of the securities are based on a number of factors, including the anticipated rate of
prepayment of the underlying assets. In a period of declining interest rates, borrowers may prepay the underlying assets more quickly
than anticipated, thereby reducing the yield to maturity and the average life of the asset-backed securities. Moreover, when a
Fund reinvests the proceeds of a prepayment in these circumstances, it will likely receive a rate of interest that is lower than
the rate on the security that was prepaid. To the extent that a Fund purchases asset-backed securities at a premium, prepayments
may result in a loss to the extent of the premium paid. If a Fund buys such securities at a discount, both scheduled payments and
unscheduled prepayments will increase current and total returns and unscheduled prepayments will also accelerate the recognition
of income which, when distributed to shareholders, will be taxable as ordinary income. In a period of rising interest rates, prepayments
of the underlying assets may occur at a slower than expected rate, creating maturity extension risk. This particular risk may effectively
change a security that was considered short- or intermediate-term at the time of purchase into a longer term security. Since the
value of longer-term securities generally fluctuates more widely in response to changes in interest rates than does the value of
shorter-term securities, maturity extension risk could increase the volatility of the Fund. When interest rates decline, the value
of an asset-backed security with prepayment features may not increase as much as that of other fixed-income securities, and, as
noted above, changes in market rates of interest may accelerate or retard prepayments and thus affect maturities.
Asset-Based Securities.
Certain
Funds may invest in debt, preferred or convertible securities, the principal amount, redemption terms or conversion terms of which
are related to the market price of some natural resource asset such as gold bullion. These securities are referred to as “asset-based
securities.” A Fund will purchase only asset-based securities that are rated, or are issued by issuers that have outstanding
debt obligations rated, investment grade (for example, AAA, AA, A or BBB by Standard & Poor’s (“S&P”)
or Fitch Ratings (“Fitch”), or Baa by Moody’s Investors Service, Inc. (“Moody’s”) or commercial
paper rated A-1 by S&P or Prime-1 by Moody’s) or by issuers that the Manager has determined to be of similar creditworthiness.
Obligations ranked in the fourth highest rating category, while considered “investment grade,” may have certain speculative
characteristics and may be more likely to be downgraded than securities rated in the three highest rating categories. If an asset-based
security is backed by a bank letter of credit or other similar facility, the Manager may take such backing into account in determining
the creditworthiness of the issuer. While the market prices for an asset-based security and the related natural resource asset
generally are expected to move in the same direction, there may not be perfect correlation in the two price movements. Asset-based
securities may not be secured by a security interest in or claim on the underlying natural resource asset. The asset-based securities
in which a Fund may invest may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Certain
asset-based securities may be payable at maturity in cash at the stated principal amount or, at the option of the holder, directly
in a stated amount of the asset to which it is related. In such instance, because no Fund presently intends to invest directly
in natural resource assets, a Fund would sell the asset-based security in the secondary market, to the extent one exists, prior
to maturity if the value of the stated amount of the asset exceeds the stated principal amount and thereby realize the appreciation
in the underlying asset.
Precious Metal-Related Securities.
A Fund
may invest in the securities of companies that explore for, extract, process or deal in precious metals (e.g., gold, silver and
platinum), and in asset-based securities indexed to the value of such metals. Such securities may be purchased when they are believed
to be attractively priced in relation to the value of a company’s precious metal-related assets or when the values of precious
metals are expected to benefit from inflationary pressure or other economic, political or financial uncertainty or instability.
Based on historical experience, during periods of economic or financial instability the securities of companies involved in precious
metals may be subject to extreme price fluctuations, reflecting the high volatility of precious metal prices during such periods.
In addition, the instability of precious metal prices may result in volatile earnings of precious metal-related companies, which
may, in turn, adversely affect the financial condition of such companies. The major producers of gold include the Republic of South
Africa, Russia, Canada, the United States, Brazil and Australia. Sales of gold by Russia are largely unpredictable and often relate
to political and economic considerations rather than to market forces. Economic, financial, social and political factors within
South Africa may significantly affect South African gold production.
Bank Loans.
Certain Funds may invest in bank
loans. Bank loans are generally non-investment grade floating rate instruments. Usually, they are freely callable at the issuer’s
option. Certain Funds may invest in fixed and floating rate loans (“Loans”) arranged through private negotiations between
a corporate borrower or a foreign sovereign entity and one or more financial institutions (“Lenders”). A Fund may invest
in such Loans in the form of participations in Loans (“Participations”) and assignments of all or a portion of Loans
from third parties (“Assignments”). A Fund considers these investments to be investments in debt securities for purposes
of its investment policies. Participations typically will result in the Fund having a contractual relationship only with the Lender,
not with the borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the Loans, nor any rights of set-off against the borrower, and the Fund may not benefit directly from
any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling the
Participation, the Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower. The Fund will acquire Participations only if the Lender interpositioned between the Fund and the borrower is
determined by the Fund’s manager to be creditworthy. When the Fund purchases Assignments from Lenders, the Fund will acquire
direct rights against the borrower on the Loan, and will not have exposure to a counterparty’s credit risk. The Funds may
enter into Participations and Assignments on a forward commitment or “when-issued” basis, whereby a Fund would agree
to purchase a Participation or Assignment at set terms in the future. For more information on forward commitments and when-issued
securities, see “When-Issued Securities, Delayed Delivery Securities and Forward Commitments” below.
A Fund may have difficulty disposing of Assignments and Participations.
In certain cases, the market for such instruments is not highly liquid, and therefore the Fund anticipates that in such cases such
instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary market may
have an adverse impact on the value of such instruments and on the Fund’s ability to dispose of particular Assignments or
Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower. Assignments
and Participations will not be considered illiquid so long as it is determined by the Funds’ manager that an adequate trading
market exists for these securities. To the extent that liquid Assignments and Participations that a Fund holds become illiquid,
due to the lack of sufficient buyers or market or other conditions, the percentage of the Fund’s assets invested in illiquid
assets would increase.
Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a syndicate. The syndicate’s agent arranges the loans, holds collateral and accepts
payments of principal and interest. If the agent develops financial problems, a Fund may not recover its investment or recovery
may be delayed.
The Loans in which the Fund may invest are subject to the
risk of loss of principal and income. Although borrowers frequently provide collateral to secure repayment of these obligations
they do not always do so. If they do provide collateral, the value of the collateral may not completely cover the borrower’s
obligations at the time of a default. If a borrower files for protection from its creditors under the U.S. bankruptcy laws, these
laws may limit a Fund’s rights to its collateral. In addition, the value of collateral may erode during a bankruptcy case.
In the event of a bankruptcy, the holder of a Loan may not recover its principal, may experience a long delay in recovering its
investment and may not receive interest during the delay.
Borrowing and Leverage.
Each Fund
may borrow as a temporary measure for extraordinary or emergency purposes, including to meet redemptions or to settle securities
transactions. Certain Funds will not purchase securities at any time when borrowings exceed 5% of their total assets, except (a)
to honor prior commitments or (b) to exercise subscription rights when outstanding borrowings have been obtained exclusively for
settlements of other securities transactions. Certain Funds may also borrow in order to make investments. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund. Such leveraging increases the Fund’s exposure
to capital risk, and borrowed funds are subject to interest costs that will reduce net income. The use of leverage by a Fund creates
an opportunity for greater total return, but, at the same time, creates special risks. For example, leveraging may exaggerate changes
in the net asset value of Fund shares and in the yield on the Fund’s portfolio. Although the principal of such borrowings
will be fixed, the Fund’s assets may change in value during the time the borrowings are outstanding. Borrowings will create
interest expenses for the Fund that can exceed the income from the assets purchased with the borrowings. To the extent the income
or capital appreciation derived
from securities purchased with borrowed funds
exceeds the interest the Fund will have to pay on the borrowings, the Fund’s return will be greater than if leverage had
not been used. Conversely, if the income or capital appreciation from the securities purchased with such borrowed funds is not
sufficient to cover the cost of borrowing, the return to the Fund will be less than if leverage had not been used and, therefore,
the amount available for distribution to shareholders as dividends will be reduced. In the latter case, the Manager in its best
judgment nevertheless may determine to maintain the Fund’s leveraged position if it expects that the benefits to the Fund’s
shareholders of maintaining the leveraged position will outweigh the current reduced return.
Certain types of borrowings by a Fund may result
in the Fund being subject to covenants in credit agreements relating to asset coverage, portfolio composition requirements and
other matters. It is not anticipated that observance of such covenants would impede the Manager from managing a Fund’s portfolio
in accordance with the Fund’s investment objectives and policies. However, a breach of any such covenants not cured within
the specified cure period may result in acceleration of outstanding indebtedness and require the Fund to dispose of portfolio investments
at a time when it may be disadvantageous to do so.
Each Fund may at times borrow from affiliates
of the Manager, provided that the terms of such borrowings are no less favorable than those available from comparable sources of
funds in the marketplace.
Cash Flows; Expenses.
The
ability of each Fund to satisfy its investment objective depends to some extent on the Manager’s ability to manage cash flow
(primarily from purchases and redemptions and distributions from the Fund’s investments). The Manager will make investment
changes to a Fund’s portfolio to accommodate cash flow while continuing to seek to replicate the total return of the Fund’s
target index. Investors should also be aware that the investment performance of each index is a hypothetical number which does
not take into account brokerage commissions and other transaction costs, custody and other costs of investing, and any incremental
operating costs (e.g., transfer agency and accounting costs) that will be borne by the Funds. Finally, since each Fund seeks to
replicate the total return of its target index, the Manager generally will not attempt to judge the merits of any particular security
as an investment.
Cash Management
. Generally, the
Manager will employ futures and options on futures to provide liquidity necessary to meet anticipated redemptions or for day-to-day
operating purposes. However, if considered appropriate in the opinion of the Manager, a portion of a Fund’s assets may be
invested in certain types of instruments with remaining maturities of 397 days or less for liquidity purposes. Such instruments
would consist of: (i) obligations of the U.S. Government, its agencies, instrumentalities, authorities or political subdivisions
(“U.S. Government Securities”); (ii) other fixed-income securities rated Aa or higher by Moody’s or AA or higher
by S&P or, if unrated, of comparable quality in the opinion of the Manager; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and bankers’ acceptances; and (v) repurchase agreements. At the
time the Fund invests in commercial paper, bank obligations or repurchase agreements, the issuer or the issuer’s parent must
have outstanding debt rated Aa or higher by Moody’s or AA or higher by S&P or outstanding commercial paper, bank obligations
or other short-term obligations rated Prime-1 by Moody’s or A-1 by S&P; or, if no such ratings are available, the instrument
must be of comparable quality in the opinion of the Manager.
Collateralized Debt Obligations.
Certain Funds may invest in collateralized debt obligations (“CDOs”), which include collateralized bond obligations
(“CBOs”), collateralized loan obligations (“CLOs”) and other similarly structured securities. CDOs are
types of asset-backed securities. A CBO is ordinarily issued by a trust or other special purpose entity (“SPE”) and
is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities)
held by such issuer. A CLO is ordinarily issued by a trust or other SPE and is typically collateralized by a pool of loans, which
may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans,
including loans that may be rated below investment grade or equivalent unrated loans, held by such issuer. Although certain CDOs
may benefit from credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such
enhancement may not always be present, and may fail to protect a Fund against the risk of loss on default of the collateral. Certain
CDO issuers may use derivatives contracts to create “synthetic” exposure to assets rather than holding such assets
directly, which entails the risks of derivative instruments described elsewhere in this SAI. CDOs may charge management fees and
administrative expenses, which are in addition to those of a Fund.
For both CBOs and CLOs, the cash flows from
the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the “equity”
tranche, which bears the first loss from defaults from the bonds
or loans in the SPE and serves to protect the
other, more senior tranches from default (though such protection is not complete). Since it is partially protected from defaults,
a senior tranche from a CBO or CLO typically has higher ratings and lower yields than its underlying securities, and may be rated
investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to
actual defaults, downgrades of the underlying collateral by rating agencies, forced liquidation of the collateral pool due to a
failure of coverage tests, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches,
market anticipation of defaults as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches
of a CDO may be paid in kind or deferred and capitalized (paid in the form of obligations of the same type rather than cash), which
involves continued exposure to default risk with respect to such payments.
The risks of an investment in a CDO depend largely
on the type of the collateral securities and the class of the CDO in which a Fund invests. Normally, CBOs, CLOs and other CDOs
are privately offered and sold, and thus are not registered under the securities laws. As a result, investments in CDOs may be
characterized by a Fund as illiquid securities. However, an active dealer market may exist for CDOs, allowing a CDO to qualify
for Rule 144A transactions. In addition to the normal risks associated with fixed income securities and asset-backed securities
generally discussed elsewhere in this SAI, CDOs carry additional risks including, but not limited to: (i) the possibility that
distributions from collateral securities will not be adequate to make interest or other payments; (ii) the risk that the collateral
may default or decline in value or be downgraded, if rated by a nationally recognized statistical rating organization (“NRSRO”);
(iii) a Fund may invest in tranches of CDOs that are subordinate to other tranches; (iv) the structure and complexity of the transaction
and the legal documents could lead to disputes among investors regarding the characterization of proceeds; (v) the investment return
achieved by the Fund could be significantly different than those predicted by financial models; (vi) the lack of a readily available
secondary market for CDOs; (vii) risk of forced “fire sale” liquidation due to technical defaults such as coverage
test failures; and (viii) the CDO’s manager may perform poorly.
Commercial Paper
.
Certain Funds
may purchase commercial paper. Commercial paper purchasable by each Fund includes “Section 4(2) paper,” a term that
includes debt obligations issued in reliance on the “private placement” exemption from registration afforded by Section
4(a)(2) of the Securities Act. Section 4(2) paper is restricted as to disposition under the Federal securities laws, and is frequently
sold (and resold) to institutional investors such as the Fund through or with the assistance of investment dealers who make a market
in the Section 4(2) paper, thereby providing liquidity. Certain transactions in Section 4(2) paper may qualify for the registration
exemption provided in Rule 144A under the Securities Act. Most Funds can purchase commercial paper rated (at the time of purchase)
“A-1” by S&P or “Prime-1” by Moody’s or when deemed advisable by a Fund’s Manager or sub-adviser,
“high quality” issues rated “A-2”, “Prime-2” or “F-2” by S&P, Moody’s
or Fitch, respectively.
Commodity-Linked Derivative Instruments
and Hybrid Instruments.
Certain Funds seek to gain exposure to the commodities markets primarily through investments in
hybrid instruments. Hybrid instruments are either equity or debt derivative securities with one or more commodity-dependent components
that have payment features similar to a commodity futures contract, a commodity option contract, or a combination of both. Therefore,
these instruments are “commodity-linked.” They are considered “hybrid” instruments because they have both
commodity-like and security-like characteristics. Hybrid instruments are derivative instruments because at least part of their
value is derived from the value of an underlying commodity, futures contract, index or other readily measurable economic variable.
The prices of commodity-linked derivative instruments
may move in different directions than investments in traditional equity and debt securities when the value of those traditional
securities is declining due to adverse economic conditions. As an example, during periods of rising inflation, debt securities
have historically tended to decline in value due to the general increase in prevailing interest rates. Conversely, during those
same periods of rising inflation, the prices of certain commodities, such as oil and metals, have historically tended to increase.
Of course, there cannot be any guarantee that these investments will perform in that manner in the future, and at certain times
the price movements of commodity-linked instruments have been parallel to those of debt and equity securities. Commodities have
historically tended to increase and decrease in value during different parts of the business cycle than financial assets. Nevertheless,
at various times, commodities prices may move in tandem with the prices of financial assets and thus may not provide overall portfolio
diversification benefits. Under favorable economic conditions, the Fund’s investments may be expected to under-perform an
investment in traditional securities. Over the long term, the returns on the Fund’s investments are expected to exhibit low
or negative correlation with stocks and bonds.
Qualifying Hybrid Instruments.
Certain
Funds may invest in hybrid instruments that qualify for exclusion from regulation under the Commodity Exchange Act and the regulations
adopted thereunder. A hybrid instrument that qualifies for this exclusion from regulation must be “predominantly a security.”
A hybrid instrument is considered to be predominantly a security if (a) the issuer of the hybrid instrument receives payment in
full of the purchase price of the hybrid instrument, substantially contemporaneously with delivery of the hybrid instrument; (b)
the purchaser or holder of the hybrid instrument is not required to make any payment to the issuer in addition to the purchase
price paid under subparagraph (a), whether as margin, settlement payment, or otherwise, during the life of the hybrid instrument
or at maturity; (c) the issuer of the hybrid instrument is not subject by the terms of the instrument to mark-to-market margining
requirements; and (d) the hybrid instrument is not marketed as a contract of sale of a commodity for future delivery (or option
on such a contract) subject to applicable provisions of the Commodity Exchange Act. Hybrid instruments may be principal protected,
partially protected, or offer no principal protection. A principal protected hybrid instrument means that the issuer will pay,
at a minimum, the par value of the note at maturity. Therefore, if the commodity value to which the hybrid instrument is linked
declines over the life of the note, the Fund will receive at maturity the face or stated value of the note. With a principal protected
hybrid instrument, the Fund will receive at maturity the greater of the par value of the note or the increase in its value based
on the underlying commodity or index. This protection is, in effect, an option whose value is subject to the volatility and price
level of the underlying commodity. The Manager’s decision whether to use principal protection depends in part on the cost
of the protection. In addition, the protection feature depends upon the ability of the issuer to meet its obligation to buy back
the security, and, therefore, depends on the creditworthiness of the issuer. With full principal protection, the Fund will receive
at maturity of the hybrid instrument either the stated par value of the hybrid instrument, or potentially, an amount greater than
the stated par value if the underlying commodity, index, futures contract or economic variable to which the hybrid instrument is
linked has increased in value. Partially protected hybrid instruments may suffer some loss of principal if the underlying commodity,
index, futures contract or economic variable to which the hybrid instrument is linked declines in value during the term of the
hybrid instrument. However, partially protected hybrid instruments have a specified limit as to the amount of principal that they
may lose.
Hybrid Instruments Without Principal Protection.
Certain Funds may invest in hybrid instruments that offer no principal protection. At maturity, there is a risk that the underlying
commodity price, futures contract, index or other economic variable may have declined sufficiently in value such that some or all
of the face value of the hybrid instrument might not be returned. The Manager, at its discretion, may invest in a partially protected
principal structured note or a note without principal protection. In deciding to purchase a note without principal protection,
the Manager may consider, among other things, the expected performance of the underlying commodity futures contract, index or other
economic variable over the term of the note, the cost of the note, and any other economic factors that the Manager believes are
relevant.
Limitations on Leverage.
Some of the hybrid
instruments in which a Fund may invest may involve leverage. To avoid being subject to undue leverage risk, a Fund will seek to
limit the amount of economic leverage it has under any one hybrid instrument that it buys and the leverage of the Fund’s
overall portfolio. A Fund will not invest in a hybrid instrument if, at the time of purchase: (i) that instrument’s “leverage
ratio” exceeds 300% of the price increase in the underlying commodity, futures contract, index or other economic variable
or (ii) the Fund’s “portfolio leverage ratio” exceeds 150%, measured at the time of purchase. “Leverage
ratio” is the expected increase in the value of a hybrid instrument, assuming a one percent price increase in the underlying
commodity, futures contract, index or other economic factor. In other words, for a hybrid instrument with a leverage factor of
150%, a 1% gain in the underlying economic variable would be expected to result in a 1.5% gain in value for the hybrid instrument.
Conversely, a hybrid instrument with a leverage factor of 150% would suffer a 1.5% loss if the underlying economic variable lost
1% of its value. “Portfolio leverage ratio” is defined as the average (mean) leverage ratio of all instruments in a
Fund’s portfolio, weighted by the market values of such instruments or, in the case of futures contracts, their notional
values. To the extent that the policy on a Fund’s use of leverage stated above conflicts with the Investment Company Act
or the rules and regulations thereunder, the Fund will comply with the applicable provisions of the Investment Company Act. A Fund
may at times or from time to time decide not to use leverage in its investments or use less leverage than may otherwise be allowable.
Counterparty Risk
. A significant risk of
hybrid instruments is counterparty risk. Unlike exchange-traded futures and options, which are standard contracts, hybrid instruments
are customized securities, tailor-made by a specific issuer. With a listed futures or options contract, an investor’s counterparty
is the exchange clearinghouse. Exchange
clearinghouses are capitalized by the exchange
members and typically have high investment grade ratings (e.g., ratings of AAA or AA by S&P). Therefore, the risk is small
that an exchange clearinghouse might be unable to meet its obligations at maturity. However, with a hybrid instrument, a Fund will
take on the counterparty credit risk of the issuer. That is, at maturity of the hybrid instrument, there is a risk that the issuer
may be unable to perform its obligations under the structured note.
Convertible Securities.
A convertible
security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed
amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to nonconvertible income securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible
securities. The value of a convertible security is influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may
have an effect on the convertible security’s investment value. Convertible securities rank senior to common stock in a corporation’s
capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to
redemption at the option of the issuer at a price established in the convertible security’s governing instrument.
The characteristics of convertible securities
make them potentially attractive investments for an investment company seeking a high total return from capital appreciation and
investment income. These characteristics include the potential for capital appreciation as the value of the underlying common stock
increases, the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased
risks of decline in value relative to the underlying common stock due to their fixed income nature. As a result of the conversion
feature, however, the interest rate or dividend preference on a convertible security is generally less than would be the case if
the securities were issued in nonconvertible form.
In analyzing convertible securities, the Manager
will consider both the yield on the convertible security relative to its credit quality and the potential capital appreciation
that is offered by the underlying common stock, among other things.
Convertible securities are issued and traded in
a number of securities markets. Even in cases where a substantial portion of the convertible securities held by a Fund are denominated
in U.S. dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. As
a result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in
which the share price is quoted will affect the value of the convertible security. With respect to convertible securities denominated
in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued, which may increase the effects of currency risk. As described below, a Fund is
authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of exchange rate fluctuations.
Apart from currency considerations, the value
of convertible securities is influenced by both the yield on nonconvertible securities of comparable issuers and by the value of
the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (
i.e.
,
strictly on the basis of its yield) is sometimes referred to as its “investment value.” To the extent interest rates
change, the investment value of the convertible security typically will fluctuate. At the same time, however, the value of the
convertible security will be influenced by its “conversion value,” which is the market value of the underlying common
stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of
the underlying common stock. If the conversion value of a convertible security is substantially below its investment value, the
price of the convertible security is governed principally by its investment value. To the extent the conversion value of a convertible
security increases to a point that approximates or exceeds its investment value, the price of the convertible security will be
influenced principally by its conversion value. A convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock while holding a fixed income security. The yield
and conversion premium of convertible securities issued in Japan and the Euromarket are frequently determined at levels that cause
the conversion value to affect their market value more than the securities’ investment value.
Holders of convertible securities generally have
a claim on the assets of the issuer prior to the common stockholders but may be subordinated to other debt securities of the same
issuer. A convertible security may be subject to redemption at the option of the issuer at a price established in a charter provision,
indenture or other governing instrument pursuant to which the convertible security was issued. If a convertible security held by
a Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock
or sell it to a third party. Certain convertible debt securities may provide a put option to the holder, which entitles the holder
to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain
circumstances.
A Fund may also invest in synthetic convertible
securities. Synthetic convertible securities may include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled
Convertibles are instruments that are created by the issuer and have the economic characteristics of traditional convertible securities
but may not actually permit conversion into the underlying equity securities in all circumstances. As an example, a private company
may issue a Cash-Settled Convertible that is convertible into common stock only if the company successfully completes a public
offering of its common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation. Manufactured
Convertibles are created by the Manager or another party by combining separate securities that possess one of the two principal
characteristics of a convertible security,
i.e.
, fixed income (“fixed income component”) or a right to acquire
equity securities (“convertibility component”). The fixed income component is achieved by investing in nonconvertible
fixed income securities, such as nonconvertible bonds, preferred stocks and money market instruments. The convertibility component
is achieved by investing in call options, warrants, or other securities with equity conversion features (“equity features”)
granting the holder the right to purchase a specified quantity of the underlying stocks within a specified period of time at a
specified price or, in the case of a stock index option, the right to receive a cash payment based on the value of the underlying
stock index.
A Manufactured Convertible differs from traditional
convertible securities in several respects. Unlike a traditional convertible security, which is a single security that has a unitary
market value, a Manufactured Convertible is comprised of two or more separate securities, each with its own market value. Therefore,
the total “market value” of such a Manufactured Convertible is the sum of the values of its fixed income component
and its convertibility component.
More flexibility is possible in the creation of
a Manufactured Convertible than in the purchase of a traditional convertible security. Because many corporations have not issued
convertible securities, the Manager may combine a fixed income instrument and an equity feature with respect to the stock of the
issuer of the fixed income instrument to create a synthetic convertible security otherwise unavailable in the market. The Manager
may also combine a fixed income instrument of an issuer with an equity feature with respect to the stock of a different issuer
when the Manager believes such a Manufactured Convertible would better promote a Fund’s objective than alternative investments.
For example, the Manager may combine an equity feature with respect to an issuer’s stock with a fixed income security of
a different issuer in the same industry to diversify the Fund’s credit exposure, or with a U.S. Treasury instrument to create
a Manufactured Convertible with a higher credit profile than a traditional convertible security issued by that issuer. A Manufactured
Convertible also is a more flexible investment in that its two components may be purchased separately and, upon purchasing the
separate securities, “combined” to create a Manufactured Convertible. For example, the Fund may purchase a warrant
for eventual inclusion in a Manufactured Convertible while postponing the purchase of a suitable bond to pair with the warrant
pending development of more favorable market conditions.
The value of a Manufactured Convertible may respond
to certain market fluctuations differently from a traditional convertible security with similar characteristics. For example, in
the event a Fund created a Manufactured Convertible by combining a short-term U.S. Treasury instrument and a call option on a stock,
the Manufactured Convertible would be expected to outperform a traditional convertible of similar maturity that is convertible
into that stock during periods when Treasury instruments outperform corporate fixed income securities and underperform during periods
when corporate fixed income securities outperform Treasury instruments.
Debt Securities.
Debt securities,
such as bonds, involve credit risk. This is the risk that the issuer will not make timely payments of principal and interest. The
degree of credit risk depends on the issuer’s financial condition and on the terms of the debt securities. Changes in an
issuer’s credit rating or the market’s perception of an issuer’s creditworthiness may also affect the value of
a Fund’s investment in that issuer. Credit risk is reduced to the extent a Fund limits its debt investments to U.S. Government
securities.
All debt securities, however, are subject to interest
rate risk. This is the risk that the value of the security may fall when interest rates rise. If interest rates move sharply in
a manner not anticipated by Fund management, a Fund’s investments in debt securities could be adversely affected and the
Fund could lose money. In general, the market price of debt securities with longer maturities will go up or down more in response
to changes in interest rates than will the market price of shorter-term debt securities.
During periods of rising interest rates, the average
life of certain fixed income securities is extended because of slower than expected principal payments. This may lock in a below-market
interest rate and extend the duration of these fixed-income securities, especially mortgage-related securities, making them more
sensitive to changes in interest rates. As a result, in a period of rising interest rates, these securities may exhibit additional
volatility and lose value. This is known as extension risk.
The
value of fixed income securities in the Funds can be expected to vary inversely with changes in prevailing interest rates. Fixed
income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation
and depreciation than securities with shorter maturities. The Funds are not restricted to any maximum or minimum time to maturity
in purchasing individual portfolio securities, and the average maturity of a Fund’s assets will vary.
Depositary Receipts (ADRs, EDRs
and GDRs)
. Certain Funds may invest in the securities of foreign issuers in the form of Depositary Receipts or other securities
convertible into securities of foreign issuers. Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted.
The Fund may invest in
both sponsored and unsponsored
American Depositary Receipts (“ADRs”)
,
European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) and other similar global instruments.
ADRs typically are
issued by an American bank or trust company
and
evidence
ownership of underlying securities issued by a
foreign
corporation.
EDRs,
which are sometimes referred to as Continental
Depositary Receipts
,
are
receipts issued in Europe
, typically by foreign banks and trust companies,
that
evidence
ownership of either foreign or domestic underlying securities. GDRs are depositary
receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs
are organized independently and without the cooperation of the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and
GDRs may be more volatile than if such instruments were sponsored by the issuer.
Depositary Receipts are generally subject
to the same risks as the foreign securities that they evidence or into which they may be converted.
Investments in ADRs, EDRs and GDRs present additional investment considerations as described under “Foreign Investment Risks.”
Derivatives
Each Fund may use instruments referred to as derivative
securities. Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold
or oil), a currency or an index (a measure of value or rates, such as the S&P 500 Index or the prime lending rate). Derivatives
allow a Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions
in other types of instruments. Each Fund may use derivatives for hedging purposes. Certain Funds may also use derivatives for speculative
purposes to seek to enhance returns. The use of a derivative is speculative if the Fund is primarily seeking to achieve gains,
rather than offset the risk of other positions. When a Fund invests in a derivative for speculative purposes, the Fund will be
fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative’s cost. Unless
otherwise permitted, no Fund may use any derivative to gain exposure to an asset or class of assets that it would be prohibited
by its investment restrictions from purchasing directly.
Hedging. Hedging is a strategy in which a derivative
is used to offset the risks associated with other Fund holdings. Losses on the other investment may be substantially reduced by
gains on a derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce
or eliminate gains or cause losses if the market moves in a manner different from that anticipated by the Fund or if the cost of
the derivative outweighs the benefit of the hedge. Hedging also involves correlation risk,
i.e.
the risk that changes in
the value of the derivative will not match those of the holdings being hedged as expected by a Fund, in which case any losses on
the holdings being hedged may not be reduced or may be increased. The inability to close options and futures positions also could
have an adverse impact on a Fund’s ability to hedge effectively its portfolio. There is also a risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom the Fund has an open position in an option, a futures
contract or a related option. There can be no assurance that a Fund’s hedging
strategies will be effective. No Fund is required
to engage in hedging transactions and each Fund may choose not to do so.
A Fund may use derivative instruments and trading
strategies, including the following:
Indexed and Inverse Securities.
A Fund may invest in securities that provide a potential return based on a particular index of value or interest rates.
For example, a Fund may invest in securities that pay interest based on an index of interest rates. The principal amount payable
upon maturity of certain securities also may be based on the value of the index. To the extent a Fund invests in these types of
securities, the Fund’s return on such securities will be subject to risk with respect to the value of the particular index:
that is, if the value of the index falls, the value of the indexed securities owned by the Fund will fall. Interest and principal
payable on certain securities may also be based on relative changes among particular indices. A Fund may also invest in so-called
“inverse floating obligations” or “residual interest bonds” on which the interest rates vary inversely
with a floating rate (which may be reset periodically by a dutch auction, a remarketing agent, or by reference to a short-term
tax-exempt interest rate index). A Fund may purchase synthetically-created inverse floating rate bonds evidenced by custodial
or trust receipts. Generally, income on inverse floating rate bonds will decrease when interest rates increase, and will increase
when interest rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase
or decrease in value in response to changes, as an illustration, in market interest rates at a rate that is a multiple of the
rate at which fixed-rate securities increase or decrease in response to such changes. As a result, the market values of such securities
will generally be more volatile than the market values of fixed-rate securities. To seek to limit the volatility of these securities,
a Fund may purchase inverse floating obligations that have shorter-term maturities or that contain limitations on the extent to
which the interest rate may vary. Certain investments in such obligations may be illiquid. The Manager believes that indexed and
inverse floating obligations represent flexible portfolio management instruments for a Fund that allow the Fund to seek potential
investment rewards, hedge other portfolio positions or vary the degree of investment leverage relatively efficiently under different
market conditions. A Fund may invest in indexed and inverse securities for hedging purposes or to seek to increase returns. When
used for hedging purposes, indexed and inverse securities involve correlation risk. Furthermore, where such a security includes
a contingent liability, in the event of an adverse movement in the underlying index or interest rate, a Fund may be required to
pay substantial additional margin to maintain the position.
The Funds may invest up to 10% of
their total assets in leveraged inverse floating rate debt instruments (“inverse floaters”). Inverse floaters are
securities the potential of which is inversely related to changes in interest rates. In general, the return on inverse floaters
will decrease when short-term interest rates increase and increase when short-term rates decrease. Municipal tender option bonds,
both taxable and tax-exempt, which may include inverse floating rate debt instruments, (including residual interests thereon)
are excluded from this 10% limitation.
Swap Agreements.
A Fund may enter into
swap agreements, including interest rate and index swap agreements, for hedging purposes or to seek to obtain a particular desired
return at a lower cost to the Fund than if the Fund had invested directly in an instrument that yielded the desired return. Swap
agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more
than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates
of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped”
between the parties are calculated with respect to a “notional amount,”
i.e.
, the dollar amount invested at
a particular interest rate, in a particular foreign currency, or in a “basket” of securities representing a particular
index. The “notional amount” of the swap agreement is only a fictive basis on which to calculate the obligations that
the parties to a swap agreement have agreed to exchange. A Fund’s obligations (or rights) under a swap agreement will generally
be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by
each party to the agreement (the “net amount”). A Fund’s obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered
by marking as segregated liquid, unencumbered assets, marked to market daily, to avoid any potential leveraging of the Fund’s
portfolio.
Whether a Fund’s use of swap agreements
will be successful in furthering its investment objective will depend on the Manager’s ability to correctly predict whether
certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts
and because they may have terms of greater than seven days, some swap agreements may be considered to be illiquid. Moreover, a
Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy
of a swap agreement
counterparty. A Fund will seek to lessen this
risk to some extent by entering into a transaction only if the counterparty meets the current credit requirement for OTC option
counterparties. Swap agreements also bear the risk that a Fund will not be able to meet its payment obligations to the counterparty.
As noted, however, a Fund will segregate liquid assets permitted to be so segregated by the Commission in an amount equal to or
greater than the market value of the Fund’s liabilities under the swap agreement or the amount it would cost the Fund initially
to make an equivalent direct investment plus or minus any amount the Fund is obligated to pay or is to receive under the swap agreement.
Restrictions imposed by the tax rules applicable to regulated investment companies, may limit the Fund’s ability to use swap
agreements. The swap market is largely unregulated. It is possible that developments in the swap market, including potential government
regulation, could adversely affect each Fund’s ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
See “Credit Default Swap Agreements,”
“Interest Rate Swaps, Caps and Floors” and “Municipal Interest Rate Swap Agreements” below for further
information on particular types of swap agreements that may be used by certain Funds.
Interest Rate Swaps, Caps and Floors.
In
order to hedge the value of a Fund’s portfolio against interest rate fluctuations or to enhance a Fund’s income, a
Fund may enter into various transactions, such as interest rate swaps and the purchase or sale of interest rate caps and floors.
Interest rate swaps are OTC contracts in which each party agrees to make a periodic interest payment based on an index or the value
of an asset in return for a periodic payment from the other party based on a different index or asset. The purchase of an interest
rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such interest rate floor. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index rises above a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest rate cap.
A Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion of its portfolio or to protect against any increase
in the price of securities the Fund anticipates purchasing at a later date. A Fund generally will use these transactions primarily
as a hedge and not as a speculative investment. However, a Fund may also invest in interest rate swaps to enhance income or to
increase the Fund’s yield during periods of steep interest rate yield curves (
i.e.
, wide differences between short
term and long term interest rates). In an interest rate swap, a Fund may exchange with another party their respective commitments
to pay or receive interest,
e.g.
, an exchange of fixed rate payments for floating rate payments. For example, if a Fund
holds a mortgage- backed security with an interest rate that is reset only once each year, it may swap the right to receive interest
at this fixed rate for the right to receive interest at a rate that is reset every week. This would enable a Fund to offset a decline
in the value of the mortgage backed security due to rising interest rates but would also limit its ability to benefit from falling
interest rates. Conversely, if a Fund holds a mortgage-backed security with an interest rate that is reset every week and it would
like to lock in what it believes to be a high interest rate for one year, it may swap the right to receive interest at this variable
weekly rate for the right to receive interest at a rate that is fixed for one year. Such a swap would protect the Fund from a reduction
in yield due to falling interest rates and may permit the Fund to enhance its income through the positive differential between
one week and one year interest rates, but would preclude it from taking full advantage of rising interest rates.
A Fund usually will enter into interest rate swap
transactions on a net basis (
i.e.
, the two payment streams are netted against one another with the Fund receiving or paying,
as the case may be, only the net amount of the two payment streams). Inasmuch as these transactions are entered into for good faith
hedging purposes, the Manager believes that such obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to its borrowing restrictions. The net amount of the excess, if any, of a Fund’s obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily basis, and an amount of liquid assets that have
an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the Fund.
If the interest rate swap transaction is entered
into on other than a net basis, the full amount of a Fund’s obligations will be accrued on a daily basis, and the full amount
of the Fund’s obligations will be maintained in a segregated account.
Typically the parties with which a Fund will enter
into interest rate transactions will be broker-dealers and other financial institutions. A Fund will enter into interest rate swap,
cap or floor transactions only with counterparties that are rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of
entering into such transaction or whose creditworthiness
is believed by the Manager to be equivalent to such rating. If there is a default by the counterparty to such a transaction, a
Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting both as principals and as agents using standardized
swap documentation. As a result, the swap market has become relatively liquid in comparison with other similar instruments traded
in the interbank market. Caps and floors, however, are less liquid than swaps. Certain Federal income tax requirements may limit
a Fund’s ability to engage in certain interest rate transactions. Gains from transactions in interest rate swaps distributed
to shareholders will be taxable as ordinary income or, in certain circumstances, as long term capital gains to shareholders.
Credit Default Swap Agreements and Similar
Instruments.
Certain Funds may enter into credit default swap agreements and similar agreements, and may also buy credit-linked
securities. The credit default swap agreement or similar instrument may have as reference obligations one or more securities that
are not currently held by a Fund. The protection “buyer” in a credit default contract may be obligated to pay the protection
“seller” an up-front payment or a periodic stream of payments over the term of the contract, provided generally that
no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par
value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference
entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled.
A Fund may be either the buyer or seller in the transaction. If a Fund is a buyer and no credit event occurs, the Fund recovers
nothing if the swap is held through its termination date. However, if a credit event occurs, the Fund may elect to receive the
full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may
have little or no value. As a seller, a Fund generally receives an up-front payment or a fixed rate of income throughout the term
of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event occurs,
generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable
obligations of the reference entity that may have little or no value.
Credit default swaps and similar instruments involve
greater risks than if a Fund had invested in the reference obligation directly, since, in addition to general market risks, they
are subject to illiquidity risk, counterparty risk and credit risk. A Fund will enter into credit default swap agreements and similar
instruments only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating
organization at the time of entering into such transaction or whose creditworthiness is believed by the Manager to be equivalent
to such rating. A buyer also will lose its investment and recover nothing should no credit event occur and the swap is held to
its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled
with the up-front or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting
in a loss of value to the Fund. When a Fund acts as a seller of a credit default swap or a similar instrument, it is exposed to
many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional
value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations.
Contracts for Difference.
Certain
Funds may enter into contracts for difference. Contracts for difference are subject to liquidity risk because the liquidity of
contracts for difference is based on the liquidity of the underlying instrument, and are subject to counterparty risk, i.e., the
risk that the counterparty to the contracts for difference transaction may be unable or unwilling to make payments or to otherwise
honor its financial obligations under the terms of the contract. To the extent that there is an imperfect correlation between
the return on a Fund’s obligation to its counterparty under the contract for difference and the return on related assets
in its portfolio, the contracts for difference transaction may increase the Fund’s financial risk. Contracts for difference,
like many other derivative instruments, involve the risk that, if the derivative security declines in value, additional margin
would be required to maintain the margin level. The seller may require a Fund to deposit additional sums to cover this, and this
may be at short notice. If additional margin is not provided in time, the seller may liquidate the positions at a loss for which
the Fund is liable. Contracts for difference are not registered with the SEC or any U.S. regulator, and are not subject to U.S.
regulation.
Credit Linked Securities.
Among the income
producing securities in which a Fund may invest are credit linked securities, which are issued by a limited purpose trust or other
vehicle that, in turn, invests in a derivative instrument or basket of derivative instruments, such as credit default swaps, interest
rate swaps and other securities, in order to provide exposure to certain fixed income markets. For instance, a Fund may invest
in credit linked securities as a cash management tool in order to gain exposure to a certain market and/or to remain fully invested
when more traditional income producing securities are not available.
Like an investment in a bond, investments in these
credit linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of
principal at the end of the term of the security. However, these payments are conditioned on the issuer’s receipt of payments
from, and the issuer’s potential obligations to, the counterparties to the derivative instruments and other securities in
which the issuer invests. For instance, the issuer may sell one or more credit default swaps, under which the issuer would receive
a stream of payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced
debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the issuer would be obligated
to pay the counterparty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the
amount of income and principal that a Fund would receive. A Fund’s investments in these instruments are indirectly subject
to the risks associated with derivative instruments, including, among others, credit risk, default or similar event risk, counterparty
risk, interest rate risk, leverage risk and management risk. It is also expected that the securities will be exempt from registration
under the Securities Act. Accordingly, there may be no established trading market for the securities and they may constitute illiquid
investments.
Interest Rate Transactions and Swaptions.
A Fund, to the extent permitted under applicable law, may enter into interest rate swaps, may purchase or sell interest rate caps
and floors and may enter into options on swap agreements (“swaptions”) on either an asset-based or liability-based
basis, depending on whether a Fund is hedging its assets or its liabilities. A Fund may enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of their holdings, as a duration management technique or to
protect against an increase in the price of securities a Fund anticipates purchasing at a later date. They may also be used for
speculation to increase returns.
Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap”
transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped”
between the parties are generally calculated with respect to a “notional amount,” i.e., the return on or increase in
value of a particular dollar amount invested at a particular interest rate or in a “basket” of securities representing
a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees
to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”; and interest rate
floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates
fall below a specified rate, or “floor”. Caps and floors are less liquid than swaps.
A Fund will usually enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net
amount of the two payments.
A swaption is a contract that gives a counterparty
the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing
swap agreement, at some designated future time on specified terms. A Fund may write (sell) and purchase put and call swaptions.
Depending on the terms of the particular option
agreement, a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases
a swaption. When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let
the option expire unexercised. However, when a Fund writes a swaption, upon exercise of the option the Fund will become obligated
according to the terms of the underlying agreement.
A Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each interest rate or currency swap or swaption on a daily basis
and its Manager or sub-adviser will designate liquid assets on its books and records in an amount having an aggregate net asset
value at least equal to the accrued excess
to the extent required by Commission guidelines.
If the other party to an interest rate swap defaults, a Fund’s risk of loss consists of the net amount of interest payments
that the Fund is contractually entitled to receive.
Total Return Swap Agreements.
Total return
swap agreements are contracts in which one party agrees to make periodic payments to another party based on the change in market
value of the assets underlying the contract, which may include a specified security, basket of securities or securities indices
during the specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from
other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or
taking physical custody of such security or investing directly in such market. Total return swap agreements may effectively add
leverage to the Fund’s portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure
on the notional amount of the swap.
Total return swap agreements are subject to the
risk that a counterparty will default on its payment obligations to the Fund thereunder. Swap agreements also bear the risk that
the Fund will not be able to meet its obligation to the counterparty. Generally, the Fund will enter into total return swaps on
a net basis (
i.e.
, the two payment streams are netted against one another with the Fund receiving or paying, as the case
may be, only the net amount of the two payments). The net amount of the excess, if any, of the Fund’s obligations over its
entitlements with respect to each total return swap will be accrued on a daily basis, and an amount of liquid assets having an
aggregate net asset value at least equal to the accrued excess will be segregated by the Fund. If the total return swap transaction
is entered into on other than a net basis, the full amount of the Fund’s obligations will be accrued on a daily basis, and
the full amount of the Fund’s obligations will be segregated by the Fund in an amount equal to or greater than the market
value of the liabilities under the total return swap agreement or the amount it would have cost the Fund initially to make an equivalent
direct investment, plus or minus any amount the Fund is obligated to pay or is to receive under the total return swap agreement.
Types of Options
Options on Securities and Securities Indices.
A Fund may engage in transactions in options on individual securities, baskets of securities or securities indices, or particular
measurements of value or rates (an “index”), such as an index of the price of treasury securities or an index representative
of short-term interest rates. Such investments may be made on exchanges and in the over-the-counter (“OTC”) markets.
In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties’ obligations in connection with such options is guaranteed
by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller,
but generally do not require the parties to post margin and are subject to greater credit risk. OTC options also involve greater
liquidity risk. See “Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives” below.
Call Options.
A Fund may purchase call
options on any of the types of securities or instruments in which it may invest. A purchased call option gives a Fund the right
to buy, and obligates the seller to sell, the underlying security at the exercise price at any time during the option period. A
Fund also may purchase and sell call options on indices. Index options are similar to options on securities except that, rather
than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the
holder the right to receive cash upon exercise of the option if the level of the index upon which the option is based is greater
than the exercise price of the option.
A call option is also covered if a Fund holds
a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price of the call written provided the difference is
maintained by the Fund in liquid assets designated on the adviser’s or sub-adviser’s books and records to the extent
required by Commission guidelines.
A Fund also is authorized to write (
i.e.
,
sell) covered call options on the securities or instruments in which it may invest and to enter into closing purchase transactions
with respect to certain of such options. A covered call option is an option in which a Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified future date and price set at the time of the contract.
The principal reason for writing call options is the attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. By writing covered call options, a Fund gives up the opportunity, while the option is
in effect, to
profit from any price increase in the underlying
security above the option exercise price. In addition, a Fund’s ability to sell the underlying security will be limited while
the option is in effect unless the Fund enters into a closing purchase transaction. A closing purchase transaction cancels out
a Fund’s position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration
of the option it has written. Covered call options also serve as a partial hedge to the extent of the premium received against
the price of the underlying security declining.
A Fund also is authorized to write (
i.e.
,
sell) uncovered call options on securities or instruments in which it may invest but that are not currently held by the Fund. The
principal reason for writing uncovered call options is to realize income without committing capital to the ownership of the underlying
securities or instruments. When writing uncovered call options, a Fund must deposit and maintain sufficient margin with the broker
dealer through which it made the uncovered call option as collateral to ensure that the securities can be purchased for delivery
if and when the option is exercised. In addition, in connection with each such transaction a Fund will segregate unencumbered liquid
securities or cash with a value at least equal to the Fund’s exposure (the difference between the unpaid amounts owed by
the Fund on such transaction minus any collateral deposited with the broker dealer), on a marked-to-market basis (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations
with respect to the transaction and will avoid any potential leveraging of the Fund’s portfolio. Such segregation will not
limit the Fund’s exposure to loss. During periods of declining securities prices or when prices are stable, writing uncovered
calls can be a profitable strategy to increase a Fund’s income with minimal capital risk. Uncovered calls are riskier than
covered calls because there is no underlying security held by a Fund that can act as a partial hedge. Uncovered calls have speculative
characteristics and the potential for loss is unlimited. When an uncovered call is exercised, a Fund must purchase the underlying
security to meet its call obligation. There is also a risk, especially with less liquid preferred and debt securities, that the
securities may not be available for purchase. If the purchase price exceeds the exercise price, a Fund will lose the difference.
Put Options.
A Fund is authorized to purchase
put options to seek to hedge against a decline in the value of its securities or to enhance its return. By buying a put option,
a Fund acquires a right to sell the underlying securities or instruments at the exercise price, thus limiting the Fund’s
risk of loss through a decline in the market value of the securities or instruments until the put option expires. The amount of
any appreciation in the value of the underlying securities or instruments will be partially offset by the amount of the premium
paid for the put option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for
the put option plus the related transaction costs. A closing sale transaction cancels out a Fund’s position as the purchaser
of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. A Fund
also may purchase uncovered put options.
Each Fund also has authority to write (
i.e.
,
sell) put options on the types of securities or instruments that may be held by the Fund, provided that such put options are covered,
meaning that such options are secured by segregated, liquid assets. A Fund will receive a premium for writing a put option, which
increases the Fund’s return. With respect to BlackRock Basic Value V.I. Fund, BlackRock Capital Appreciation V.I. Fund, BlackRock
Equity Dividend V.I. Fund, BlackRock Global Allocation V.I. Fund, BlackRock Global Opportunities V.I. Fund, BlackRock International
V.I. Fund, BlackRock Large Cap Core V.I. Fund, BlackRock Large Cap Growth V.I. Fund, BlackRock Large Cap Value V.I. Fund, BlackRock
S&P 500 V.I. Fund, BlackRock Value Opportunities V.I. Fund, each a series of BlackRock Variable Series Funds, Inc., and BlackRock
Capital Appreciation Portfolio, BlackRock Global Allocation Portfolio and BlackRock Large Cap Core Portfolio, each a series of
BlackRock Series Fund, Inc., a Fund will not sell puts if, as a result, more than 50% of the Fund’s assets would be required
to cover its potential obligations under its hedging and other investment transactions.
Each Fund is also authorized to write (
i.e.
,
sell) uncovered put options on securities or instruments in which it may invest but with respect to which the Fund does not currently
have a corresponding short position or has not deposited as collateral cash equal to the exercise value of the put option with
the broker dealer through which it made the uncovered put option. The principal reason for writing uncovered put options is to
receive premium income and to acquire such securities or instruments at a net cost below the current market value. A Fund has the
obligation to buy the securities or instruments at an agreed upon price if the price of the securities or instruments decreases
below the exercise price. If the price of the securities or instruments increases during the option period, the option will expire
worthless and a Fund will retain the premium and
will not have to purchase the securities or instruments at the exercise price. In connection with such a transaction, a Fund will
segregate unencumbered liquid assets with a value at least equal to the Fund’s exposure, on a marked-to-market basis (as
calculated pursuant to requirements of the Commission). Such segregation will ensure that a Fund has assets available to satisfy
its obligations with respect to the transaction and will avoid any potential leveraging of the Fund’s portfolio. Such segregation
will not limit the Fund’s exposure to loss.
Options on Government National Mortgage Association
(“GNMA”) Certificates.
The following information relates to the unique characteristics of options on GNMA Certificates.
Since the remaining principal balance of GNMA Certificates declines each month as a result of mortgage payments, a Fund, as a writer
of a GNMA call holding GNMA Certificates as “cover” to satisfy its delivery obligation in the event of exercise, may
find that the GNMA Certificates it holds no longer have a sufficient remaining principal balance for this purpose. Should this
occur, a Fund will purchase additional GNMA Certificates from the same pool (if obtainable) or other GNMA Certificates in the cash
market in order to maintain its “cover.”
A GNMA Certificate held by a Fund to cover an
option position in any but the nearest expiration month may cease to represent cover for the option in the event of a decline in
the GNMA coupon rate at which new pools are originated under the FHA/VA loan ceiling in effect at any given time. If this should
occur, a Fund will no longer be covered, and the Fund will either enter into a closing purchase transaction or replace such Certificate
with a certificate that represents cover. When a Fund closes its position or replaces such Certificate, it may realize an unanticipated
loss and incur transaction costs.
Risks Associated with Options.
There are
several risks associated with transactions in options on securities and indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary market for particular options, whether traded over-the-counter
or on a national securities exchange (“Exchange”) may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed by an Exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series
of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities
of an Exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or one or
more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been issued by the Options Clearing Corporation as a result
of trades on that Exchange would continue to be exercisable in accordance with their terms.
Futures
A Fund may engage in transactions in futures and
options on futures. Futures are standardized, exchange-traded contracts that obligate a purchaser to take delivery, and a seller
to make delivery, of a specific amount of an asset at a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract a Fund is required to deposit collateral (“margin”)
equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed,
the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled
to a payment representing any profit experienced as a result of the futures position the prior day. Futures involve substantial
leverage risk.
The sale of a futures contract limits a Fund’s
risk of loss from a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures
contract’s expiration date. In the event the market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, a Fund will realize a loss on the futures position and a lower return on the portfolio
holdings than would have been realized without the purchase of the futures contract.
The purchase of a futures contract may protect
a Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period
when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in
value or a Fund determines not to complete an
anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position.
A Fund is also authorized to purchase or sell
call and put options on futures contracts including financial futures and stock indices. Generally, these strategies would be used
under the same market and market sector conditions (
i.e.
, conditions relating to specific types of investments) in which
the Fund entered into futures transactions. A Fund may purchase put options or write call options on futures contracts and stock
indices in lieu of selling the underlying futures contract in anticipation of a decrease in the market value of its securities.
Similarly, a Fund can purchase call options, or write put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an increase in the market value of securities which
the Fund intends to purchase.
To maintain greater flexibility, a Fund may invest
in instruments which have characteristics similar to futures contracts. These instruments may take a variety of forms, such as
debt securities with interest or principal payments determined by reference to the value of a security, an index of securities
or a commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures and securities,
including volatility and illiquidity.
When a Fund engages in transactions
in futures and options on futures, the Fund will segregate liquid assets with a value at least equal to the Fund’s exposure,
on a mark-to-market basis, to the transactions (as calculated pursuant to requirements of the Commission).
Risks Associated with Futures.
The primary
risks associated with the use of futures contracts and options are (a) the imperfect correlation between the change in market value
of the instruments held by a Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market
for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated
market movements, which are potentially unlimited; (d) the Manager’s or sub-adviser’s inability to predict correctly
the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility
that the counterparty will default in the performance of its obligations.
Foreign Exchange Transactions.
A Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on
currencies and purchase and sell currency futures and related options thereon (collectively, “Currency Instruments”)
for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against
the U.S. dollar or, with respect to certain Funds, to seek to enhance returns. Such transactions could be effected with respect
to hedges on foreign dollar denominated securities owned by a Fund, sold by a Fund but not yet delivered, or committed or anticipated
to be purchased by a Fund. As an illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an
investment in a yen-denominated security. In such circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful,
a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To
offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a “straddle”).
By selling such a call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in
the relative value of the yen to the dollar. “Straddles” of the type that may be used by a Fund are considered to
constitute hedging transactions. Certain Funds have a fundamental investment restriction that restricts currency option straddles.
No Fund will attempt to hedge all of its foreign portfolio positions.
Forward Foreign Exchange Transactions
.
Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational
currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require
current, rather than future, settlement. A Fund will enter into foreign exchange transactions for purposes of hedging either a
specific transaction or a portfolio position, or, with respect to certain Funds, to seek to enhance returns. A Fund may enter into
a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to
settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution.
A Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency
in which a portfolio position of the Fund is denominated or by purchasing a currency in
which the Fund anticipates acquiring a portfolio
position in the near future. Forward foreign exchange transactions involve substantial currency risk, and also involve credit and
liquidity risk. A Fund may also hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency
other than the currency being hedged (a “cross-hedge”). A Fund will only enter into a cross-hedge if the Manager believes
that (i) there is a demonstrably high correlation between the currency in which the cross-hedge is denominated and the currency
being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly
more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency
being hedged.
A Fund may also engage in proxy hedging transactions
to reduce the effect of currency fluctuations on the value of existing or anticipated holdings of portfolio securities. Proxy hedging
is often used when the currency to which the Fund is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging
entails entering into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency
or currencies in which some or all of the Fund’s securities are, or are expected to be, denominated, and to buy U.S. dollars.
Proxy hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions
can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated.
In addition, there is the risk that the perceived linkage between various currencies may not be present or may not be present during
the particular time that a Fund is engaging in proxy hedging. A Fund may also cross-hedge currencies by entering into forward contracts
to sell one or more currencies that are expected to decline in value relative to other currencies to which the Fund has or in which
the Fund expects to have portfolio exposure. For example, a Fund may hold both Canadian government bonds and Japanese government
bonds, and the adviser or sub-adviser may believe that Canadian dollars will deteriorate against Japanese yen. The Fund would sell
Canadian dollars to reduce its exposure to that currency and buy Japanese yen. This strategy would be a hedge against a decline
in the value of Canadian dollars, although it would expose the Fund to declines in the value of the Japanese yen relative to the
U.S. dollar.
Some of the forward non-U.S. currency contracts
entered into by the Funds are classified as non-deliverable forwards (NDF). NDFs are cash-settled, short-term forward contracts
that may be thinly traded or are denominated in non-convertible foreign currency, where the profit or loss at the time at the settlement
date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement,
for an agreed upon notional amount of funds. All NDFs have a fixing date and a settlement date. The fixing date is the date at
which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement
date is the date by which the payment of the difference is due to the party receiving payment. NDFs are commonly quoted for time
periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure
to and/or hedge exposure to foreign currencies that are not internationally traded.
Currency Futures
. A Fund may also seek
to enhance returns or hedge against the decline in the value of a currency through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts
while forward foreign exchange transactions are traded in the OTC market. Currency futures involve substantial currency risk, and
also involve leverage risk.
Currency Options
. A
Fund may also seek to enhance returns or hedge against the decline in the value of a currency through the use of currency options.
Certain Funds have fundamental restrictions that permit the purchase of currency options, but prohibit the writing of currency
options. Currency options are similar to options on securities. For example, in consideration for an option premium the writer
of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified amount of another currency. A Fund may engage
in transactions in options on currencies either on exchanges or OTC markets. See “Types of Options” above and “Additional
Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives” below. Currency options involve substantial
currency risk, and may also involve credit, leverage or liquidity risk.
Currency Swaps.
In order to protect against
currency fluctuations, a Fund may enter into currency swaps. A Fund may also hedge portfolio positions through currency swaps,
which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second
currency on a forward basis. Currency swaps involve the exchange of the rights of a Fund and another party to make or receive payments
in
specified currencies. Currency swaps usually involve
the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Because currency
swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated
currency, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on
its contractual delivery obligations.
Limitations on Currency Transactions
. A
Fund will not hedge a currency in excess of the aggregate market value of the securities that it owns (including receivables for
unsettled securities sales), or has committed to purchase or anticipates purchasing, which are denominated in such currency. Open
positions in forward foreign exchange transactions used for non-hedging purposes will be covered by the segregation of liquid assets
and are marked to market daily. A Fund’s exposure to futures or options on currencies will be covered as described below
under “Risk Factors in Derivatives.”
Risk Factors in Hedging Foreign Currency.
Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. While a Fund’s
use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund’s
shares, the net asset value of the Fund’s shares will fluctuate. Moreover, although Currency Instruments will be used with
the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated
currency movements will not be accurately predicted and that the Fund’s hedging strategies will be ineffective. To the extent
that a Fund hedges against anticipated currency movements that do not occur, the Fund may realize losses and decrease its total
return as the result of its hedging transactions. Furthermore, a Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency exchange rates occur.
In connection with its trading in forward foreign
currency contracts, a Fund will contract with a foreign or domestic bank, or foreign or domestic securities dealer, to make or
take future delivery of a specified amount of a particular currency. There are no limitations on daily price moves in such forward
contracts, and banks and dealers are not required to continue to make markets in such contracts. There have been periods during
which certain banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually
wide spread between the price at which the bank or dealer is prepared to buy and that at which it is prepared to sell. Governmental
imposition of credit controls might limit any such forward contract trading. With respect to its trading of forward contracts,
if any, a Fund will be subject to the risk of bank or dealer failure and the inability of, or refusal by, a bank or dealer to perform
with respect to such contracts. Any such default would deprive the Fund of any profit potential or force the Fund to cover its
commitments for resale, if any, at the then market price and could result in a loss to the Fund.
It may not be possible for a Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so
generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency
exchange rate movement relates to a market with respect to which Currency Instruments are not available and it is not possible
to engage in effective foreign currency hedging. The cost to a Fund of engaging in foreign currency transactions varies with such
factors as the currencies involved, the length of the contract period and the market conditions then prevailing. Since transactions
in foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Derivatives
Derivatives are volatile and involve significant
risks, including:
Credit Risk
— the risk that the counterparty
in a derivative transaction will be unable to honor its financial obligation to a Fund, or the risk that the reference entity in
a credit default swap or similar derivative will not be able to honor its financial obligations.
Currency Risk
— the risk that changes
in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.
Leverage Risk
— the risk associated
with certain types of investments or trading strategies (such as, for example, borrowing money to increase the amount of investments)
that relatively small market movements may result in large
changes in the value of an investment. Certain
investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.
Liquidity Risk
— the risk that certain
securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes
the security is currently worth.
Correlation Risk
— the risk that
changes in the value of a derivative will not match the changes in the value of the portfolio holdings that are being hedged or
of the particular market or security to which the Fund seeks exposure.
Index
Risk
— If the derivative is linked to the performance of an index, it will be subject to the risks associated with changes
in that index. If the index changes, a Fund could receive lower interest payments or experience a reduction in the value of the
derivative to below what that Fund paid. Certain indexed securities, including inverse securities (which move in an opposite direction
to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the
changes in the applicable index.
A Fund intends to enter into transactions involving
derivatives only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments
traded in OTC transactions, such instruments satisfy the
criteria set forth below under “Additional
Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives.” However, there can be no assurance that, at
any specific time, either a liquid secondary market will exist for a derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial
losses, if at all.
Certain transactions in derivatives
(such as futures transactions or sales of put options) involve substantial leverage risk and may expose a Fund to potential losses
that exceed the amount originally invested by the Fund. When a Fund engages in such a transaction, the Fund will segregate liquid
assets with a value at least equal to the Fund’s exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission).
Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC
Derivatives
Certain derivatives traded in OTC markets, including
indexed securities, swaps and OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or
impossible for a Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more
difficult for a Fund to ascertain a market value for such instruments. A Fund will, therefore, acquire illiquid OTC instruments
(i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated
or sold, or (ii) for which the Manager anticipates the Fund can receive on each business day at least two independent bids or offers,
unless a quotation from only one dealer is available, in which case that dealer’s quotation may be used.
Because derivatives traded in OTC markets are
not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that a Fund
has unrealized gains in such instruments or has deposited collateral with its counterparty the Fund is at risk that its counterparty
will become bankrupt or otherwise fail to honor its obligations. A Fund will attempt to minimize these risks by engaging in transactions
in derivatives traded in OTC markets only with financial institutions that have substantial capital or that have provided the Fund
with a third-party guaranty or other credit enhancement.
Distressed Securities.
A Fund may
invest in securities, including loans purchased in the secondary market, that are the subject of bankruptcy proceedings or otherwise
in default or in risk of being in default as to the repayment of principal and/or interest at the time of acquisition by the Fund
or that are rated in the lower rating categories by one or more nationally recognized statistical rating organizations (for example,
Ca or lower by Moody’s and CC or lower by S&P or Fitch) or, if unrated, are in the judgment of the Manager of equivalent
quality (“Distressed Securities”). Investment in Distressed Securities is speculative and involves significant risks.
A Fund will generally make such investments only
when the Manager believes it is reasonably likely that the issuer of the Distressed Securities will make an exchange offer or will
be the subject of a plan of reorganization pursuant to which the Fund will receive new securities in return for the Distressed
Securities. However, there can be no assurance that such an exchange offer will be made or that such a plan of reorganization will
be adopted. In addition, a significant period of time may pass between the time at which a Fund makes its investment in Distressed
Securities and the time that any such exchange
offer or plan of reorganization is completed. During this period, it is unlikely that a Fund will receive any interest payments
on the Distressed Securities, the Fund will be subject to significant uncertainty as to whether or not the exchange offer or plan
of reorganization will be completed and the Fund may be required to bear certain extraordinary expenses to protect and recover
its investment. Therefore, to the extent the Fund seeks capital appreciation through investment in distressed securities, the Fund’s
ability to achieve current income for its shareholders may be diminished. The Fund also will be subject to significant uncertainty
as to when and in what manner and for what value the obligations evidenced by the distressed securities will eventually be satisfied
(e.g., through a liquidation of the obligor’s assets, an exchange offer or plan of reorganization involving the distressed
securities or a payment of some amount in satisfaction of the obligation). Even if an exchange offer is made or plan of reorganization
is adopted with respect to Distressed Securities held by a Fund, there can be no assurance that the securities or other assets
received by a Fund in connection with such exchange offer or plan of reorganization will not have a lower value or income potential
than may have been anticipated when the investment was made or no value. Moreover, any securities received by a Fund upon completion
of an exchange offer or plan of reorganization may be restricted as to resale. Similarly, if a Fund participates in negotiations
with respect to any exchange offer or plan of reorganization with respect to an issuer of Distressed Securities, the Fund may be
restricted from disposing of such securities. To the extent that a Fund becomes involved in such proceedings, the Fund may have
a more active participation in the affairs of the issuer than that assumed generally by an investor. The Fund, however, will not
make investments for the purpose of exercising day-to-day management of any issuer’s affairs.
Dollar Rolls.
A dollar roll transaction
involves a sale by the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar
security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and a similar
maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those
sold. During the period between the sale and repurchase, a Fund will not be entitled to receive interest and principal payments
on the securities sold. Proceeds of the sale will be invested in additional instruments for the Fund, and the income from these
investments will generate income for the Fund. If such income does not exceed the income, capital appreciation and gain or loss
that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment
performance of a Fund compared with what the performance would have been without the use of dollar rolls. At the time a Fund enters
into a dollar roll transaction, the Manager or sub-adviser will designate assets on its books and records in an amount equal to
the amount of the Fund’s commitments and will subsequently monitor the account to ensure that its value is maintained.
Dollar rolls involve the risk that the market
value of the securities subject to a Fund’s forward purchase commitment may decline below, or the market value of the securities
subject to a Fund’s forward sale commitment may increase above, the exercise price of the forward commitment. In the event
the buyer of the securities files for bankruptcy or becomes insolvent, a Fund’s use of the proceeds of the current sale portion
of the transaction may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce
the Fund’s obligation to purchase the similar securities in the forward transaction. Dollar rolls are speculative techniques
that can be deemed to involve leverage. At the time a Fund sells securities and agrees to repurchase securities at a future date,
the Fund will segregate liquid assets with a value equal to the repurchase price. A Fund may engage in dollar roll transactions
to enhance return. Each dollar roll transaction is accounted for as a sale or purchase of a portfolio security and a subsequent
purchase or sale of a substantially similar security in the forward market. Successful use of mortgage dollar rolls may depend
upon the Manager’s ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can
be successfully employed.
Equity Securities.
Equity securities
include common stock and, for certain Funds, preferred stock (including convertible preferred stock); bonds, notes and debentures
convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts; general and limited
partnerships and limited liability companies; and depositary receipts. Stock markets are volatile. The price of equity securities
will fluctuate and can decline and reduce the value of a portfolio investing in equities. The price of equity securities fluctuates
based on changes in a company’s financial condition and overall market and economic conditions. The value of equity securities
purchased by the Fund could decline if the financial condition of the companies the Fund invests in decline or if overall market
and economic conditions deteriorate. They may also decline due to factors that affect a particular industry or industries, such
as labor shortages or increase in production costs and competitive conditions within an industry. In addition, they may decline
due to general market conditions that are not specifically related to a company or industry, such as real or perceived adverse
economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or generally
adverse investor sentiment.
From time to time certain of the Funds may invest
in shares of companies through initial public offerings (“IPOs”). IPOs have the potential to produce, and have in fact
produced, substantial gains for certain Funds. There is no assurance that any Fund will have continued access to profitable IPOs
and therefore investors should not rely on these past gains as an indication of future performance. The investment performance
of a Fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when it is
able to do so. In addition, as a Fund increases in size, the impact of IPOs on its performance will generally decrease. Securities
issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities
issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition,
the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.
The Funds may invest in companies that have relatively
small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources
and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult
to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant
ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies
are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater
price movements and less ability to sell a Fund’s investment than if the Fund held the securities of larger, more established
companies.
Exchange Traded Notes (“ETNs”)
.
Certain Funds may invest in ETNs. ETNs are generally notes representing debt of the issuer, usually a financial institution. ETNs
combine both aspects of bonds and ETFs. An ETN’s returns are based on the performance of one or more underlying assets, reference
rates or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market.
However, unlike an ETF, an ETN can be held until the ETN’s maturity, at which time the issuer will pay a return linked to
the performance of the specific asset, index or rate (“reference instrument”) to which the ETN is linked minus certain
fees. Unlike regular bonds, ETNs do not make periodic interest payments, and principal is not protected.
The value of an ETN may be influenced by, among
other things, time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying markets,
changes in the applicable interest rates, the performance of the reference instrument, changes in the issuer’s credit rating
and economic, legal, political or geographic events that affect the reference instrument. An ETN that is tied to a reference instrument
may not replicate the performance of the reference instrument. ETNs also incur certain expenses not incurred by their applicable
reference instrument. Some ETNs that use leverage can, at times, be relatively illiquid and, thus, they may be difficult to purchase
or sell at a fair price. Levered ETNs are subject to the same risk as other instruments that use leverage in any form. While leverage
allows for greater potential return, the potential for loss is also greater. Finally, additional losses may be incurred if the
investment loses value because, in addition to the money lost on the investment, the loan still needs to be repaid.
Because the return on the ETN is dependent on
the issuer’s ability or willingness to meet its obligations, the value of the ETN may change due to a change in the issuer’s
credit rating, despite no change in the underlying reference instrument. The market value of ETN shares may differ from the value
of the reference instrument. This difference in price may be due to the fact that the supply and demand in the market for ETN shares
at any point in time is not always identical to the supply and demand in the market for the assets underlying the reference instrument
that the ETN seeks to track.
There may be restrictions on the Fund’s
right to redeem its investment in an ETN, which are generally meant to be held until maturity. The Fund’s decision to sell
its ETN holdings may be limited by the availability of a secondary market. An investor in an ETN could lose some or all of the
amount invested.
Foreign Investment Risks.
Certain
Funds may invest in foreign securities, including securities from issuers located in emerging market countries. These securities
may be denominated in U.S. dollars or in a foreign currency. Investing in foreign securities involves risks not typically associated
with investing in securities of companies organized and operated in the United States that can increase the chances that a Fund
will lose money.
Securities issued by certain companies organized
outside the United States may not be deemed to be foreign securities (but rather deemed to be U.S. securities) if (i) the company’s
principal operations are conducted from the U.S., (ii) the company’s equity securities trade principally on a U.S. stock
exchange, (iii) the company does a
substantial amount of business in the U.S. or
(iv) the issuer of securities is included in the Fund’s primary U.S. benchmark index.
In addition to equity securities, foreign investments
of the Funds may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state, province or municipality; (b) debt obligations of supranational
organizations; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of domestic banks and corporations
issued in foreign currencies; (e) debt obligations denominated in the Euro; and (f) foreign corporate debt securities and commercial
paper. Such securities may include loan participations and assignments, convertible securities and zero-coupon securities.
Dividends or interest on, or proceeds from the
sale of, foreign securities may be subject to foreign withholding taxes.
Foreign Market Risk.
Funds that may invest
in foreign securities offer the potential for more diversification than a Fund that invests only in the United States because securities
traded on foreign markets have often (though not always) performed differently from securities traded in the United States. However,
such investments often involve risks not present in U.S. investments that can increase the chances that a Fund will lose money.
In particular, a Fund is subject to the risk that, because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may be difficult for the Fund to buy and sell securities on those exchanges. In addition,
prices of foreign securities may fluctuate more than prices of securities traded in the United States. Investments in foreign markets
may also be adversely affected by governmental actions such as the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries.
Any of these actions could severely affect security prices, impair a Fund’s ability to purchase or sell foreign securities
or transfer the Fund’s assets or income back into the United States, or otherwise adversely affect a Fund’s operations.
Other potential foreign market risks include exchange controls, difficulties in pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable legal judgments in foreign courts, and political and social conditions, such as
diplomatic relations, confiscatory taxation, expropriation, limitation on the removal of funds or assets, or imposition of (or
change in) exchange control regulations. Legal remedies available to investors in certain foreign countries may be less extensive
than those available to investors in the United States or other foreign countries. In addition, changes in government administrations
or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and
could favorably or adversely affect a Fund’s operations.
Foreign Economy Risk.
The economies of
certain foreign markets often do not compare favorably with that of the United States with respect to such issues as growth of
gross national product, reinvestment of capital, resources, and balance of payments position. Certain such economies may rely heavily
on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions
against a particular country or countries, changes in international trading patterns, trade barriers, and other protectionist or
retaliatory measures.
Currency Risk and Exchange Risk.
Because
foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Fund that invests
in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates. Generally,
when the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the
currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security
denominated in that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as “currency
risk,” means that a stronger U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those
returns.
Governmental Supervision and Regulation/Accounting
Standards.
Many foreign governments supervise and regulate stock exchanges, brokers and the sale of securities less than does
the United States. Some countries may not have laws to protect investors comparable to the U.S. securities laws. For example, some
foreign countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or sells a company’s
securities based on nonpublic information about that company. Accounting standards in other countries are not necessarily the same
as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards,
it may be harder for Fund management to completely and accurately determine a company’s financial condition. In addition,
the U.S. Government has from time to time in the past imposed restrictions, through
penalties and otherwise, on foreign investments
by U.S. investors such as the Fund. If such restrictions should be reinstituted, it might become necessary for the Fund to invest
all or substantially all of its assets in U.S. securities. Also, brokerage commissions and other costs of buying or selling securities
often are higher in foreign countries than they are in the United States. This reduces the amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside
the United States.
A Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some
foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there
may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on a Fund’s
ability to recover its assets if a foreign bank or depository or issuer of a security or any of their agents goes bankrupt. In
addition, it is often more expensive for a Fund to buy, sell and hold securities in certain foreign markets than in the United
States. The increased expense of investing in foreign markets reduces the amount a Fund can earn on its investments and typically
results in a higher operating expense ratio for the Fund as compared to investment companies that invest only in the United States.
Publicly Available Information.
In general,
less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United
States. While the volume of transactions effected on foreign stock exchanges has increased in recent years, it remains appreciably
below that of the New York Stock Exchange. Accordingly, a Fund’s foreign investments may be less liquid and their prices
may be more volatile than comparable investments in securities in U.S. companies. In addition, there is generally less government
supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.
Settlement Risk.
Settlement and clearance
procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically generated by
the settlement of U.S. investments. Communications between the United States and emerging market countries may be unreliable, increasing
the risk of delayed settlements or losses of security certificates in markets that still rely on physical settlement. Settlements
in certain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it
difficult for a Fund to carry out transactions. If a Fund cannot settle or is delayed in settling a purchase of securities, it
may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some
period. If a Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security
then declines or, if it has contracted to sell the security to another party, the Fund could be liable to that party for any losses
incurred.
Funding Agreements.
Certain Funds
may invest in Guaranteed Investment Contracts (“GICs”) and similar funding agreements. In connection with these investments,
a Fund makes cash contributions to a deposit fund of an insurance company’s general account. The insurance company then credits
to the Fund on a monthly basis guaranteed interest, which is based on an index (such as LIBOR). The funding agreements provide
that this guaranteed interest will not be less than a certain minimum rate. The purchase price paid for a funding agreement becomes
part of the general assets of the insurance company, and the contract is paid from the general assets of the insurance company.
Generally, funding agreements are not assignable or transferable without the permission of the issuing insurance companies, and
an active secondary market in some funding agreements does not currently exist.
Guarantees
.
A Fund may purchase securities which contain guarantees issued by an entity separate from the issuer of the security. Generally,
the guarantor of a security (often an affiliate of the issuer) will fulfill an issuer’s payment obligations under a security
if the issuer is unable to do so.
Illiquid or Restricted Securities.
Each
Fund may invest up to 15% of its net assets in securities that lack an established secondary trading market or otherwise are considered
illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition
of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade
at a discount from comparable, more liquid investments. Investment of a Fund’s assets in illiquid securities may restrict
the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage
of market opportunities. The risks associated with illiquidity will be particularly acute where a Fund’s operations
require cash, such as when the Fund redeems shares
or pays dividends, and could result in the Fund borrowing to meet short term cash requirements or incurring capital losses on the
sale of illiquid investments.
A Fund may invest in securities that are not registered
under the Securities Act (“restricted securities”). Restricted securities may be sold in private placement transactions
between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many
cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual
restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and
more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the
Fund or less than their fair market value. In addition, issuers whose securities are not publicly traded may not be subject to
the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any
privately placed securities held by a Fund are required to be registered under the securities laws of one or more jurisdictions
before being resold, the Fund may be required to bear the expenses of registration. Certain of the Fund’s investments in
private placements may consist of direct investments and may include investments in smaller, less seasoned issuers, which may involve
greater risks. These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited
management group. In making investments in such securities, a Fund may obtain access to material nonpublic information, which may
restrict the Fund’s ability to conduct portfolio transactions in such securities.
Some of these securities are new and complex,
and trade only among institutions; the markets for these securities are still developing, and may not function as efficiently as
established markets. Owning a large percentage of restricted or illiquid securities could hamper the Fund’s ability to raise
cash to meet redemptions. Also, because there may not be an established market price for these securities, the Fund may have to
estimate their value, which means that their valuation (and, to a much smaller extent, the valuation of the Fund) may have a subjective
element. Transactions in restricted or illiquid securities may entail registration expense and other transaction costs that are
higher than those for transactions in unrestricted or liquid securities. Where registration is required for restricted or illiquid
securities a considerable time period may elapse between the time the Fund decides to sell the security and the time it is actually
permitted to sell the security under an effective registration statement. If during such period, adverse market conditions were
to develop, the Fund might obtain less favorable pricing terms that when it decided to sell the security.
Inflation-Indexed Bonds.
Certain
Funds may invest in inflation-indexed bonds, which are fixed income securities or other instruments whose principal value is periodically
adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure
that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index (“CPI”)
accruals as part of a semi-annual coupon.
Inflation-indexed securities issued by the
U.S. Treasury have maturities of five, ten or thirty years, although it is possible that securities with other maturities will
be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted
principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months was 1%, the mid-year par value of the bond would be
$1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the
year resulted in the whole year’s inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second
semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation
falls, the principal value of inflation-indexed bonds will be adjusted downward, and, consequently, the interest payable on these
securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of
deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. Certain Funds may also invest
in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided,
the adjusted principal value of the bond repaid at maturity may be less than the original principal. In addition, if the Fund purchases
inflation-indexed bonds offered by foreign issuers, the rate of inflation measured by the foreign inflation index may not be correlated
to the rate of inflation in the United States.
The value of inflation-indexed bonds is expected
to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal
interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates
increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed
bonds. There can be no assurance, however, that the value of inflation-indexed bonds will be directly correlated to changes in
interest rates.
While these securities are expected to be protected
from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due
to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not
be protected to the extent that the increase is not reflected in the bond’s inflation measure.
In general, the measure used to determine the
periodic adjustment of U.S. inflation-indexed bonds is the Consumer Price Index for Urban Consumers (“CPI-U”), which
is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made
up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any
foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there
can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.
Any increase in the principal amount of an inflation-indexed
bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Inflation
Risk.
Like all mutual funds, the Funds are subject to inflation risk. Inflation risk is the risk that the present value
of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases,
the present value of a Fund’s assets can decline as can the value of a Fund’s distributions.
Information Concerning the
Indexes.
Standard & Poor’s
®
500 Index (“S&P
500”)
. “Standard & Poor’s
®
, S&P
®
, “S&P 500
®
,
“Standard & Poor’s 500”, and “500” are trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by certain BlackRock Funds. No Fund is sponsored, endorsed, sold or promoted by S&P, a division of The
McGraw Hill Companies, Inc. S&P makes no representation regarding the advisability of investing in any Fund. S&P makes
no representation or warranty, express or implied, to the owners of shares of a Fund or any member of the public regarding the
advisability of investing in securities generally or in a Fund particularly or the ability of the S&P 500 to track general
stock market performance. S&P’s only relationship to certain Funds is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 which is determined, composed and calculated by S&P without regard to the Funds. S&P
has no obligation to take the needs of a Fund or the owners of shares of a Fund into consideration in determining, composing or
calculating the S&P 500. S&P is not responsible for and has not participated in the determination of the prices and amount
of any Fund or the timing of the issuance or sale of shares of a Fund or in the determination or calculation of the equation by
which a Fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing
or trading of any Fund.
S&P does not guarantee the accuracy
and/or the completeness of the S&P 500 Index or any data included therein, and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or implied, as to results to be obtained by a Fund, owners
of shares of a Fund, or any other person or entity from the use of the S&P 500 Index or any data included therein. S&P
makes no express or implied warranties and expressly disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the S&P 500 Index or any data included therein. Without limiting any of the foregoing, in no event shall
S&P have any liability for any special, punitive, indirect, or consequential damages (including lost profits), even if notified
of the possibility of such damages.
Russell
®
Indexes.
No
Fund is promoted, sponsored or endorsed by, nor in any way affiliated with Frank Russell Company. Frank Russell Company is not
responsible for and has not reviewed any Fund nor any associated literature or publications and Frank Russell Company makes no
representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise.
Frank Russell Company reserves the right,
at any time and without notice, to alter, amend, terminate or in any way change a Russell Index. Frank Russell Company has no obligation
to take the needs of any particular Fund or its
participants or any other product or
person into consideration in determining, composing or calculating the Russell Index.
Frank Russell Company’s
publication of the Russell Indexes in no way suggests or implies an opinion by Frank Russell Company as to the attractiveness
or appropriateness of investment in any or all securities upon which the Russell Indexes is based. Frank Russell Company makes
no representation, warranty, or guarantee as to the accuracy, completeness, reliability, or otherwise of the Russell Indexes or
any data included in the Russell Indexes. Frank Russell Company makes no representation or warranty regarding the use, or the
results of use, of the Russell Indexes or any data included therein, or any security (or combination thereof) comprising the Russell
Indexes. Frank Russell Company makes no other express or implied warranty, and expressly disclaims any warranty, of any kind,
including, without means of limitation, any warranty of merchantability or fitness for a particular purpose with respect to the
Russell Indexes or any data or any security (or combination thereof) included therein.
MSCI Indexes.
The
MSCI Europe, Australasia and Far East (Capitalization Weighted) Index (“EAFE Index”) and the MSCI All-Country World
ex-US Index (“ACWI ex-US Index” and together with the EAFE Index, the “MSCI Indexes” and individually
an “MSCI Index”) are the exclusive property of MSCI, Inc. (“MSCI”). The EAFE Index and ACWI ex-US Index
are service marks of MSCI and have been licensed for use by the Manager and its affiliates.
No Fund is sponsored, endorsed,
sold or promoted by MSCI. MSCI makes no representation or warranty, express or implied, to the owners of shares of a Fund or any
member of the public regarding the advisability of investing in securities generally or in a Fund particularly or the ability
of an MSCI Index to track general stock market performance. MSCI is the licensor of certain trademarks, service marks and trade
names of MSCI and of the MSCI Indexes. MSCI has no obligation to take the needs of any Fund or the owners of shares of a Fund
into consideration in determining, composing or calculating an MSCI Index. MSCI is not responsible for and has not participated
in the determination of the timing of, prices at, or quantities of shares of any Fund to be issued or in the determination or
calculation of the equation by which the shares of a Fund are redeemable for cash. MSCI has no obligation or liability to owners
of shares of a Fund in connection with the administration, marketing or trading of the Fund.
Although MSCI shall obtain information
for inclusion in or for use in the calculation of an MSCI Index from sources which MSCI considers reliable, MSCI does not guarantee
the accuracy and/or the completeness of the MSCI Index or any data included therein. MSCI makes no warranty, express or implied,
as to results to be obtained by licensee, licensee’s customers and counterparties, owners of shares of a Fund, or any other
person or entity from the use of an MSCI Index or any data included therein in connection with the rights licensed hereunder or
for any other use. MSCI makes no express or implied warranties, and hereby expressly disclaims all warranties of merchantability
or fitness for a particular purpose with respect to an MSCI Index or any data included therein. Without limiting any of the foregoing,
in no event shall MSCI have any liability for any direct, indirect, special, punitive, consequential or any other damages (including
lost profits) even if notified of the possibility of such damages.
Initial Public Offering
(“IPO”) Risk.
The volume of initial public offerings and the levels at which the newly issued stocks
trade in the secondary market are affected by the performance of the stock market overall. If initial public offerings are brought
to the market, availability may be limited and a Fund may not be able to buy any shares at the offering price, or if it is able
to buy shares, it may not be able to buy as many shares at the offering price as it would like. In addition, the prices of securities
involved in initial public offerings are often subject to greater and more unpredictable price changes than more established stocks.
IPOs have the potential to produce substantial gains. There is no assurance that any Fund will have access to profitable IPOs
and therefore investors should not rely on any past gains from IPOs as an indication of future performance. The investment performance
of a Fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when it
is able to do so. In addition, as a Fund increases in size, the impact of IPOs on its performance will generally decrease. Securities
issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities
issued in IPOs have no trading history, and information about the companies may be available for very limited periods.
Investment Grade Debt Obligations.
Certain Funds
may invest in “investment grade securities,” which are securities rated in the four highest rating categories of an
NRSRO or deemed to be of equivalent quality by a Fund’s Manager. Certain Funds may invest in debt securities rated Aaa by
Moody’s or AAA by S&P. It should be noted that debt obligations rated in the lowest of the top four ratings (i.e., “Baa”
by Moody’s or “BBB” by S&P) are considered to have some speculative characteristics and are more sensitive
to economic change than higher rated securities. If an investment grade security of a Fund is subsequently downgraded below investment
grade, the Fund’s Manager will consider such an event in determining whether the Fund should continue to hold the security.
Subject to its investment strategies, there is no limit on
the amount of such downgraded securities a Fund may hold, although under normal market conditions the manager do not expect to
hold these securities to a material extent.
See Appendix A to this Statement of Additional Information
for a description of applicable securities ratings.
Investment in Emerging Markets.
Certain
Funds may invest in the securities of issuers domiciled in various countries with emerging capital markets. Specifically, a country
with an emerging capital market is any country that the World Bank, the International Finance Corporation, the United Nations or
its authorities has determined to have a low or middle income economy. Countries with emerging markets can be found in regions
such as Asia, Latin America, Eastern Europe and Africa.
Investments in the securities of issuers domiciled
in countries with emerging capital markets involve certain additional risks that do not generally apply to investments in securities
of issuers in more developed capital markets, such as (i) low or non-existent trading volume, resulting in a lack of liquidity
and increased volatility in prices for such securities, as compared to securities of comparable issuers in more developed capital
markets; (ii) uncertain national policies and social, political and economic instability, increasing the potential for expropriation
of assets, confiscatory taxation, high rates of inflation or unfavorable diplomatic developments; (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition of exchange controls, custodial restrictions or
other foreign or U.S. governmental laws or restrictions applicable to such investments; (iv) national policies that may limit a
Fund’s investment opportunities such as restrictions on investment in issuers or industries deemed sensitive to national
interests; and (v) the lack or relatively early development of legal structures governing private and foreign investments and private
property. In addition to withholding taxes on investment income, some countries with emerging markets may impose differential capital
gains taxes on foreign investors.
Political and economic structures in emerging
market countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political
and economic stability characteristic of more developed countries. In such a dynamic environment, there can be no assurance that
any or all of these capital markets will continue to present viable investment opportunities for a Fund. In the past, governments
of such nations have expropriated substantial amounts of private property, and most claims of the property owners have never been
fully settled. There is no assurance that such expropriations will not reoccur. In such an event, it is possible that a Fund could
lose the entire value of its investments in the affected market. As a result the risks described above, including the risks of
nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may
affect the value of investments in these countries and the availability to a Fund of additional investments. The small size and
inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in these countries
may make investments in the countries illiquid and more volatile than investments in Japan or most Western European countries.
Also, there may be less publicly available information
about issuers in emerging markets than would be available about issuers in more developed capital markets, and such issuers may
not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies
are subject. In certain countries with emerging capital markets, reporting standards vary widely. As a result, traditional investment
measurements used in the United States, such as price/earnings ratios, may not be applicable. Emerging market securities may be
substantially less liquid and more volatile than those of mature markets, and company shares may be held by a limited number of
persons. This may adversely affect the timing and pricing of the Fund’s acquisition or disposal of securities.
Practices in relation to settlement of securities
transactions in emerging markets involve higher risks than those in developed markets, in part because a Fund will need to use
brokers and counterparties that are less well capitalized, and custody and registration of assets in some countries may be unreliable.
The possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to recognize ownership exists in some
emerging markets, and, along with other factors, could result in ownership registration being completely lost. A Fund would absorb
any loss resulting from such registration problems and may have no successful claim for compensation.
Investment in non-dollar denominated securities
including securities from issuers located in emerging market countries may be on either a currency hedged or unhedged basis, and
the Funds may hold from time to time various foreign currencies pending investment or conversion into U.S. dollars. Some of these
instruments may have the characteristics of futures contracts. In addition, certain Funds may engage in foreign currency exchange
transactions
to seek to protect against changes in the level
of future exchange rates which would adversely affect the Fund’s performance. These investments and transactions involving
foreign securities, currencies, options (including options that relate to foreign currencies), futures, hedging and cross-hedging
are described below and under “Interest Rate Transactions and Currency Swaps,” Foreign Currency Transactions”
and “Options and Futures Contracts.”
Risks of Investing in Asia-Pacific Countries.
In addition
to the risks of foreign investing and the risks of investing in developing markets, the developing market Asia-Pacific countries
in which a Fund may invest are subject to certain additional or specific risks. Certain Funds may make substantial investments
in Asia-Pacific countries. In many of these markets, there is a high concentration of market capitalization and trading volume
in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial
intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region
such as in Japan and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well
capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment discussed below, result in potentially fewer investment opportunities for
a Fund and may have an adverse impact on the investment performance of the Fund.
Many of the developing market Asia-Pacific countries may
be subject to a greater degree of economic, political and social instability than is the case in the United States and Western
European countries. Such instability may result from, among other things: (i) authoritarian governments or military involvement
in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular unrest
associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile relations
with neighbouring countries; and (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries,
such as Indonesia, have a substantial role in regulating and supervising the economy. Another risk common to most such countries
is that the economy is heavily export oriented and, accordingly, is dependent upon international trade. The existence of overburdened
infrastructure and obsolete financial systems also presents risks in certain countries, as do environmental problems. Certain economies
also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity
prices that, in turn, may be affected by a variety of factors.
The legal systems in certain developing market Asia-Pacific
countries also may have an adverse impact on the Fund. For example, while the potential liability of a shareholder in a U.S. corporation
with respect to acts of the corporation is generally limited to the amount of the shareholder’s investment, the notion of
limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing
market Asia-Pacific companies may be more limited than those of shareholders of U.S. corporations. It may be difficult or impossible
to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing market Asia-Pacific countries
have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government
owns or controls many companies, including the largest in the country. Accordingly, government actions in the future could have
a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies
and a Fund itself, as well as the value of securities in the Fund’s portfolio. In addition, economic statistics of developing
market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
In addition to the relative lack of publicly available information
about developing market Asia-Pacific issuers and the possibility that such issuers may not be subject to the same accounting, auditing
and financial reporting standards as U.S. companies, inflation accounting rules in some developing market Asia-Pacific countries
require companies that keep accounting records in the local currency, for both tax and accounting purposes, to restate certain
assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant purchasing
power. Inflation accounting may indirectly generate losses or profits for certain developing market Asia-Pacific companies.
Satisfactory custodial services for investment securities
may not be available in some developing Asia-Pacific countries, which may result in the Fund incurring additional costs and delays
in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific countries, such as the Philippines,
India and Turkey, are especially large debtors to commercial banks and foreign governments.
On March 11, 2011, a powerful earthquake and resulting tsunami
struck northeastern Japan causing major damage along the coast, including damage to nuclear power plants in the region. This disaster,
and the resulting damage, could have a severe and negative impact on a Fund’s investment portfolio and, in the longer term,
could impair the ability of issuers in which the Fund invests to conduct their businesses in the manner normally conducted.
Fund management may determine that, notwithstanding otherwise
favorable investment criteria, it may not be practicable or appropriate to invest in a particular developing Asia-Pacific country.
A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Restrictions on Foreign Investments in Asia-Pacific Countries.
Some developing Asia-Pacific countries prohibit or impose substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as a Fund. As illustrations, certain countries may require governmental
approval prior to investments by foreign persons or limit the amount of investment by foreign persons in a particular company or
limit the investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms
(including price and shareholder rights) than securities of the company available for purchase by nationals. There can be no assurance
that a Fund will be able to obtain required governmental approvals in a timely manner. In addition, changes to restrictions on
foreign ownership of securities subsequent to a Fund’s purchase of such securities may have an adverse effect on the value
of such shares. Certain countries may restrict investment opportunities in issuers or industries deemed important to national interests.
The manner in which foreign investors may invest in companies
in certain developing Asia-Pacific countries, as well as limitations on such investments, also may have an adverse impact on the
operations of a Fund. For example, a Fund may be required in certain of such countries to invest initially through a local broker
or other entity and then have the shares purchased re-registered in the name of the Fund. Re-registration may in some instances
not be able to occur on a timely basis, resulting in a delay during which a Fund may be denied certain of its rights as an investor,
including rights as to dividends or to be made aware of certain corporate actions. There also may be instances where a Fund places
a purchase order but is subsequently informed, at the time of re-registration, that the permissible allocation of the investment
to foreign investors has been filled, depriving the Fund of the ability to make its desired investment at that time.
Substantial limitations may exist in certain countries with
respect to a Fund’s ability to repatriate investment income, capital or the proceeds of sales of securities by foreign investors.
A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of
capital, as well as by the application to the Fund of any restrictions on investments. It is possible that certain countries may
impose currency controls or other restrictions relating to their currencies or to securities of issuers in those countries. To
the extent that such restrictions have the effect of making certain investments illiquid, securities may not be available for sale
to meet redemptions. Depending on a variety of financial factors, the percentage of a Fund’s portfolio subject to currency
controls may increase. In the event other countries impose similar controls, the portion of the Fund’s assets that may be
used to meet redemptions may be further decreased. Even where there is no outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects of the operations of a Fund (for example, if funds may be withdrawn only in
certain currencies and/or only at an exchange rate established by the government).
In certain countries, banks or other financial institutions
may be among the leading companies or have actively traded securities available for investment. The Investment Company Act restricts
a Fund’s investments in any equity securities of an issuer that, in its most recent fiscal year, derived more than 15% of
its revenues from “securities related activities,” as defined by the rules thereunder. These provisions may restrict
a Fund’s investments in certain foreign banks and other financial institutions.
Political and economic structures in emerging market countries
may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic
stability characteristic of more developed countries. Some of these countries may have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of private companies. As a result the risks described
above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated
political or social developments may affect the value of
investments in these countries and the availability to a Fund of additional investments in emerging market countries. The small
size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in
these countries may make investments in the countries illiquid and more volatile than investments in Japan or most Western European
countries. There may be little financial or accounting information available with respect to issuers located in certain emerging
market countries, and it may be difficult to assess the value or prospects of an investment in such issuers.
The expense ratios of the Funds investing significantly
in foreign securities can be expected to be higher than those of Funds investing primarily in domestic securities. The costs attributable
to investing abroad are usually higher for several reasons, such as the higher cost of custody of foreign securities, higher commissions
paid on comparable transactions on foreign markets and additional costs arising from delays in settlements of transactions involving
foreign securities.
Risks of Investments in Russia
. A Fund
may invest a portion of its assets in securities issued by companies located in Russia. Because of the recent formation of the
Russian securities markets as well as the underdeveloped state of Russia’s banking system, settlement, clearing and registration
of securities transactions are subject to significant risks. Ownership of shares is defined according to entries in the company’s
share register and normally evidenced by extracts from the register. These extracts are not negotiable instruments and are not
effective evidence of securities ownership. The registrars are not necessarily subject to effective state supervision nor are they
licensed with any governmental entity. Also, there is no central registration system for shareholders and it is possible for a
Fund to lose its registration through fraud, negligence or mere oversight. While a Fund will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund of its ownership rights or improperly dilute its
interest. In addition, while applicable Russian regulations impose liability on registrars for losses resulting from their errors,
it may be difficult for a Fund to enforce any rights it may have against the registrar or issuer of the securities in the event
of loss of share registration. While a Fund intends to invest directly in Russian companies that use an independent registrar,
there can be no assurance that such investments will not result in a loss to the Fund.
Brady Bonds.
A Fund’s emerging market
debt securities may include emerging market governmental debt obligations commonly referred to as Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection
with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the “Brady Plan”). Brady Plan debt restructurings have been implemented in a number of countries, including: Argentina,
Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger, Nigeria, Panama, Peru, the Philippines,
Poland, Uruguay and Venezuela.
Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady Bonds, which may
be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury
zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized
on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year’s
interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady
Bonds are entitled to “value recovery payments” in certain circumstances, which in effect constitute supplemental interest
payments but generally are not collateralized. For example, some Mexican and Venezuelan Brady Bonds include attached value recovery
options, which increase interest payments if oil revenues rise. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the
uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (the uncollateralized amounts
constitute the “residual risk”).
Brady Bonds involve various risk factors described
above associated with investing in foreign securities, including the history of defaults with respect to commercial bank loans
by public and private entities of countries issuing Brady Bonds. In light of the residual risk of Brady Bonds and, among other
factors, the history of defaults, investments in Brady Bonds are considered speculative. There can be no assurance that Brady Bonds
in which the Funds may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause
the Funds to suffer a loss of interest or principal on any of its holdings.
Investment in Other Investment Companies.
Each Fund may, subject to applicable law, invest in other investment companies (including investment companies managed
by BlackRock and its affiliates), including money market funds and exchange traded funds (“ETFs”), which are typically
open-end funds or unit investment trusts listed on a stock exchange. In accordance with the Investment Company Act, a Fund may
invest up to 10% of its total assets in securities of other investment companies (measured at the time of such investment). In
addition, under the Investment Company Act a Fund may not acquire securities of an investment company if such acquisition would
cause the Fund to own more than 3% of the total outstanding voting stock of such investment company and a Fund may not invest in
another investment company if such investment would cause more than 5% of the value of the Fund’s total assets to be invested
in securities of such investment company. (These limits do not restrict a Feeder Fund from investing all of its assets in shares
of its Master Portfolio.) In addition to the restrictions on investing in other investment companies discussed above, a Fund may
not invest in a registered closed-end investment company if such investment would cause the Fund and other BlackRock-advised investment
companies to own more than 10% of the total outstanding voting stock of such closed-end investment company. Pursuant to the Investment
Company Act (or alternatively, pursuant to exemptive orders received from the Commission) these percentage limitations do not apply
to investments in affiliated money market funds, and under certain circumstances, do not apply to investments in affiliated investment
companies, including ETFs. In addition, many third-party ETFs have obtained exemptive relief from the Commission to permit unaffiliated
funds (such as the Funds) to invest in their shares beyond the statutory limits, subject to certain conditions and pursuant to
contractual arrangements between the ETFs and the investing funds. A Fund may rely on these exemptive orders in investing in ETFs.
Further, under certain circumstances a Fund may be able to rely on certain provisions of the Investment Company Act to invest in
shares of unaffiliated investment companies beyond the statutory limits noted above, but subject to certain other statutory restrictions.
As with other investments, investments in other
investment companies are subject to market and selection risk.
Shares of investment companies, such as closed-end
fund investment companies, that trade on an exchange may at times be acquired at market prices representing premiums to their net
asset values. In addition, investment companies held by a Fund that trade on an exchange could trade at a discount from net asset
value, and such discount could increase while the Fund holds the shares. If the market price of shares of an exchange-traded investment
company decreases below the price that the Fund paid for the shares and the Fund were to sell its shares of such investment company
at a time when the market price is lower than the price at which it purchased the shares, the Fund would experience a loss.
In addition, if a Fund acquires shares in investment
companies, including affiliated investment companies, shareholders would bear both their proportionate share of expenses in the
Fund and, indirectly, the expenses of such investment companies. Such expenses, both at the Fund level and acquired investment
company level, would include management and advisory fees, unless such fees have been waived by BlackRock. Please see the relevant
Fund’s prospectus to determine whether any such management and advisory fees have been waived by BlackRock. Investments by
a Fund in wholly owned investment entities created under the laws of certain countries will not be deemed an investment in other
investment companies.
To the extent shares of a Fund are held by an
affiliated fund, the ability of the Fund itself to purchase other affiliated investment companies may be limited. In addition,
a fund-of-funds (
e.g.
, an investment company that seeks to meet its investment objective by investing significantly in other
investment companies) may be limited in its ability to purchase affiliated underlying funds if such affiliated underlying funds
themselves own shares of affiliated funds.
A number of publicly traded closed-end investment
companies have been organized to facilitate indirect foreign investment in developing countries, and certain of such countries,
such as Thailand, South Korea, Chile and Brazil, have specifically authorized such funds. There also are investment opportunities
in certain of such countries in pooled vehicles that resemble open-end investment companies. The restrictions on investments in
securities of
investment companies set forth above may limit
opportunities for a Fund to invest indirectly in certain developing countries.
Junk Bonds.
Non-investment grade
or “high yield” fixed income or convertible securities commonly known to investors as “junk bonds” are
debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Fund management
believes are of comparable quality. While generally providing greater income and opportunity for gain, non-investment grade debt
securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default,
and their yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized
rating agencies (rated “Ba” or lower by Moody’s or “BB” or lower by S&P) or will be non-rated.
The credit rating of a high yield security does not necessarily address its market value risk, and ratings may from time to time
change, positively or negatively, to reflect developments regarding the issuer’s financial condition. High yield securities
are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends
in accordance with the terms of the obligation and may have more credit risk than higher rated securities.
The major risks in junk bond investments include
the following:
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Junk bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse
changes in the issuer’s industry and to general economic conditions. Issuers of junk bonds may be unable to meet their interest
or principal payment obligations because of an economic downturn, specific issuer developments or the unavailability of additional
financing.
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The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than
issuers of investment grade bonds. If the issuer experiences financial stress, it may be unable to meet its debt obligations. The
issuer’s ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability
of additional financing. Issuers of high yield securities are often in the growth stage of their development and/or involved in
a reorganization or takeover.
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Junk bonds are frequently ranked junior to claims by other creditors. If the issuer cannot meet its
obligations, the senior obligations are generally paid off before the junior obligations, which will potentially limit a Fund’s
ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in high
yield securities have a lower degree of protection with respect to principal and interest payments then do investors in higher
rated securities.
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Junk bonds frequently have redemption features that permit an issuer to repurchase the security from
a Fund before it matures. If an issuer redeems the junk bonds, a Fund may have to invest the proceeds in bonds with lower yields
and may lose income.
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Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may
have a greater impact on the prices of junk bonds than on those of other higher rated fixed income securities.
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The secondary markets for high yield securities are not as liquid as the secondary markets for higher
rated securities. The secondary markets for high yield securities are concentrated in relatively few market makers and participants
in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual
funds. In addition, the trading volume for high yield securities is generally lower than that for higher rated securities and the
secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. Under certain economic and/or market conditions, a Fund may have difficulty disposing of certain
high yield securities due to the limited number of investors in that sector of the market. An illiquid secondary market may adversely
affect the market price of the high yield security, which may result in increased difficulty selling the particular issue and obtaining
accurate market quotations on the issue when valuing a Fund’s assets. Market quotations on high yield securities are available
only from a limited number of dealers, and such quotations may not be the actual prices available for a purchase or sale. When
the secondary market for high yield securities becomes more illiquid, or in the absence of readily available market quotations
for such securities, the relative lack of reliable objective data makes it more difficult to value a Fund’s securities, and
judgment plays a more important role in determining such valuations.
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A Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new
terms with a defaulting issuer.
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The junk bond markets may react strongly to adverse news about an issuer or the economy, or to the
perception or expectation of adverse news, whether or not it is based on fundamental analysis.
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Additionally, prices for high yield
securities may be affected by legislative and regulatory developments. These developments could adversely affect a Fund’s
net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of
these securities and the value and liquidity of outstanding high yield securities, especially in a thinly traded market. For example,
federal legislation requiring the divestiture by federally insured savings and loan associations of their investments in high yield
bonds and limiting the deductibility of interest by certain corporate issuers of high yield bonds adversely affected the market
in the past.
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The rating assigned by a rating agency evaluates the issuing agency’s assessment of the safety
of a non-investment grade security’s principal and interest payments, but does not address market value risk. Because such
ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies
and other sources, the sub-adviser performs its own analysis of the issuers whose non-investment grade securities a Fund holds.
Because of this, the Fund’s performance may depend more on the sub-adviser’s own credit analysis than in the case of
mutual funds investing in higher-rated securities.
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In selecting non-investment
grade securities, the adviser or sub-adviser considers factors such as those relating to the creditworthiness of issuers, the ratings
and performance of the securities, the protections afforded the securities and the diversity of the Fund. The sub-adviser continuously
monitors the issuers of non-investment grade securities held by the Fund for their ability to make required principal and interest
payments, as well as in an effort to control the liquidity of the Fund so that it can meet redemption requests. If a security’s
rating is reduced below the minimum credit rating that is permitted for a Fund, the Fund’s sub-adviser will consider whether
the Fund should continue to hold the security.
In the event that a Fund investing
in high yield securities experiences an unexpected level of net redemptions, the Fund could be forced to sell its holdings without
regard to the investment merits, thereby decreasing the assets upon which the Fund’s rate of return is based.
The costs attributable to investing
in the junk bond markets are usually higher for several reasons, such as higher investment research costs and higher commission
costs.
Lease Obligations.
A Fund
may hold participation certificates in a lease, an installment purchase contract, or a conditional sales contract (“lease
obligations”).
The Manager will monitor the credit standing of
each borrower and each entity providing credit support and/or a put option relating to lease obligations. In determining whether
a lease obligation is liquid, the Manager will consider, among other factors, the following: (i) whether the lease can be cancelled;
(ii) the degree of assurance that assets represented by the lease could be sold; (iii) the strength of the lessee’s general
credit (
e.g.
, its debt, administrative, economic and financial characteristics); (iv) in the case of a municipal lease,
the likelihood that the municipality would discontinue appropriating funding for the leased property because the property is no
longer deemed essential to the operations of the municipality (
e.g.
, the potential for an “event of nonappropriation”);
(v) legal recourse in the event of failure to appropriate; (vi) whether the security is backed by a credit enhancement such as
insurance; and (vii) any limitations which are imposed on the lease obligor’s ability to utilize substitute property or services
other than those covered by the lease obligation.
Life Settlement Investments
.
A Fund may invest in life settlements, which are sales to third parties, such as the Fund, of existing life insurance contracts
for more than their cash surrender value but less than the net benefits to be paid under the policies. When a Fund acquires such
a contract, it pays the policy premiums in return for the expected receipt of the net benefit as the beneficiary under the policy.
Investments in these contracts involve certain risks, including liquidity risk, credit risk of the insurance company, and inaccurate
estimations of life expectancy of the insured individuals (viators). These policies are considered illiquid in that they are bought
and sold in a secondary market through life settlement agents. As such, a Fund’s investments in life settlement contracts
are subject to the Fund’s investment restriction relating to illiquid securities. Also, in the event of a bankruptcy of the
insurance carrier for a policy, the Fund may receive reduced or no benefits under the contract. A Fund seeks to minimize credit
risk by investing in policies issued by a diverse range of highly-rated insurance carriers. Furthermore, a Fund may encounter losses
on its investments if there is an inaccurate estimation of the life expectancies of viators. A Fund intends to reduce this life
expectancy risk by investing only in contracts where the life expectancy was reviewed by
an experienced actuary, as well as by diversifying
its investments across viators of varying ages and medical profiles. In addition, it is unclear whether the income from life settlements
is qualifying income for purposes of the Internal Revenue Service 90% gross income test a Fund must satisfy each year to qualify
as a regulated investment company (“RIC”). A Fund intends to monitor its investments to ensure that the Fund remains
qualified as a RIC.
Liquidity
Management
.
As a temporary defensive measure, if its Manager determines that market conditions warrant, certain
Funds may invest without limitation in high quality money market instruments. Certain Funds may also invest in high quality money
market instruments pending investment or to meet anticipated redemption requests. High quality money market instruments include
U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign issuers, bank obligations,
including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial paper, repurchase agreements and obligations
of supranational organizations. Generally, such obligations will mature within one year from the date of settlement, but may mature
within two years from the date of settlement.
Master Limited Partnerships.
Certain
Funds may invest in publicly traded master limited partnerships (“MLPs”) which are limited partnerships or limited
liability companies taxable as partnerships. MLPs may derive income and gains from the exploration, development, mining or production,
processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any
mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. When investing
in an MLP, a Fund intends to purchase publicly traded common units issued to limited partners of the MLP. The general partner is
typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or
more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general
partner typically controls the operations and management of the MLP through an up to 2% equity interest in the MLP plus, in many
cases, ownership of common units and subordinated units. Limited partners own the remainder of the partnership, through ownership
of common units, and have a limited role in the partnership’s operations and management.
MLPs are typically structured such that common
units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount
(“minimum quarterly distributions” or “MQD”). Common and general partner interests also accrue arrearages
in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units
receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the
MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis.
The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner
which results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions
to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions.
A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid
to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs, increase
capital expenditures and acquire assets in order to increase the partnership’s cash flow and raise the quarterly cash distribution
in order to reach higher tiers. Such results benefit all security holders of the MLP.
MLP common units represent a limited partnership
interest in the MLP. Common units are listed and traded on U.S. securities exchanges, with their value fluctuating predominantly
based on prevailing market conditions and the success of the MLP. Certain Funds intend to purchase common units in market transactions.
Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability annually
to elect directors. In the event of liquidation, common units have preference over subordinated units, but not over debt or preferred
units, to the remaining assets of the MLP.
Merger Transaction Risk.
In replicating
its target index, a Fund may buy stock of the target company in an announced merger transaction prior to the consummation of such
transaction. In that circumstance, a Fund would expect to receive an amount (whether in cash, stock of the acquiring company or
a combination of both) in excess of the purchase price paid by the Fund for the target company’s stock. However, a Fund is
subject to the risk that the merger transaction may be canceled, delayed or restructured, in which case a Fund’s holding
of the target company’s stock may not result in any profit for the Fund and may lose significant value.
Mezzanine Investments.
Certain Funds,
consistent with their restrictions on investing in securities of a specific credit quality, may invest in certain high yield securities
known as mezzanine investments, which are subordinated
debt securities which are generally issued in
private placements in connection with an equity security (e.g., with attached warrants). Such mezzanine investments may be issued
with or without registration rights. Similar to other high yield securities, maturities of mezzanine investments are typically
seven to ten years, but the expected average life is significantly shorter at three to five years. Mezzanine investments are usually
unsecured and subordinate to other obligations of the issuer.
Money Market Obligations of Domestic Banks,
Foreign Banks and Foreign Branches of U.S. Banks
.
Certain Funds may purchase bank obligations, such as certificates
of deposit, notes, bankers’ acceptances and time deposits, including instruments issued or supported by the credit of U.S.
or foreign banks or savings institutions having total assets at the time of purchase in excess of $1 billion. These obligations
may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific
obligation or by government regulation. The assets of a bank or savings institution will be deemed to include the assets of its
domestic and foreign branches for purposes of a Fund’s investment policies. Investments in short-term bank obligations may
include obligations of foreign banks and domestic branches of foreign banks, and also foreign branches of domestic banks.
To the extent consistent with
their investment objectives, a Fund may invest in debt obligations of domestic or foreign corporations and banks, and may acquire
commercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which
is U.S. dollar-denominated commercial paper of a foreign issuer.
Money Market Securities.
Certain
Funds may invest in a broad range of short-term, high quality, U.S. dollar-denominated instruments, such as government, bank, commercial
and other obligations that are available in the money markets. In particular, the Funds may invest in:
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(a)
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U.S. dollar-denominated obligations issued or supported by the credit of U.S. or foreign banks or savings institutions with total assets in excess of $1 billion (including obligations of foreign branches of such banks);
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(b)
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high quality commercial paper and other obligations issued or guaranteed by U.S. and foreign corporations and other issuers rated (at the time of purchase) A-2 or higher by S&P, Prime-2 or higher by Moody’s or F-2 or higher by Fitch, as well as high quality corporate bonds rated (at the time of purchase) A or higher by those rating agencies;
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(c)
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unrated notes, paper and other instruments that are of comparable quality to the instruments described in (b) above as determined by the Fund’s Manager;
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(d)
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asset-backed securities (including interests in pools of assets such as mortgages, installment purchase obligations and credit card receivables);
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(e)
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securities issued or guaranteed as to principal and interest by the U.S. Government or by its agencies or authorities and related custodial receipts;
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(f)
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dollar-denominated securities issued or guaranteed by foreign governments or their political subdivisions, agencies or authorities;
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(g)
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funding agreements issued by highly-rated U.S. insurance companies;
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(h)
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securities issued or guaranteed by state or local governmental bodies;
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(i)
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repurchase agreements relating to the above instruments;
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(j)
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municipal bonds and notes whose principal and interest payments are guaranteed by the U.S. Government or one of its agencies or authorities or which otherwise depend on the credit of the United States;
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(k)
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fixed and variable rate notes and similar debt instruments rated MIG-2, VMIG-2 or Prime-2 or higher by Moody’s, SP-2 or A-2 or higher by S&P, or F-2 or higher by Fitch;
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(l)
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tax-exempt commercial paper and similar debt instruments rated Prime-2 or higher by Moody’s, A-2 or higher by S&P, or F-2 or higher by Fitch;
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(m)
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municipal bonds rated A or higher by Moody’s, S&P or Fitch;
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(n)
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unrated notes, paper or other instruments that are of comparable quality to the instruments described above, as determined by the Fund’s Manager under guidelines established by the Board; and
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(o)
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municipal bonds and notes which are guaranteed as to principal and interest by the U.S. Government or an agency or instrumentality thereof or which otherwise depend directly or indirectly on the credit of the United States.
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Mortgage-Related Securities
Mortgage-Backed Securities.
Mortgage-backed
securities represent interests in pools of mortgages in which payments of both principal and interest on the securities are generally
made monthly, in effect “passing through” monthly payments made by borrowers on the residential or commercial mortgage
loans that underlie the securities (net of any fees paid to the issuer or guarantor of the securities). Mortgage-backed securities
differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal
payments at maturity or specified call dates.
Mortgage-backed securities are subject to the
general risks associated with investing in real estate securities; that is, they may lose value if the value of the underlying
real estate to which a pool of mortgages relates declines. In addition, investments in mortgage-backed securities involve certain
specific risks. These risks include the failure of a party to meet its commitments under the related operative documents, adverse
interest rate changes and the effects of prepayments on mortgage cash flows. Mortgage-backed securities are “pass-through”
securities, meaning that principal and interest payments made by the borrower on the underlying mortgages are passed through to
a Fund. The value of mortgage-backed securities, like that of traditional fixed income securities, typically increases when interest
rates fall and decreases when interest rates rise. However, mortgage-backed securities differ from traditional fixed income securities
because of their potential for prepayment without penalty. The price paid by a Fund for its mortgage-backed securities, the yield
the Fund expects to receive from such securities and the weighted average life of the securities are based on a number of factors,
including the anticipated rate of prepayment of the underlying mortgages. In a period of declining interest rates, borrowers may
prepay the underlying mortgages more quickly than anticipated, thereby reducing the yield to maturity and the average life of the
mortgage-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in these circumstances, it will likely
receive a rate of interest that is lower than the rate on the security that was prepaid.
To the extent that a Fund purchases mortgage-backed
securities at a premium, mortgage foreclosures and principal prepayments may result in a loss to the extent of the premium paid.
If a Fund buys such securities at a discount, both scheduled payments of principal and unscheduled prepayments will increase current
and total returns and will accelerate the recognition of income, which, when distributed to shareholders, will be taxable as ordinary
income. In a period of rising interest rates, prepayments of the underlying mortgages may occur at a slower than expected rate,
creating maturity extension risk. This particular risk may effectively change a security that was considered short or intermediate-term
at the time of purchase into a long-term security. Since the value of long-term securities generally fluctuates more widely in
response to changes in interest rates than that of shorter-term securities, maturity extension risk could increase the inherent
volatility of the Fund. Under certain interest rate and prepayment scenarios, a Fund may fail to recoup fully its investment in
mortgage-backed securities notwithstanding any direct or indirect governmental or agency guarantee.
There are currently three types of mortgage pass-through
securities: (1) those issued by the U.S. government or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) and the Federal
Home Loan Mortgage Corporation (“Freddie Mac”); (2) those issued by private issuers that represent an interest in or
are collateralized by pass-through securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities;
and (3) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but that usually have some form of private credit enhancement.
Ginnie Mae is a wholly owned U.S. government corporation
within the Department of Housing and Urban Development. Ginnie Mae is authorized to guarantee, with the full faith and credit of
the U.S. government, the timely payment of principal and interest on securities issued by the institutions approved by Ginnie Mae
(such as
savings and loan institutions, commercial banks
and mortgage banks), and backed by pools of Federal Housing Administration (“FHA”)-insured or Veterans’ Administration
(“VA”)-guaranteed mortgages. Pass-through certificates guaranteed by Ginnie Mae (such certificates are also known as
“Ginnie Maes”) are guaranteed as to the timely payment of principal and interest by Ginnie Mae, whose guarantee is
backed by the full faith and credit of the United States. Ginnie Mae certificates also are supported by the authority of Ginnie
Mae to borrow funds from the U.S. Treasury Department to make payments under its guarantee. Mortgage-related securities issued
by Fannie Mae include Fannie Mae guaranteed Mortgage Pass-Through Certificates (also known as “Fannie Maes”), which
are guaranteed as to timely payment of principal and interest by Fannie Mae. They are not backed by or entitled to the full faith
and credit of the United States, but are supported by the right of Fannie Mae to borrow from the U.S. Treasury Department. Fannie
Mae was established as a federal agency in 1938 and in 1968 was chartered by Congress as a private shareholder-owned company. Mortgage-related
securities issued by the Freddie Mac include Freddie Mac Mortgage Participation Certificates (also known as “Freddie Macs”
or “PCs”). Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970. Freddie Macs are not guaranteed
by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie
Mac guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. While Freddie
Mac generally does not guarantee timely payment of principal, Freddie Mac may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after
it becomes payable. On September 6, 2008, Director James Lockhart of the Federal Housing Finance Agency (“FHFA”) appointed
FHFA as conservator of both Fannie Mae and Freddie Mac. In addition the U.S. Treasury Department agreed to provide Fannie Mae and
Freddie Mac up to $100 billion of capital each on an as needed basis to insure that they continue to provide liquidity to the housing
and mortgage markets.
Private mortgage pass-through securities are structured
similarly to Ginnie Mae, Fannie Mae, and Freddie Mac mortgage pass-through securities and are issued by originators of and investors
in mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the
foregoing.
Pools created by private mortgage pass-through
issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the private pools. However, timely payment of interest and principal of these pools
may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters
of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. The insurance
and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security
meets a Fund’s investment quality standards. There can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. Private mortgage pass-through securities may be bought without
insurance or guarantees if, through an examination of the loan experience and practices of the originator/servicers and poolers,
the Manager determines that the securities meet a Fund’s quality standards. Any mortgage-related securities that are issued
by private issuers have some exposure to subprime loans as well as to the mortgage and credit markets generally.
In addition, mortgage-related
securities that are issued by private issuers are not subject to the underwriting requirements for the underlying mortgages that
are applicable to those mortgage-related securities that have a government or government-sponsored entity guarantee. As a result,
the mortgage loans underlying private mortgage-related securities may, and frequently do, have less favorable collateral, credit
risk or other underwriting characteristics than government or government-sponsored mortgage-related securities and have wider variances
in a number of terms including interest rate, term, size, purpose and borrower characteristics. Privately issued pools more frequently
include second mortgages, high loan-to-value mortgages and manufactured housing loans. The coupon rates and maturities of the underlying
mortgage loans in a private-label mortgage-related securities pool may vary to a greater extent than those included in a government
guaranteed pool, and the pool may include subprime mortgage loans. Subprime loans refer to loans made to borrowers with weakened
credit histories or with a lower capacity to make timely payments on their loans. For these reasons, the loans underlying these
securities have had in many cases higher default rates than those loans that meet government underwriting requirements.
The risk of non-payment is greater
for mortgage-related securities that are backed by mortgage pools that contain subprime loans, but a level of risk exists for all
loans. Market factors adversely affecting mortgage loan repayments may include a general economic turndown, high unemployment,
a general slowdown in the real estate market, a
drop in the market prices of real estate, or an
increase in interest rates resulting in higher mortgage payments by holders of adjustable rate mortgages.
Privately issued mortgage-related
securities are not traded on an exchange and there may be a limited market for the securities, especially when there is a perceived
weakness in the mortgage and real estate market sectors. Without an active trading market, mortgage-related securities held in
a fund’s portfolio may be particularly difficult to value because of the complexities involved in assessing the value of
the underlying mortgage loans.
A Fund from time to time may purchase in the secondary
market (i) certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (“PNC Mortgage”)
or Midland Loan Services, Inc. (“Midland”), or (ii) mortgage-related securities containing loans or mortgages originated
by PNC Bank, National Association (“PNC Bank”) or its affiliates. It is possible that under some circumstances, PNC
Mortgage, Midland or other affiliates could have interests that are in conflict with the holders of these mortgage-backed securities,
and such holders could have rights against PNC Mortgage, Midland or their affiliates. For example, if PNC Mortgage, Midland or
their affiliates engaged in negligence or willful misconduct in carrying out its duties as a master servicer, then any holder of
the mortgage-backed security could seek recourse against PNC Mortgage, Midland or their affiliates, as applicable. Also, as a master
servicer, PNC Mortgage, Midland or their affiliates may make certain representations and warranties regarding the quality of the
mortgages and properties underlying a mortgage-backed security. If one or more of those representations or warranties is false,
then the holders of the mortgage-backed securities could trigger an obligation of PNC Mortgage, Midland or their affiliates, as
applicable, to repurchase the mortgages from the issuing trust. Finally, PNC Mortgage, Midland or their affiliates may own securities
that are subordinate to the senior mortgage-backed securities owned by a Fund.
Collateralized Mortgage Obligations
(“CMOs”).
CMOs are debt obligations collateralized by residential or commercial mortgage loans or residential or commercial mortgage pass-through
securities. Interest and prepaid principal are generally paid monthly. CMOs may be collateralized by whole mortgage loans or private
mortgage pass-through securities but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed
by Ginnie Mae, Freddie Mac, or Fannie Mae. The issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit (“REMIC”). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, often
referred to as a “tranche,” each issued at a specific adjustable or fixed interest rate, and bearing a different stated
maturity date and each must be fully retired no later than its final distribution date. Actual maturity and average life will depend
upon the prepayment experience of the collateral, which is ordinarily unrelated to the stated maturity date. CMOs often provide
for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly
the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the longer maturity classes usually receive principal
only after the first class has been retired. An investor may be partially protected against a sooner than desired return of principal
because of the sequential payments.
Certain issuers of CMOs are not considered investment
companies pursuant to a rule adopted by the Commission, and a Fund may invest in the securities of such issuers without the limitations
imposed by the Investment Company Act on investments by a Fund in other investment companies. In addition, in reliance on an earlier
Commission interpretation, a Fund’s investments in certain other qualifying CMOs, which cannot or do not rely on the rule,
are also not subject to the limitation of the Investment Company Act on acquiring interests in other investment companies. In order
to be able to rely on the Commission’s interpretation, these CMOs must be unmanaged, fixed asset issuers, that: (1) invest
primarily in mortgage-backed securities; (2) do not issue redeemable securities; (3) operate under general exemptive orders exempting
them from all provisions of the Investment Company Act; and (4) are not registered or regulated under the Investment Company Act
as investment companies. To the extent that a Fund selects CMOs that cannot rely on the rule or do not meet the above requirements,
the Fund may not invest more than 10% of its assets in all such entities and may not acquire more than 3% of the voting securities
of any single such entity.
A Fund may also invest in, among other things,
parallel pay CMOs, sequential pay CMOs, and floating rate CMOs. Parallel pay CMOs are structured to provide payments of principal
on each payment date to more than one class, concurrently on a proportionate or disproportionate basis. These simultaneous payments
are taken into account in calculating the final distribution date of each class. Sequential pay CMOs generally pay principal to
only one class at a time while paying interest to several classes. A wide variety of REMIC Certificates may be issued in the
parallel pay or sequential pay structures. These
securities include accrual certificates (also known as “Z-Bonds”), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been retired and are converted thereafter to an interest-paying
security. Floating rate CMOs are securities whose coupon rate fluctuates according to some formula related to an existing market
index or rate. Typical indices would include the eleventh district cost-of-funds index (“COFI”), LIBOR, one-year Treasury
yields, and ten-year Treasury yields.
Classes of CMOs also include planned amortization
classes (“PACs”) and targeted amortization classes (“TACs”). PAC bonds generally require payments of a
specified amount of principal on each payment date. The scheduled principal payments for PAC Certificates generally have the highest
priority on each payment date after interest due has been paid to all classes entitled to receive interest currently. Shortfalls,
if any, are added to the amount payable on the next payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to create PAC tranches, one or more tranches generally must
be created that absorb most of the volatility in the underlying mortgage assets. These tranches (often called “supports”
or “companion” tranches) tend to have market prices and yields that are more volatile than the PAC classes.
TACs are similar to PACs in that they require
that specified amounts of principal be applied on each payment date to one or more classes of REMIC Certificates. A PAC’s
payment schedule, however, remains in effect as long as prepayment rates on the underlying mortgages do not exceed certain ranges.
In contrast, a TAC provides investors with protection, to a certain level, against either faster than expected or slower than expected
prepayment rates, but not both. TACs thus provide more cash flow stability than a regular sequential paying class, but less than
a PAC. TACs also tend to have market prices and yields that are more volatile than PACs.
Adjustable Rate Mortgage Securities.
Adjustable
rate mortgage securities (“ARMs”) are pass-through securities collateralized by mortgages with adjustable rather than
fixed rates. ARMs eligible for inclusion in a mortgage pool generally provide for a fixed initial mortgage interest rate for a
set number of scheduled monthly payments. After that schedule of payments has been completed, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond
which the mortgage interest rate may not vary over the lifetime of the security. In addition, certain ARMs provide for additional
limitations on the maximum amount by which the mortgage interest rate may adjust for any single adjustment period. In the event
that market rates of interest rise more rapidly to levels above that of the ARM’s maximum rate, the ARM’s coupon may
represent a below market rate of interest. In these circumstances, the market value of the ARM security will likely have fallen.
Certain ARMs contain limitations on changes in
the required monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any
such excess interest is added to the principal balance of the mortgage loan, which is repaid through future monthly payments. If
the monthly payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and
the principal payment required at such point to amortize the outstanding principal balance over the remaining term of the loan,
the excess is then used to reduce the outstanding principal balance of the ARM.
CMO Residuals.
CMO residuals are derivative
mortgage securities issued by agencies or instrumentalities of the U.S. government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, and
special purpose entities of the foregoing. The cash flow generated by the mortgage assets underlying a series of CMOs is applied
first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of
the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the
foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return
of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the
mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the
prepayment experience on the mortgage assets. In part, the yield to maturity on the CMO residuals is extremely sensitive to prepayments
on the related underlying mortgage assets, in the same manner as an interest-only (“IO”) class of stripped mortgage-related
securities. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity
on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments
are based. In certain circumstances, a Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold
by institutional investors through one or more investment banking firms acting as brokers or dealers. CMO residuals may not have
the liquidity of other more established securities trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question. In addition, CMO residuals may or, pursuant to
an exemption therefrom, may not have been registered under the Securities Act. Residual interests generally are junior to, and
may be significantly more volatile than, “regular” CMO and REMIC interests.
Stripped Mortgage-Backed Securities.
A
Fund may invest in stripped mortgage-backed securities (“SMBSs”) issued by agencies or instrumentalities of the United
States. SMBSs are derivative multi-class mortgage-backed securities.
SMBS arrangements commonly involve two classes of securities that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common variety of SMBS is where one class (the principal only or PO class) receives some of the
interest and most of the principal from the underlying assets, while the other class (the interest only or IO class) receives most
of the interest and the remainder of the principal. In the most extreme case, the IO class receives all of the interest, while
the PO class receives all of the principal. While a Fund may purchase securities of a PO class, a Fund is more likely to purchase
the securities of an IO class. The yield to maturity of an IO class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying assets, and a rapid rate of principal payments in excess of that considered in pricing the
securities will have a material adverse effect on an IO security’s yield to maturity. If the underlying mortgage assets experience
greater than anticipated payments of principal, a Fund may fail to recoup fully its initial investment in IOs. In addition, there
are certain types of IOs that represent the interest portion of a particular class as opposed to the interest portion of the entire
pool. The sensitivity of this type of IO to interest rate fluctuations may be increased because of the characteristics of the principal
portion to which they relate. As a result of the above factors, a Fund generally will purchase IOs only as a component of so called
“synthetic” securities. This means that purchases of IOs will be matched with certain purchases of other securities,
such as POs, inverse floating rate CMOs or fixed rate securities; as interest rates fall, presenting a greater risk of unanticipated
prepayments of principal, the negative effect on a Fund because of its holdings of IOs should be diminished somewhat because of
the increased yield on the inverse floating rate CMOs or the increased appreciation on the POs or fixed rate securities.
Tiered Index Bonds.
Tiered index bonds
are relatively new forms of mortgage-related securities. The interest rate on a tiered index bond is tied to a specified index
or market rate. So long as this index or market rate is below a predetermined “strike” rate, the interest rate on the
tiered index bond remains fixed. If, however, the specified index or market rate rises above the “strike” rate, the
interest rate of the tiered index bond will decrease. Thus, under these circumstances, the interest rate on a tiered index bond,
like an inverse floater, will move in the opposite direction of prevailing interest rates, with the result that the price of the
tiered index bond may be considerably more volatile than that of a fixed-rate bond.
TBA Commitments.
Certain
Funds may enter into “to be announced” or “TBA” commitments. TBA commitments are forward agreements for
the purchase or sale of securities, including mortgage-backed securities for a fixed price, with payment and delivery on an agreed
upon future settlement date. The specific securities to be delivered are not identified at the trade date. However, delivered
securities must meet specified terms, including issuer, rate and mortgage terms. See “When Issued Securities, Delayed Delivery
Securities and Forward Commitments” below.
Municipal Investments
The Municipal Funds may invest in obligations
issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, the payments from which, in the opinion of bond counsel to the issuer, are excludable
from gross income for Federal income tax purposes (“Municipal Bonds”). Certain of the Municipal Funds may also invest
in Municipal Bonds that pay interest excludable from gross income for purposes of state and local income taxes of the designated
state and/or allow the value of a Fund’s shares to be exempt from state and local taxes of the designated state (“State
Municipal Bonds”). The Municipal Funds may also invest in securities not issued by or on behalf of a state or territory or
by an agency or instrumentality thereof, if the Manager believes such securities to pay interest excludable from gross income for
purposes of Federal income tax and state and local income taxes of the designated state and/or state and local personal property
taxes of the designated state (“Non-Municipal Tax-Exempt Securities”). Non-Municipal Tax-Exempt Securities could include
trust certificates or other instruments evidencing interest in one or more long term municipal securities. Non-Municipal Tax-Exempt
Securities also may include securities issued by other investment companies that invest in municipal bonds, to the extent such
investments are permitted by applicable
law. Non-Municipal Tax-Exempt Securities that
pay interest excludable from gross income for Federal income tax purposes will be considered “Municipal Bonds” for
purposes of a Municipal Fund’s investment objective and policies. Non-Municipal Tax-Exempt Securities that pay interest excludable
from gross income for purposes of Federal income tax and state and local income taxes of a designated state and/or allow the value
of a Fund’s shares to be exempt from state and local personal property taxes of that state will be considered “State
Municipal Bonds” for purposes of the investment objective and policies of each of California Municipal Bond Fund, New Jersey
Municipal Bond Fund, New York Municipal Bond Fund and Pennsylvania Municipal Bond Fund.
Risk Factors and Special Considerations Relating
to Municipal Bonds.
The risks and special considerations involved in investment in Municipal Bonds vary with the types of instruments
being acquired. Investments in Non-Municipal Tax-Exempt Securities may present similar risks, depending on the particular product.
Certain instruments in which a Fund may invest may be characterized as derivatives.
The value of Municipal Bonds generally may be
affected by uncertainties in the municipal markets as a result of legislation or litigation, including legislation or litigation
that changes the taxation of Municipal Bonds or the rights of Municipal Bond holders in the event of a bankruptcy. Municipal bankruptcies
are rare and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the application of
state law to Municipal Bond issuers could produce varying results among the states or among Municipal Bond issuers within a state.
These uncertainties could have a significant impact on the prices of the Municipal Bonds in which a Fund invests.
Description of Municipal Bonds
Municipal Bonds include debt obligations issued
to obtain funds for various public purposes, including the construction of a wide range of public facilities, refunding of outstanding
obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition,
certain types of bonds are issued by or on behalf of public authorities to finance various privately owned or operated facilities,
including certain facilities for the local furnishing of electric energy or gas, sewage facilities, solid waste disposal facilities
and other specialized facilities. Such obligations are included within the term Municipal Bonds if the interest paid thereon is
excluded from gross income for Federal income tax purposes and any applicable state and local taxes. Other types of private activity
bonds, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Bonds, although the current Federal tax laws place substantial limitations on the size of
such issues. The interest on Municipal Bonds may bear a fixed rate or be payable at a variable or floating rate. The two principal
classifications of Municipal Bonds are “general obligation” and “revenue” or “special obligation”
bonds, which latter category includes private activity bonds (“PABs”) (or “industrial development bonds”
under pre-1986 law).
General Obligation Bonds.
General obligation
bonds are secured by the issuer’s pledge of its full faith, credit and taxing power for the payment of principal and interest.
The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entity’s
creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters,
declines in the state’s industrial base or inability to attract new industries, economic limits on the ability to tax without
eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to
which the entity relies on Federal or state aid, access to capital markets or other factors beyond the state’s or entity’s
control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment
of principal when due is affected by the issuer’s maintenance of its tax base.
Revenue Bonds.
Revenue bonds are payable
only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special
excise tax or other specific revenue source such as payments from the user of the facility being financed; accordingly, the timely
payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a
function of the economic viability of such facility or such revenue source.
Revenue bonds issued by state or local agencies
to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal
bonds generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs.
Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the
properties, may pay
interest that changes based in part on the financial
performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments
which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations
may make it more difficult for issuers to meet payment obligations on subordinated bonds.
PABs.
PABs are, in most cases, tax-exempt
securities issued by states, municipalities or public authorities to provide funds, usually through a loan or lease arrangement,
to a private entity for the purpose of financing construction or improvement of a facility to be used by the entity. Such bonds
are secured primarily by revenues derived from loan repayments or lease payments due from the entity, which may or may not be guaranteed
by a parent company or otherwise secured. PABs generally are not secured by a pledge of the taxing power of the issuer of such
bonds. Therefore, an investor should understand that repayment of such bonds generally depends on the revenues of a private entity
and be aware of the risks that such an investment may entail. The continued ability of an entity to generate sufficient revenues
for the payment of principal and interest on such bonds will be affected by many factors including the size of the entity, its
capital structure, demand for its products or services, competition, general economic conditions, government regulation and the
entity’s dependence on revenues for the operation of the particular facility being financed.
Moral Obligation Bonds.
“Moral obligation”
bonds are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations,
the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality that created the
special purpose public authority that issued the bonds.
Municipal Notes.
Municipal notes are shorter
term municipal debt obligations. They may provide interim financing in anticipation of tax collection, bond sales or revenue receipts.
If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid,
and a Fund may lose money.
Municipal Commercial Paper.
Municipal commercial
paper is generally unsecured and issued to meet short-term financing needs. The lack of security presents some risk of loss to
a Fund since, in the event of an issuer’s bankruptcy, unsecured creditors are repaid only after the secured creditors out
of the assets, if any, that remain.
Municipal Lease Obligations.
Also included
within the general category of Municipal Bonds are certificates of participation (“COPs”) issued by government authorities
or entities to finance the acquisition or construction of equipment, land and/or facilities. The COPs represent participations
in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called “lease obligations”)
relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are subject to the risk
of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuer’s unlimited
taxing power is pledged, a lease obligation is frequently backed by the issuer’s covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease obligations contain “non-appropriation” clauses,
which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although “non-appropriation” lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might prove difficult. These securities represent a type
of financing that has not yet developed the depth of marketability associated with more conventional securities. Certain investments
in lease obligations may be illiquid. A Fund may not invest in illiquid lease obligations if such investments, together with all
other illiquid investments, would exceed 15% of the Fund’s net assets. A Fund may, however, invest without regard to such
limitation in lease obligations that the Manager, pursuant to guidelines that have been adopted by the Directors and subject to
the supervision of the Directors, determines to be liquid. The Manager will deem lease obligations to be liquid if they are publicly
offered and have received an investment grade rating of Baa or better by Moody’s, or BBB or better by S&P or Fitch Ratings
(“Fitch”). Unrated lease obligations, or those rated below investment grade, will be considered liquid if the obligations
come to the market through an underwritten public offering and at least two dealers are willing to give competitive bids. In reference
to the latter, the Manager must, among other things, also review the creditworthiness of the entity obligated to make payment under
the lease obligation and make certain specified determinations based on such factors as the existence of a rating or credit enhancement
— such as insurance — the frequency of trades or quotes for the obligation and the willingness of dealers to make a
market in the obligation.
The ability of issuers of municipal leases to
make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are
allocated and reallocated among federal, state
and local governmental units. Such non-payment
would result in a reduction of income to a Fund, and could result in a reduction in the value of the municipal lease experiencing
non-payment and a potential decrease in the net asset value of a Fund. Issuers of municipal securities might seek protection under
the bankruptcy laws. In the event of bankruptcy of such an issuer, a Fund could experience delays and limitations with respect
to the collection of principal and interest on such municipal leases and a Fund may not, in all circumstances, be able to collect
all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Fund
might take possession of and manage the assets securing the issuer’s obligations on such securities, which may increase a
Fund’s operating expenses and adversely affect the net asset value of a Fund. When the lease contains a non-appropriation
clause, however, the failure to pay would not be a default and a Fund would not have the right to take possession of the assets.
Any income derived from a Fund’s ownership or operation of such assets may not be tax-exempt. In addition, a Fund’s
intention to qualify as a “regulated investment company” under the Internal Revenue Code of 1986, as amended (the “Code”),
may limit the extent to which a Fund may exercise its rights by taking possession of such assets, because as a regulated investment
company a Fund is subject to certain limitations on its investments and on the nature of its income.
Tender Option Bonds.
Certain Funds
may, invest in residual interest municipal tender option bonds, which are derivative interests in Municipal Bonds. The residual
interest municipal tender option bonds in which the Funds will invest pay interest or income that, in the opinion of counsel to
the issuer, is exempt from regular Federal income tax. BlackRock will not conduct its own analysis of the tax status of the interest
or income paid by residual interest municipal tender option bonds held by the Funds, but will rely on the opinion of counsel to
the issuer. Although volatile, these residual interests typically offer the potential for yields exceeding the yields available
on fixed rate Municipal Bonds with comparable credit quality, coupon, call provisions and maturity. The Funds may invest in residual
interests for the purpose of using economic leverage.
Residual interest municipal tender option bonds
represent beneficial interests in a special purpose trust formed by a third party sponsor for the purpose of holding Municipal
Bonds purchased from a Fund or from another third party. The special purpose trust typically sells two classes of beneficial interests:
short-term floating rate interests (sometimes known as “put bonds” or “puttable securities”), which are
sold to third party investors, and residual interests, which a Fund would purchase. The short-term floating rate interests have
first priority on the cash flow from the Municipal Bonds. A Fund is paid the residual cash flow from the special purpose trust.
If the Fund is the initial seller of the Municipal Bonds to the special purpose trust, it receives the proceeds from the sale of
the floating rate interests in the special purpose trust, less certain transaction costs. These proceeds generally would be used
by the Fund to purchase additional Municipal Bonds or other permitted investments. If a Fund ever purchases all or a portion of
the short-term floating rate securities sold by the special purpose trust, it may surrender those short-term floating rate securities
together with a proportionate amount of residual interests to the trustee of the special purpose trust in exchange for a proportionate
amount of the Municipal Bonds owned by the special purpose trust. In addition, all voting rights and decisions to be made with
respect to any other rights relating to the Municipal Bonds held in the special purpose trust are passed through to the Fund, as
the holder of the residual interests.
A Fund may invest in highly leveraged residual
interest municipal tender option bonds. A residual interest municipal tender option bond generally is considered highly leveraged
if the principal amount of the short-term floating rate interests issued by the related tender option bond trust exceeds 50% of
the principal amount of the Municipal Bonds owned by the tender option bond trust.
The sponsor of a highly leveraged tender option
bond trust generally will retain a liquidity provider that stands ready to purchase the short-term floating rate interests at their
original purchase price upon the occurrence of certain events, such as on a certain date prior to the scheduled expiration date
of the transaction, upon a certain percentage of the floating rate interests failing to be remarketed in a timely fashion, upon
the bonds owned by the tender option bond trust being downgraded (but not below investment grade or upon the occurrence of a bankruptcy
event with respect to the issuer of the Municipal Bonds) or upon the occurrence of certain regulatory or tax events. However, the
liquidity provider is not required to purchase the floating rate interests upon the occurrence of certain other events, including
upon the downgrading of the Municipal Bonds owned by the tender option bond trust below investment grade or certain events that
indicate the issuer of the bonds may be entering bankruptcy. The general effect of these provisions is to pass to the holders of
the floating rate interests the most severe credit risks associated with the Municipal Bonds owned by the tender option bond trust
and to leave with the liquidity provider the interest rate risk and certain other risks associated with the Municipal Bonds.
If the liquidity provider acquires the floating
rate interests upon the occurrence of an event described above, the liquidity provider generally will be entitled to an in-kind
distribution of the Municipal Bonds owned by the tender option bond trust or to cause the tender option bond trust to sell the
bonds and distribute the proceeds to the liquidity provider. The liquidity provider generally will enter into an agreement with
a Fund that will require the Fund to make a payment to the liquidity provider in an amount equal to any loss suffered by the liquidity
provider in connection with the foregoing transactions. The net economic effect of this agreement and these transactions is as
if the Fund had entered into a special type of reverse repurchase agreement with the sponsor of the tender option bond trust, pursuant
to which the Fund is required to repurchase the Municipal Bonds it sells to the sponsor only upon the occurrence of certain events
(such as a failed remarketing of the floating rate interests—most likely due to an adverse change in interest rates) but
not others (such as a default of the Municipal Bonds). In order to cover any potential obligation of the Fund to the liquidity
provider pursuant to this agreement, the Fund may designate on its books and records liquid instruments having a value not less
than the amount, if any, by which the original purchase price of the floating rate interests issued by the related tender option
bond trust exceeds the market value of the Municipal Bonds owned by the tender option bond trust.
A Fund may also invest in the short-term floating
rate interest tender option bonds. The remarketing agent for the special purpose trust sets a floating or variable rate on typically
a weekly basis. These securities grant the Funds the right to require the issuer or a specified third party acting as agent for
the issuer (e.g., a tender agent) to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the
occurrence of specified events or conditions. The put option or tender option right is typically available to the investor on a
periodic (e.g., daily, weekly or monthly) basis. Typically, the put option is exercisable on dates on which the floating or variable
rate changes.
Investments in residual interest and floating
rate interest tender option bonds may be considered derivatives and are subject to the risk thereof, including counterparty risk,
interest rate risk and volatility.
On December 10, 2013, regulators
published final rules implementing section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Volcker
Rule”), which prohibit banking entities from engaging in proprietary trading of certain instruments and limit such entities’
investments in, and relationships with, “covered funds, as defined in the rules.” Banking entities subject to the
rules are required to fully comply by July 21, 2015. These rules may preclude banking entities and their affiliates from (i) sponsoring
TOB trust programs (as such programs are presently structured) and (ii) continuing relationships with or services for existing
TOB trust programs. As a result, TOB trusts may need to be restructured or unwound. There can be no assurances that TOB trusts
can be restructured, that new sponsors of TOB trusts will develop, or that alternative forms of leverage will be available to
the Trusts. Any alternative forms of leverage may be more or less advantageous to the Trusts than existing TOB leverage.
TOB transactions constitute an important
component of the municipal bond market. Accordingly, implementation of the Volcker Rule may adversely impact the municipal market,
including through reduced demand for and liquidity of municipal bonds and increased financing costs for municipal issuers. Any
such developments could adversely affect the Trusts. The ultimate impact of these rules on the TOB market and the overall municipal
market is not yet certain.
Yields.
Yields on Municipal Bonds are dependent
on a variety of factors, including the general condition of the money market and of the municipal bond market, the size of a particular
offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of a Fund
to achieve its investment objective is also dependent on the continuing ability of the issuers of the securities in which the Fund
invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved
in holding Municipal Bonds, both within a particular classification and between classifications, depending on numerous factors.
Furthermore, the rights of owners of Municipal Bonds and the obligations of the issuer of such Municipal Bonds may be subject to
applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and to general
equitable principles, which may limit the enforcement of certain remedies.
Variable Rate Demand Obligations (“VRDOs”)
and Participating VRDOs.
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula
and a right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest
upon a short notice period not to exceed
seven days. Participating VRDOs provide a Fund
with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDOs from the financial institution that issued the participation interest
upon a specified number of days notice, not to exceed seven days. In addition, the Participating VRDO is backed by an irrevocable
letter of credit or guaranty of the financial institution. A Fund would have an undivided interest in the underlying obligation
and thus participate on the same basis as the financial institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit and issuing
the repurchase commitment.
There is the possibility that because of default
or insolvency the demand feature of VRDOs and Participating VRDOs may not be honored. The interest rates are adjustable at intervals
(ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated
to maintain the market rate of the VRDOs at approximately the par value of the VRDOs on the adjustment date. The adjustments typically
are based upon the Public Securities Association Index or some other appropriate interest rate adjustment index. The Funds have
been advised by counsel that they should be entitled to treat the income received on Participating VRDOs as interest from tax-exempt
obligations. It is not contemplated that any Fund will invest more than a limited amount of its total assets in Participating VRDOs.
Because of the interest rate adjustment formula
on VRDOs (including Participating VRDOs), VRDOs are not comparable to fixed rate securities. During periods of declining interest
rates, a Fund’s yield on a VRDO will decrease and its shareholders will forego the opportunity for capital appreciation.
During periods of rising interest rates, however, a Fund’s yield on a VRDO will increase and the Fund’s shareholders
will have a reduced risk of capital depreciation.
VRDOs that contain a right of demand to receive
payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid
securities. A VRDO with a demand notice period exceeding seven days will therefore be subject to a Fund’s restriction on
illiquid investments unless, in the judgment of the Directors such VRDO is liquid. The Directors may adopt guidelines and delegate
to the Manager the daily function of determining and monitoring liquidity of such VRDOs. The Directors, however, will retain sufficient
oversight and will be ultimately responsible for such determinations.
The VRDOs and Participating VRDOs in which a Fund
may invest will be in the following rating categories at the time of purchase: MIG-1/ VMIG-1 through MIG-3/VMIG-3 for notes and
VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moody’s), SP-1 through SP-2 for notes and A-1 through
A-3 for VRDOs and commercial paper (as determined by S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined
by Fitch).
Transactions in Financial Futures Contracts.
The Municipal Funds and certain other funds deal in financial futures contracts based on a long-term municipal bond index developed
by the Chicago Board of Trade (“CBT”) and The Bond Buyer (the “Municipal Bond Index”). The Municipal Bond
Index is comprised of 40 tax-exempt municipal revenue and general obligation bonds. Each bond included in the Municipal Bond Index
must be rated A or higher by Moody’s or S&P and must have a remaining maturity of 19 years or more. Twice a month new
issues satisfying the eligibility requirements are added to, and an equal number of old issues are deleted from, the Municipal
Bond Index. The value of the Municipal Bond Index is computed daily according to a formula based on the price of each bond in the
Municipal Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded
only on the CBT. Like other contract markets, the CBT assures performance under futures contracts through a clearing corporation,
a nonprofit organization managed by the exchange membership that is also responsible for handling daily accounting of deposits
or withdrawals of margin.
The particular municipal bonds comprising the
index underlying the Municipal Bond Index financial futures contract may vary from the bonds held by a Municipal Fund. As a result,
a Municipal Fund’s ability to hedge effectively all or a portion of the value of its Municipal Bonds through the use of such
financial futures contracts will depend in part on the degree to which price movements in the index underlying the financial futures
contract correlate with the price movements of the Municipal Bonds held by the Fund. The correlation may be affected by
disparities in the average maturity, ratings,
geographical mix or structure of a Municipal Fund’s investments as compared to those comprising the Municipal Bond Index
and general economic or political factors. In addition, the correlation between movements in the value of the Municipal Bond Index
may be subject to change over time as additions to and deletions from the Municipal Bond Index alter its structure. The correlation
between futures contracts on U.S. Government securities and the Municipal Bonds held by a Municipal Fund may be adversely affected
by similar factors and the risk of imperfect correlation between movements in the prices of such futures contracts and the prices
of Municipal Bonds held by a Municipal Fund may be greater. Municipal Bond Index futures contracts were approved for trading in
1986. Trading in such futures contracts may tend to be less liquid than trading in other futures contracts. The trading of futures
contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult
or impossible to liquidate existing positions.
Call Rights.
A Fund may purchase a Municipal
Bond issuer’s right to call all or a portion of such Municipal Bond for mandatory tender for purchase (a “Call Right”).
A holder of a Call Right may exercise such right to require a mandatory tender for the purchase of related Municipal Bonds, subject
to certain conditions. A Call Right that is not exercised prior to maturity of the related Municipal Bond will expire without value.
The economic effect of holding both the Call Right and the related Municipal Bond is identical to holding a Municipal Bond as a
non-callable security. Certain investments in such obligations may be illiquid. A Fund may not invest in such illiquid obligations
if such investments, together with other illiquid investments, would exceed 15% of a Fund’s net assets.
Municipal Interest Rate Swap Transactions.
In order to hedge the value of a Fund against interest rate fluctuations or to enhance a Fund’s income, a Fund
may enter into interest rate swap transactions such as Municipal Market Data AAA Cash Curve swaps (“MMD Swaps”) or
Securities Industry and Financial Markets Association Municipal Swap Index swaps (“SIFMA Swaps”). To the extent that
a Fund enters into these transactions, the Fund expects to do so primarily to preserve a return or spread on a particular investment
or portion of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a
later date. A Fund intends to use these transactions primarily as a hedge rather than as a speculative investment. However, a
Fund also may invest in MMD Swaps and SIFMA Swaps to enhance income or gain or to increase the Fund’s yield, for example,
during periods of steep interest rate yield curves (
i.e.
, wide differences between short term and long term interest rates).
A Fund may purchase and sell SIFMA
Swaps in the SIFMA swap market. In a SIFMA Swap, a Fund exchanges with another party their respective commitments to pay or receive
interest (
e.g.
, an exchange of fixed rate payments for floating rate payments linked to the SIFMA Municipal Swap Index).
Because the underlying index is a tax-exempt index, SIFMA Swaps may reduce cross-market risks incurred by a Fund and increase
a Fund’s ability to hedge effectively. SIFMA Swaps are typically quoted for the entire yield curve, beginning with a seven
day floating rate index out to 30 years. The duration of a SIFMA Swap is approximately equal to the duration of a fixed-rate Municipal
Bond with the same attributes as the swap (
e.g.
, coupon, maturity, call feature).
A Fund may also purchase and sell MMD Swaps, also
known as MMD rate locks. An MMD Swap permits a Fund to lock in a specified municipal interest rate for a portion of its portfolio
to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect
against any increase in the price of securities to be purchased at a later date. By using an MMD Swap, a Fund can create a synthetic
long or short position, allowing the Fund to select the most attractive part of the yield curve. An MMD Swap is a contract between
a Fund and an MMD Swap provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent
upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date
of the contract. For example, if a Fund buys an MMD Swap and the Municipal Market Data AAA General Obligation Scale is below the
specified level on the expiration date, the counterparty to the contract will make a payment to the Fund equal to the specified
level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation
Scale is above the specified level on the expiration date, a Fund will make a payment to the counterparty equal to the actual level
minus the specified level, multiplied by the notional amount of the contract.
In connection with investments in
SIFMA and MMD Swaps, there is a risk that municipal yields will move in the opposite direction than anticipated by a Fund, which
would cause the Fund to make payments to its counterparty in the transaction that could adversely affect the Fund’s performance.
A Fund has no obligation to enter into SIFMA or MMD Swaps and may not do so. The net amount of the excess, if any, of a Fund’s
obligations over its entitlements
with respect to each interest rate swap will be
accrued on a daily basis and an amount of liquid assets that have an aggregate net asset value at least equal to the accrued excess
will be maintained in a segregated account by the Fund.
Insured Municipal Bonds
. Bonds purchased
by a Fund may be covered by insurance that guarantees that interest payments on the bond will be made on time and the principal
will be repaid when the bond matures. Either the issuer of the bond or the Fund purchases the insurance. Insurance is expected
to protect the Fund against losses caused by a bond issuer’s failure to make interest or principal payments. However, insurance
does not protect the Fund or its shareholders against losses caused by declines in a bond’s market value. Also, the Fund
cannot be certain that any insurance company does not make these payments. In addition, if the Fund purchases the insurance, it
may pay the premiums, which will reduce the Fund’s yield. The Fund seeks to use only insurance companies with claims paying
ability, financial strength, or equivalent ratings of at least investment grade. However, if insurance from insurers with these
ratings is not available, the Fund may use insurance companies with lower ratings or stop purchasing insurance or insured bonds.
If a bond’s insurer fails to fulfill its obligations or loses its credit rating, the value of the bond could drop.
Build America Bonds
. If a Fund holds Build
America Bonds, the Fund may be eligible to receive a Federal income tax credit; however, the issuer of a Build America Bond may
instead elect to receive a cash payment directly from the federal government in lieu of holders such as the fund receiving a tax
credit. The interest on Build America Bonds is taxable for Federal income tax purposes. If the Fund does receive tax credits from
Build America Bonds or other tax credit bonds on one or more specified dates during the fund’s taxable year, and the Fund
satisfies the minimum distribution requirement, the Fund may elect for U.S. Federal income tax purposes to pass through to shareholders
tax credits otherwise allowable to the Fund for that year with respect to such bonds. A tax credit bond is defined in the Code
as a “qualified tax credit bond” (which includes a qualified forestry conservation bond, a new clean renewable energy
bond, a qualified energy conservation bond, or a qualified zone academy bond, each of which must meet certain requirements specified
in the Code), a “Build America Bond” (which includes certain qualified bonds issued before January 1, 2011) or certain
other specified bonds. If the Fund were to so elect, a shareholder would be required to include in income and would be entitled
to claim as a tax credit an amount equal to a proportionate share of such credits, and such amount would be subject to withholding
provisions of the Code. Certain limitations may apply on the extent to which the credit may be claimed.
Net Interest
Margin (NIM) Securities
. A Fund may invest in net interest margin (“NIM”) securities. These securities are
derivative interest-only mortgage securities structured off home equity loan transactions. NIM securities receive any “excess”
interest computed after paying coupon costs, servicing costs and fees and any credit losses associated with the underlying pool
of home equity loans. Like traditional stripped mortgage-backed securities, the yield to maturity on a NIM security is sensitive
not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying
home equity loans. NIM securities are highly sensitive to credit losses on the underlying collateral and the timing in which those
losses are taken.
Participation Notes.
A Fund may
buy participation notes from a bank or broker-dealer (“issuer”) that entitle the Fund to a return measured by the change
in value of an identified underlying security or basket of securities (collectively, the “underlying security”). Participation
notes are typically used when a direct investment in the underlying security is restricted due to country-specific regulations.
The Fund is subject to counterparty risk associated
with each issuer. Investment in a participation note is not the same as investment in the constituent shares of the company. A
participation note represents only an obligation of the issuer to provide the Fund the economic performance equivalent to holding
shares of an underlying security. A participation note does not provide any beneficial or equitable entitlement or interest in
the relevant underlying security. In other words, shares of the underlying security are not in any way owned by the Fund. However
each participation note synthetically replicates the economic benefit of holding shares in the underlying security. Because a participation
note is an obligation of the issuer, rather than a direct investment in shares of the underlying security, the Fund may suffer
losses potentially equal to the full value of the participation note if the issuer fails to perform its obligations. A Fund attempts
to mitigate that risk by purchasing only from issuers which BlackRock deems to be creditworthy.
The counterparty may, but is not required to,
purchase the shares of the underlying security to hedge its obligation. The fund may, but is not required to, purchase credit protection
against the default of the issuer. When the participation note expires or a Fund exercises the participation note and closes its
position, that Fund receives a
payment that is based upon the then-current value
of the underlying security converted into U.S. dollars (less transaction costs). The price, performance and liquidity of the participation
note are all linked directly to the underlying security. A Fund’s ability to redeem or exercise a participation note generally
is dependent on the liquidity in the local trading market for the security underlying the participation note.
Pay-in-kind Bonds.
Certain
Funds may invest in Pay-in-kind, or PIK, bonds. PIK bonds are bonds which pay interest through the issuance of additional debt
or equity securities. Similar to zero coupon obligations, pay-in-kind bonds also carry additional risk as holders of these types
of securities realize no cash until the cash payment date unless a portion of such securities is sold and, if the issuer defaults,
a Fund may obtain no return at all on its investment. The market price of pay-in-kind bonds is affected by interest rate changes
to a greater extent, and therefore tends to be more volatile, than that of securities which pay interest in cash. Additionally,
current federal tax law requires the holder of certain pay-in-kind bonds to accrue income with respect to these securities prior
to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal
income and excise taxes, each Fund may be required to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.
Portfolio Turnover Rates
.
A Fund’s annual portfolio turnover rate will not be a factor preventing a sale or purchase when the Manager believes investment
considerations warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular
year. High portfolio turnover (
i.e.
, 100% or more) may result in increased transaction costs to a Fund, including brokerage
commissions, dealer mark-ups and other transaction costs on the sale of the securities and reinvestment in other securities. The
sale of a Fund’s securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain
or loss will likely be short-term capital gain or loss. These effects of higher than normal portfolio turnover may adversely affect
a Fund’s performance.
Preferred Stock.
Certain of
the Funds may invest in preferred stocks. Preferred stock has a preference over common stock in liquidation (and generally dividends
as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred
stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while
the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock
is junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause
greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
Unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board
of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
Real Estate Related Securities.
Although
no Fund may invest directly in real estate, certain Funds may invest in equity securities of issuers that are principally engaged
in the real estate industry. Such investments are subject to certain risks associated with the ownership of real estate and with
the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related
to general and local economic conditions; possible lack of availability of mortgage funds or other limitations on access to capital;
overbuilding; risks associated with leverage; market illiquidity; extended vacancies of properties; increase in competition, property
taxes, capital expenditures and operating expenses; changes in zoning laws or other governmental regulation; costs resulting from
the clean-up of, and liability to third parties for damages resulting from, environmental problems; tenant bankruptcies or other
credit problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations
on and variations in rents, including decreases in market rates for rents; investment in developments that are not completed or
that are subject to delays in completion; and changes in interest rates. To the extent that assets underlying a Fund’s investments
are concentrated geographically, by property type or in certain other respects, the Fund may be subject to certain of the foregoing
risks to a greater extent. Investments by a Fund in securities of companies providing mortgage servicing will be subject to the
risks associated with refinancings and their impact on servicing rights.
In addition, if a Fund receives rental income
or income from the disposition of real property acquired as a result of a default on securities the Fund owns, the receipt of such
income may adversely affect the Fund’s ability to retain its tax status as a regulated investment company because of certain
income source requirements applicable to regulated investment companies under the Code.
Real Estate Investment Trusts (“REITs”).
In pursuing its investment strategy, a Fund may invest in shares of REITs. REITs possess certain risks which differ from an investment
in common stocks. REITs are financial vehicles that pool investor’s capital to purchase or finance real estate. REITs may
concentrate their investments in specific
geographic areas or in specific property
types, i.e., hotels, shopping malls, residential complexes and office buildings.
REITs are subject to management fees and
other expenses, and so a Fund that invests in REITs will bear its proportionate share of the costs of the REITs’ operations.
There are three general categories of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest primarily in direct
fee ownership or leasehold ownership of real property; they derive most of their income from rents. Mortgage REITs invest mostly
in mortgages on real estate, which may secure construction, development or long-term loans; the main source of their income is
mortgage interest payments. Hybrid REITs hold both ownership and mortgage interests in real estate.
Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate industry in general. The market value of REIT shares
and the ability of the REITs to distribute income may be adversely affected by several factors, including rising interest rates,
changes in the national, state and local economic climate and real estate conditions, perceptions of prospective tenants of the
safety, convenience and attractiveness of the properties, the ability of the owners to provide adequate management, maintenance
and insurance, the cost of complying with the Americans with Disabilities Act, increased competition from new properties, the impact
of present or future environmental legislation and compliance with environmental laws, failing to maintain their exemptions from
registration under the Investment Company Act, changes in real estate taxes and other operating expenses, adverse changes in governmental
rules and fiscal policies, adverse changes in zoning laws and other factors beyond the control of the issuers of the REITs. In
addition, distributions received by a Fund from REITs may consist of dividends, capital gains and/or return of capital. As REITs
generally pay a higher rate of dividends (on a pre-tax basis) than operating companies, to the extent application of the Fund’s
investment strategy results in the Fund investing in REIT shares, the percentage of the Fund’s dividend income received from
REIT shares will likely exceed the percentage of the Fund’s portfolio which is comprised of REIT shares. Generally, dividends
received by a Fund from REIT shares and distributed to the Fund’s shareholders will not constitute “qualified dividend
income” eligible for the reduced tax rate applicable to qualified dividend income; therefore, the tax rate applicable to
that portion of the dividend income attributable to REIT shares held by the Fund that shareholders of the Fund receive will be
taxed at a higher rate than dividends eligible for the reduced tax rate applicable to qualified dividend income.
REITs (especially mortgage REITs) are also
subject to interest rate risk. Rising interest rates may cause REIT investors to demand a higher annual yield, which may, in turn,
cause a decline in the market price of the equity securities issued by a REIT. Rising interest rates also generally increase the
costs of obtaining financing, which could cause the value of a Fund’s REIT investments to decline. During periods when interest
rates are declining, mortgages are often refinanced. Refinancing may reduce the yield on investments in mortgage REITs. In addition,
since REITs depend on payment under their mortgage loans and leases to generate cash to make distributions to their shareholders,
investments in REITs may be adversely affected by defaults on such mortgage loans or leases.
Investing in certain REITs, which often
have small market capitalizations, may also involve the same risks as investing in other small capitalization companies. REITs
may have limited financial resources and their securities may trade less frequently and in limited volume and may be subject to
more abrupt or erratic price movements than larger company securities. Historically, small capitalization stocks, such as REITs,
have been more volatile in price than the larger capitalization stocks such as those included in the S&P 500 Index. The management
of a REIT may be subject to conflicts of interest with respect to the operation of the business of the REIT and may be involved
in real estate activities competitive with the REIT. REITs may own properties through joint ventures or in other circumstances
in which the REIT may not have control over its investments. REITs may incur significant amounts of leverage.
Repurchase Agreements and Purchase
and Sale Contracts.
Under repurchase agreements and purchase and sale contracts, the other party agrees, upon entering
into the contract with a Fund, to repurchase a security sold to the Fund at a mutually agreed-upon time and price in a specified
currency, thereby determining the yield during the term of the agreement.
A purchase and sale contract differs from
a repurchase agreement in that the contract arrangements stipulate that securities are owned by the Fund and the purchaser receives
any interest on the security paid during the period. In the case of repurchase agreements, the prices at which the trades are conducted
do not reflect accrued interest on the underlying obligation; whereas, in the case of purchase and sale contracts, the prices take
into account accrued interest. A Fund may enter into “tri-party” repurchase agreements. In “tri-party”
repurchase agreements, an
unaffiliated third party custodian maintains
accounts to hold collateral for the Fund and its counterparties and, therefore, the Fund may be subject to the credit risk of those
custodians.
Some repurchase agreements and purchase
and sale contracts are structured to result in a fixed rate of return insulated from market fluctuations during the term of the
agreement, although such return may be affected by currency fluctuations. However, in the event of a default under a repurchase
agreement or under a purchase and sale contract, instead of the contractual fixed rate, the rate of return to the Fund would be
dependent upon intervening fluctuations of the market values of the securities underlying the contract and the accrued interest
on those securities. In such event, the Fund would have rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the default.
Both types of agreement usually cover short
periods, such as less than one week, although they may have longer terms, and may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser. In the case of a repurchase agreement, as a purchaser,
a Fund’s Manager or sub-adviser will monitor the creditworthiness of the seller, and a Fund will require the seller to provide
additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the
repurchase agreement. The Fund does not have this right to seek additional collateral as a purchaser in the case of purchase and
sale contracts. The Fund’s Manager or sub-adviser will mark-to-market daily the value of the securities. Securities subject
to repurchase agreements and purchase and sale contracts will be held by the Fund’s custodian (or sub-custodian) in the Federal
Reserve/Treasury book-entry system or by another authorized securities depository.
In the event of default by the seller under
a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute
collateral for the seller’s obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur
costs or possible losses in connection with disposition of the collateral. If the seller becomes insolvent and subject to liquidation
or reorganization under applicable bankruptcy or other laws, a Fund’s ability to dispose of the underlying securities may
be restricted. Finally, it is possible that a Fund may not be able to substantiate its interest in the underlying securities. To
minimize this risk, the securities underlying the repurchase agreement will be held by the custodian at all times in an amount
at least equal to the repurchase price, including accrued interest. If the seller fails to repurchase the securities, a Fund may
suffer a loss to the extent proceeds from the sale of the underlying securities are less than the repurchase price.
A Fund may not invest in repurchase agreements
or purchase and sale contracts maturing in more than seven days if such investments, together with the Fund’s other illiquid
investments, would exceed 15% of the Fund’s net assets. Repurchase agreements and purchase and sale contracts may be entered
into only with financial institutions that have capital of at least $50 million or whose obligations are guaranteed by an entity
that has capital of at least $50 million.
Reverse Repurchase Agreements.
A Fund may enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under
a reverse repurchase agreement, a Fund sells securities to another party and agrees to repurchase them at a particular date and
price. A Fund may enter into a reverse repurchase agreement when it is anticipated that the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest expense of the transaction.
At the time a Fund enters into a reverse
repurchase agreement, it will segregate liquid assets with a value not less than the repurchase price (including accrued interest).
The use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Furthermore, reverse repurchase
agreements involve the risks that (i) the interest income earned in the investment of the proceeds will be less than the interest
expense, (ii) the market value of the securities retained in lieu of sale by a Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase, (iii) the market value of the securities sold will decline below the price at
which the Fund is required to repurchase them and (iv) the securities will not be returned to the Fund.
In addition, if the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive
an extension of time to determine whether to enforce a Fund’s obligations to repurchase the securities and the Fund’s
use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.
Rights Offerings and Warrants to Purchase.
Certain Funds may participate in rights offerings and may purchase warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares of the corporation at a specified price during a
specified period of time. Subscription rights
normally have a short life span to expiration.
The purchase of rights or warrants involves the risk that a Fund could lose the purchase value of a right or warrant if the right
to subscribe to additional shares is not exercised prior to the rights’ and warrants’ expiration. Also, the purchase
of rights and/or warrants involves the risk that the effective price paid for the right and/or warrant added to the subscription
price of the related security may exceed the value of the subscribed security’s market price such as when there is no movement
in the level of the underlying security. Buying a warrant does not make the Fund a shareholder of the underlying stock.
Securities Lending
.
Each Fund may lend portfolio securities to certain borrowers determined to be creditworthy by BlackRock, including
to borrowers affiliated with BlackRock. The borrowers provide collateral that is maintained in an amount at least equal to the
current market value of the securities loaned. No securities loan shall be made on behalf of a Fund if, as a result, the aggregate
value of all securities loans of the particular Fund exceeds one-third of the value of such Fund’s total assets (including
the value of the collateral received). A Fund may terminate a loan at any time and obtain the return of the securities loaned.
Each Fund receives the value of any interest or cash or non-cash distributions paid on the loaned securities.
With respect to loans that are collateralized
by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Funds are compensated by the
difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral
other than cash, a Fund is compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities.
Any cash collateral received by the Fund for such loans, and uninvested cash, may be invested, among other things, in a private
investment company managed by an affiliate of the Manager
or in registered money market funds advised by the Manager
or its affiliates; such investments are subject to investment risk.
Securities lending involves exposure
to certain risks, including operational risk (i.e., the risk of losses resulting from problems in the settlement and accounting
process), “gap” risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees
each Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty
were to default, a Fund would be subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities,
or to a possible loss of rights in the collateral. In the event a borrower does not return a Fund’s securities as agreed,
the Fund may experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the
loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities.
This event could trigger adverse tax consequences for a Fund. A Fund could lose money if its short-term investment of the collateral
declines in value over the period of the loan. Substitute payments for dividends received by a Fund for securities loaned out
by the Fund will not be considered qualified dividend income. The securities lending agent will take the tax effects on shareholders
of this difference into account in connection with the Fund’s securities lending program. Substitute payments received on
tax-exempt securities loaned out will not be tax-exempt income.
Securities of Smaller or Emerging
Growth Companies.
Investment in smaller or emerging growth companies involves greater risk than is customarily associated
with investments in more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt
or erratic market movements than larger, more established companies or the market average in general. These companies may have
limited product lines, markets or financial resources, or they may be dependent on a limited management group.
While smaller or emerging growth company
issuers may offer greater opportunities for capital appreciation than large cap issuers, investments in smaller or emerging growth
companies may involve greater risks and thus may be considered speculative. Fund management believes that properly selected companies
of this type have the potential to increase their earnings or market valuation at a rate substantially in excess of the general
growth of the economy. Full development of these companies and trends frequently takes time.
Small cap and emerging growth securities
will often be traded only in the OTC market or on a regional securities exchange and may not be traded every day or in the volume
typical of trading on a national securities exchange. As a result, the disposition by a Fund of portfolio securities to meet redemptions
or otherwise may require the Fund to make many small sales over a lengthy period of time, or to sell these securities at a discount
from market prices or during periods when, in Fund management’s judgment, such disposition is not desirable.
The process of selection and continuous
supervision by Fund management does not, of course, guarantee successful investment results; however, it does provide access to
an asset class not available to the average individual due to the time and cost involved. Careful initial selection is particularly
important in this area as many new enterprises have promise but lack certain of the fundamental factors necessary to prosper. Investing
in small cap and emerging
growth companies requires specialized
research and analysis. In addition, many investors cannot invest sufficient assets in such companies to provide wide diversification.
Small companies are generally little
known to most individual investors although some may be dominant in their respective industries. Fund management believes that
relatively small companies will continue to have the opportunity to develop into significant business enterprises. A Fund may invest
in securities of small issuers in the relatively early stages of business development that have a new technology, a unique or proprietary
product or service, or a favorable market position. Such companies may not be counted upon to develop into major industrial companies,
but Fund management believes that eventual recognition of their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.
Equity securities of specific small cap
issuers may present different opportunities for long-term capital appreciation during varying portions of economic or securities
market cycles, as well as during varying stages of their business development. The market valuation of small cap issuers tends
to fluctuate during economic or market cycles, presenting attractive investment opportunities at various points during these cycles.
Smaller companies, due to the size and kinds
of markets that they serve, may be less susceptible than large companies to intervention from the Federal government by means of
price controls, regulations or litigation.
Short Sales.
Certain Funds
may make short sales of securities, either as a hedge against potential declines in value of a portfolio security or to realize
appreciation when a security that the Fund does not own declines in value. Certain Funds have a fundamental investment restriction
prohibiting short sales of securities unless they are “against-the-box.” In a short sale “against-the-box,”
at the time of the sale, the Fund owns or has the immediate and unconditional right to acquire the identical security at no additional
cost. When a Fund makes a short sale, it borrows the security sold short and delivers it to the broker-dealer through which it
made the short sale. A Fund may have to pay a fee to borrow particular securities and is often obligated to turn over any payments
received on such borrowed securities to the lender of the securities.
A Fund secures its obligation to replace
the borrowed security by depositing collateral with the broker-dealer, usually in cash, U.S. Government securities or other liquid
securities similar to those borrowed. With respect to uncovered short positions, a Fund is required to deposit similar collateral
with its custodian, if necessary, to the extent that the value of both collateral deposits in the aggregate is at all times equal
to at least 100% of the current market value of the security sold short. Depending on arrangements made with the broker-dealer
from which the Fund borrowed the security, regarding payment received by the Fund on such security, a Fund may not receive any
payments (including interest) on its collateral deposited with such broker-dealer.
Because making short sales in securities
that it does not own exposes a Fund to the risks associated with those securities, such short sales involve speculative exposure
risk. A Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short
sale and the date on which the Fund replaces the borrowed security. As a result, if a Fund makes short sales in securities that
increase in value, it will likely underperform similar mutual funds that do not make short sales in securities. A Fund will realize
a gain on a short sale if the security declines in price between those dates. There can be no assurance that a Fund will be able
to close out a short sale position at any particular time or at an acceptable price. Although a Fund’s gain is limited to
the price at which it sold the security short, its potential loss is limited only by the maximum attainable price of the security,
less the price at which the security was sold and may, theoretically, be unlimited.
A Fund may also make short sales “against
the box” without being subject to such limitations.
Sovereign Debt.
Investment
in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental
entity’s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole, the governmental entity’s policy towards
the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities
may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements
may be conditioned on the implementation of economic reforms and/or economic performance and the timely service of such debtor’s
obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation
of such third parties’ commitments
to lend funds to the governmental entity, which may further impair such debtor’s ability or willingness to timely service
its debts. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested
to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default
by a governmental entity, there may be few or no effective legal remedies for collecting on such debt.
Standby Commitment Agreements.
Standby
commitment agreements commit a Fund, for a stated period of time, to purchase a stated amount of securities that may be issued
and sold to that Fund at the option of the issuer. The price of the security is fixed at the time of the commitment. At the time
of entering into the agreement, the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued.
A Fund will enter into such agreements for the purpose of investing in the security underlying the commitment at a price that is
considered advantageous to the Fund. A Fund will limit its investment in such commitments so that the aggregate purchase price
of securities subject to such commitments, together with the value of the Fund’s other illiquid investments, will not exceed
15% of its net assets taken at the time of the commitment. A Fund segregates liquid assets in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities
subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less
than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security
during the commitment period.
The purchase of a security pursuant to a
standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be
expected to be issued, and the value of the security thereafter will be reflected in the calculation of a Fund’s net asset
value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued,
the commitment fee will be recorded as income on the expiration date of the standby commitment.
Stand-by commitments will only be entered
into with dealers, banks and broker-dealers which, in the Manager’s or sub-adviser’s opinion, present minimal credit
risks. A Fund will acquire stand-by commitments solely to facilitate portfolio liquidity and not to exercise its rights thereunder
for trading purposes. Stand-by commitments will be valued at zero in determining net asset value. Accordingly, where a Fund pays
directly or indirectly for a stand-by commitment, its cost will be reflected as an unrealized loss for the period during which
the commitment is held by such Fund and will be reflected as a realized gain or loss when the commitment is exercised or expires.
Stripped Securities.
Stripped
securities are created when the issuer separates the interest and principal components of an instrument and sells them as separate
securities. In general, one security is entitled to receive the interest payments on the underlying assets (the interest only or
“IO” security) and the other to receive the principal payments (the principal only or “PO” security). Some
stripped securities may receive a combination of interest and principal payments. The yields to maturity on IOs and POs are sensitive
to the expected or anticipated rate of principal payments (including prepayments) on the related underlying assets, and principal
payments may have a material effect on yield to maturity. If the underlying assets experience greater than anticipated prepayments
of principal, a Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying assets experience less than
anticipated prepayments of principal, the yield on POs could be adversely affected. Stripped securities may be highly sensitive
to changes in interest rates and rates of prepayment.
The International Bond Portfolio also may
purchase “stripped” securities that evidence ownership in the future interest payments or principal payments on obligations
of non-U.S. governments.
Structured Notes
.
Structured
notes and other related instruments purchased by the Fund are generally privately negotiated debt obligations where the principal
and/or interest is determined by reference to the performance of a specific asset, benchmark asset, market or interest rate (“reference
measure”). Issuers of structured notes include corporations and banks. The interest rate or the principal amount payable
upon maturity or redemption may increase or decrease, depending upon changes in the value of the reference measure. The terms of
a structured note may provide that, in certain circumstances, no principal is due at maturity and, therefore, may result in a loss
of invested capital by a Fund. The interest and/or principal payments that may be made on a structured product may vary widely,
depending on a variety of factors, including the volatility of the reference measure.
Structured notes may be positively or negatively
indexed, so the appreciation of the reference measure may produce an increase or a decrease in the interest rate or the value of
the principal at maturity. The rate of return on structured notes may be determined by applying a multiplier to the performance
or differential performance of reference measures. Application of a multiplier involves leverage that will serve to magnify the
potential for gain and the risk of loss.
The purchase of structured notes exposes
a Fund to the credit risk of the issuer of the structured product. Structured notes may also be more volatile, less liquid, and
more difficult to price accurately than less complex securities and instruments or more traditional debt securities. The secondary
market for structured notes could be illiquid making them difficult to sell when the Fund determines to sell them. The possible
lack of a liquid secondary market for structured notes and the resulting inability of the Fund to sell a structured note could
expose the Fund to losses and could make structured notes more difficult for the Fund to value accurately.
Supranational Entities.
A
Fund may invest in debt securities of supranational entities. Examples of such entities include the International Bank for Reconstruction
and Development (the World Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development
Bank. The government members, or “stockholders,” usually make initial capital contributions to the supranational entity
and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings.
There is no guarantee that one or more stockholders of a supranational entity will continue to make any necessary additional capital
contributions. If such contributions are not made, the entity may be unable to pay interest or repay principal on its debt securities,
and a Fund may lose money on such investments.
Tax-Exempt Derivatives.
Certain
Funds may hold tax-exempt derivatives which may be in the form of tender option bonds, participations, beneficial interests in
a trust, partnership interests or other forms. A number of different structures have been used. For example, interests in long-term
fixed-rate municipal debt obligations, held by a bank as trustee or custodian, are coupled with tender option, demand and other
features when the tax-exempt derivatives are created. Together, these features entitle the holder of the interest to tender (or
put) the underlying municipal debt obligation to a third party at periodic intervals and to receive the principal amount thereof.
In some cases, municipal debt obligations are represented by custodial receipts evidencing rights to receive specific future interest
payments, principal payments, or both, on the underlying securities held by the custodian. Under such arrangements, the holder
of the custodial receipt has the option to tender the underlying securities at their face value to the sponsor (usually a bank
or broker dealer or other financial institution), which is paid periodic fees equal to the difference between the securities’
fixed coupon rate and the rate that would cause the securities, coupled with the tender option, to trade at par on the date of
a rate adjustment. A participation interest gives the Fund an undivided interest in a Municipal Bond in the proportion the Fund’s
participation bears to the total principal amount of the Municipal Bond, and typically provides for a repurchase feature for all
or any part of the full principal amount of the participation interest, plus accrued interest. Trusts and partnerships are typically
used to convert long-term fixed rate high quality bonds of a single state or municipal issuer into variable or floating rate demand
instruments. The Municipal Bond Funds may hold tax-exempt derivatives, such as participation interests and custodial receipts,
for municipal debt obligations which give the holder the right to receive payment of principal subject to the conditions described
above. The Internal Revenue Service (the “IRS”) has not ruled on whether the interest received on tax-exempt derivatives
in the form of participation interests or custodial receipts is tax-exempt, and accordingly, purchases of any such interests or
receipts are based on the opinions of counsel to the sponsors of such derivative securities. Neither a Fund nor its investment
adviser or sub-advisers will review the proceedings related to the creation of any tax-exempt derivatives or the basis for such
opinions.
Tax-Exempt Preferred Shares.
Certain
Funds may invest in preferred interests of other investment funds that pay dividends that are exempt from regular Federal income
tax. Such funds in turn invest in municipal bonds and other assets that pay interest or make distributions that are exempt from
regular Federal income tax, such as revenue bonds issued by state or local agencies to fund the development of low-income, multi-family
housing. Investment in such tax-exempt preferred shares involves many of the same issues as investing in other investment companies.
These investments also have additional risks, including liquidity risk, the absence of regulation governing investment practices,
capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers
or industries. The Municipal Bond Funds will treat investments in tax-exempt preferred shares as investments in municipal bonds.
Taxability Risk.
Certain of
the Funds intends to minimize the payment of taxable income to shareholders by investing in tax-exempt or municipal securities
in reliance at the time of purchase on an opinion of bond counsel to
the issuer that the interest paid on those
securities will be excludable from gross income for Federal income tax purposes. Such securities, however, may be determined to
pay, or have paid, taxable income subsequent to the Fund’s acquisition of the securities. In that event, the IRS may demand
that the Fund pay Federal income taxes on the affected interest income, and, if the Fund agrees to do so, the Fund’s yield
could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Fund as “exempt
interest dividends” could be adversely affected, subjecting the Fund’s shareholders to increased Federal income tax
liabilities. If the interest paid on any tax-exempt or municipal security held by the Fund is subsequently determined to be taxable,
the Fund will dispose of that security as soon as reasonably practicable. In addition, the treatment of dividends previously paid
or to be paid by the Fund as “exempt interest dividends” could be adversely affected, subjecting the Fund’s shareholders
to increased Federal income tax liabilities. If the interest paid on any tax-exempt or municipal security held by the Fund is subsequently
determined to be taxable, the Fund will dispose of that security as soon as reasonably practicable. In addition, future laws, regulations,
rulings or court decisions may cause interest on municipal securities to be subject, directly or indirectly, to Federal income
taxation or interest on state municipal securities to be subject to state or local income taxation, or the value of state municipal
securities to be subject to state or local intangible personal property tax, or may otherwise prevent the Fund from realizing the
full current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities,
and thus the value of an investment in the Fund.
Trust Preferred Securities.
Certain
of the Funds may invest in trust preferred securities. Trust preferred securities are typically issued by corporations, generally
in the form of interest bearing notes with preferred securities characteristics, or by an affiliated business trust of a corporation,
generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The trust preferred
securities market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated
maturity dates.
Trust preferred securities are typically
junior and fully subordinated liabilities of an issuer and benefit from a guarantee that is junior and fully subordinated to the
other liabilities of the guarantor. In addition, trust preferred securities typically permit an issuer to defer the payment of
income for five years or more without triggering an event of default. Because of their subordinated position in the capital structure
of an issuer, the ability to defer payments for extended periods of time without default consequences to the issuer, and certain
other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments
on the trust preferred securities have not been made), these trust preferred securities are often treated as close substitutes
for traditional preferred securities, both by issuers and investors.
Trust preferred securities include but are
not limited to trust originated preferred securities (“TOPRS®”); monthly income preferred securities (“MIPS®”);
quarterly income bond securities (“QUIBS®” ); quarterly income debt securities (“QUIDS®”); quarterly
income preferred securities (“QUIPS
SM
”); corporate trust securities (“CORTS®”); public income
notes (“PINES®”); and other trust preferred securities.
Trust preferred securities are typically
issued with a final maturity date, although some are perpetual in nature. In certain instances, a final maturity date may be extended
and/or the final payment of principal may be deferred at the issuer’s option for a specified time without default. No redemption
can typically take place unless all cumulative payment obligations have been met, although issuers may be able to engage in open-market
repurchases without regard to whether all payments have been paid.
Many trust preferred securities are issued
by trusts or other special purpose entities established by operating companies and are not a direct obligation of an operating
company. At the time the trust or special purpose entity sells such preferred securities to investors, it purchases debt of the
operating company (with terms comparable to those of the trust or special purpose entity securities), which enables the operating
company to deduct for tax purposes the interest paid on the debt held by the trust or special purpose entity. The trust or special
purpose entity is generally required to be treated as transparent for Federal income tax purposes such that the holders of the
trust preferred securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly,
payments on the trust preferred securities are treated as interest rather than dividends for Federal income tax purposes. The trust
or special purpose entity in turn would be a holder of the operating company’s debt and would have priority with respect
to the operating company’s earnings and profits over the operating company’s common shareholders, but would typically
be subordinated to other classes of the operating company’s debt. Typically a preferred share has a rating that is slightly
below that of its corresponding operating company’s senior debt securities.
U.S. Government Obligations.
A
Fund may purchase obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and instrumentalities. Obligations
of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury.
Others are supported by the right of the issuer to borrow from the U.S. Treasury; and still others are supported only by the credit
of the agency or instrumentality issuing the obligation. No assurance can be given that the U.S. Government will provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Certain U.S. Treasury and agency
securities may be held by trusts that issue participation certificates (such as Treasury income growth receipts (“TIGRs”)
and certificates of accrual on Treasury certificates (“CATs”)). These certificates, as well as Treasury receipts and
other stripped securities, represent beneficial ownership interests in either future interest payments or the future principal
payments on U.S. Government obligations. These instruments are issued at a discount to their “face value” and may (particularly
in the case of stripped mortgage-backed securities) exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors.
Examples of the types of U.S. Government
obligations that may be held by the Funds include U.S. Treasury Bills, Treasury Notes and Treasury Bonds and the obligations of
the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration,
Ginnie Mae, Fannie Mae, Federal Financing Bank, General Services Administration, Student Loan Marketing Association, Central Bank
for Cooperatives, Federal Home Loan Banks, Freddie Mac, Federal Intermediate Credit Banks, Federal Land Banks, Farm Credit Banks
System, Maritime Administration, Tennessee Valley Authority and Washington D.C. Armory Board. The Funds may also invest in mortgage-related
securities issued or guaranteed by U.S. Government agencies and instrumentalities, including such instruments as obligations of
Ginnie Mae, Fannie Mae and Freddie Mac.
Utility Industries
Risks that are intrinsic to the utility
industries include difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs
during an inflationary period, restrictions on operations and increased cost and delays attributable to environmental considerations
and regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled
capital markets, technological innovations that may render existing plants, equipment or products obsolete, the potential impact
of natural or man-made disasters, increased costs and reduced availability of certain types of fuel, occasional reduced availability
and high costs of natural gas for resale, the effects of energy conservation, the effects of a national energy policy and lengthy
delays and greatly increased costs and other problems associated with the design, construction, licensing, regulation and operation
of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive
materials and the disposal of radioactive wastes. There are substantial differences among the regulatory practices and policies
of various jurisdictions, and any given regulatory agency may make major shifts in policy from time to time. There is no assurance
that regulatory authorities will, in the future, grant rate increases or that such increases will be adequate to permit the payment
of dividends on common stocks issued by a utility company. Additionally, existing and possible future regulatory legislation may
make it even more difficult for utilities to obtain adequate relief. Certain of the issuers of securities held in the Fund’s
portfolio may own or operate nuclear generating facilities. Governmental authorities may from time to time review existing policies
and impose additional requirements governing the licensing, construction and operation of nuclear power plants. Prolonged changes
in climatic conditions can also have a significant impact on both the revenues of an electric and gas utility as well as the expenses
of a utility, particularly a hydro-based electric utility.
Utility companies in the United States
and in foreign countries are generally subject to regulation. In the United States, most utility companies are regulated by state
and/or federal authorities. Such regulation is intended to ensure appropriate standards of service and adequate capacity to meet
public demand. Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting
the public while ensuring that the rate of return earned by utility companies is sufficient to allow them to attract capital in
order to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return
will continue in the future.
The nature of regulation of the utility
industries continues to evolve both in the United States and in foreign countries. In recent years, changes in regulation in the
United States increasingly have allowed utility companies to provide services and products outside their traditional geographic
areas and lines of business, creating new areas of competition within the industries. In some instances, utility companies are
operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well
as new entrants to
the field of telecommunications, non-regulated
providers of utility services have become a significant part of their respective industries. The Manager believes that the emergence
of competition and deregulation will result in certain utility companies being able to earn more than their traditional regulated
rates of return, while others may be forced to defend their core business from increased competition and may be less profitable.
Reduced profitability, as well as new uses of funds (such as for expansion, operations or stock buybacks) could result in cuts
in dividend payout rates. The Manager seeks to take advantage of favorable investment opportunities that may arise from these structural
changes. Of course, there can be no assurance that favorable developments will occur in the future.
Foreign utility companies are also subject
to regulation, although such regulations may or may not be comparable to those in the United States. Foreign utility companies
may be more heavily regulated by their respective governments than utilities in the United States and, as in the United States,
generally are required to seek government approval for rate increases. In addition, many foreign utilities use fuels that may cause
more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment
to meet any proposed pollution restrictions. Foreign regulatory systems vary from country to country and may evolve in ways different
from regulation in the United States.
A Fund’s investment policies are
designed to enable it to capitalize on evolving investment opportunities throughout the world. For example, the rapid growth of
certain foreign economies will necessitate expansion of capacity in the utility industries in those countries. Although many foreign
utility companies currently are government-owned, thereby limiting current investment opportunities for a Fund, the Manager believes
that, in order to attract significant capital for growth, foreign governments are likely to seek global investors through the privatization
of their utility industries. Privatization, which refers to the trend toward investor ownership of assets rather than government
ownership, is expected to occur in newer, faster-growing economies and in mature economies. Of course, there is no assurance that
such favorable developments will occur or that investment opportunities in foreign markets will increase.
The revenues of domestic and foreign
utility companies generally reflect the economic growth and development in the geographic areas in which they do business. The
Manager will take into account anticipated economic growth rates and other economic developments when selecting securities of utility
companies.
Electric.
The electric utility
industry consists of companies that are engaged principally in the generation, transmission and sale of electric energy, although
many also provide other energy-related services. In the past, electric utility companies, in general, have been favorably affected
by lower fuel and financing costs and the full or near completion of major construction programs. In addition, many of these companies
have generated cash flows in excess of current operating expenses and construction expenditures, permitting some degree of diversification
into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional
geographic areas. Electric utility companies have historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance
with environmental and safety regulations and changes in the regulatory climate. As interest rates declined, many utilities refinanced
high cost debt and in doing so improved their fixed charges coverage. Regulators, however, lowered allowed rates of return as interest
rates declined and thereby caused the benefits of the rate declines to be shared wholly or in part with customers. In a period
of rising interest rates, the allowed rates of return may not keep pace with the utilities’ increased costs. The construction
and operation of nuclear power facilities are subject to strict scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission and state agencies which have comparable jurisdiction. Strict scrutiny might result in higher operating costs and higher
capital expenditures, with the risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk
that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power
plants may be subject to significant costs for disposal of nuclear fuel and for decommissioning such plants.
The rating agencies look closely at the
business profile of utilities. Ratings for companies are expected to be impacted to a greater extent in the future by the division
of their asset base. Electric utility companies that focus more on the generation of electricity may be assigned less favorable
ratings as this business is expected to be competitive and the least regulated. On the other hand, companies that focus on transmission
and distribution, which is expected to be the least competitive and the more regulated part of the business, may see higher ratings
given the greater predictability of cash flow.
A number of states are considering or
have enacted deregulation proposals. The introduction of competition into the industry as a result of such deregulation has at
times resulted in lower revenue, lower credit ratings, increased default risk, and lower electric utility security prices. Such
increased competition may also cause long-term
contracts, which electric utilities previously
entered into to buy power, to become “stranded assets” which have no economic value. Any loss associated with such
contracts must be absorbed by ratepayers and investors. In addition, some electric utilities have acquired electric utilities overseas
to diversify, enhance earnings and gain experience in operating in a deregulated environment. In some instances, such acquisitions
have involved significant borrowings, which have burdened the acquirer’s balance sheet. There is no assurance that current
deregulation proposals will be adopted. However, deregulation in any form could significantly impact the electric utilities industry.
Telecommunications.
The telecommunications
industry today includes both traditional telephone companies, with a history of broad market coverage and highly regulated businesses,
and cable companies, which began as small, lightly regulated businesses focused on limited markets. Today these two historically
different businesses are converging in an industry that is trending toward larger, competitive national and international markets
with an emphasis on deregulation. Companies that distribute telephone services and provide access to the telephone networks still
comprise the greatest portion of this segment, but non-regulated activities such as wireless telephone services, paging, data transmission
and processing, equipment retailing, computer software and hardware and internet services are becoming increasingly significant
components as well. In particular, wireless and internet telephone services continue to gain market share at the expense of traditional
telephone companies. The presence of unregulated companies in this industry and the entry of traditional telephone companies into
unregulated or less regulated businesses provide significant investment opportunities with companies that may increase their earnings
at faster rates than had been allowed in traditional regulated businesses. Still, increasing competition, technological innovations
and other structural changes could adversely affect the profitability of such utilities and the growth rate of their dividends.
Given mergers and proposed legislation and enforcement changes, it is likely that both traditional telephone companies and cable
companies will continue to provide an expanding range of utility services to both residential, corporate and governmental customers.
Gas
. Gas transmission companies
and gas distribution companies are undergoing significant changes. In the United States, interstate transmission companies are
regulated by the Federal Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified
into oil and gas exploration and development, making returns more sensitive to energy prices. In the recent decade, gas utility
companies have been adversely affected by disruptions in the oil industry and have also been affected by increased concentration
and competition. In the opinion of the Manager, however, environmental considerations could improve the gas industry outlook in
the future. For example, natural gas is the cleanest of the hydrocarbon fuels, and this may result in incremental shifts in fuel
consumption toward natural gas and away from oil and coal, even for electricity generation. However, technological or regulatory
changes within the industry may delay or prevent this result.
Water.
Water supply utilities
are companies that collect, purify, distribute and sell water. In the United States and around the world the industry is highly
fragmented because most of the supplies are owned by local authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the Manager, there may be opportunities for certain companies
to acquire other water utility companies and for foreign acquisition of domestic companies. The Manager believes that favorable
investment opportunities may result from consolidation of this segment. As with other utilities, however, increased regulation,
increased costs and potential disruptions in supply may adversely affect investments in water supply utilities.
Utility Industries Generally.
There
can be no assurance that the positive developments noted above, including those relating to privatization and changing regulation,
will occur or that risk factors other than those noted above will not develop in the future.
When Issued Securities, Delayed Delivery
Securities and Forward Commitments.
A Fund may purchase or sell securities that it is entitled to receive on a when issued
basis. A Fund may also purchase or sell securities on a delayed delivery basis or through a forward commitment (including on a
“TBA” (to be announced) basis). These transactions involve the purchase or sale of securities by a Fund at an established
price with payment and delivery taking place in the future. The Fund enters into these transactions to obtain what is considered
an advantageous price to the Fund at the time of entering into the transaction. When a Fund purchases securities in these transactions,
the Fund segregates liquid securities in an amount equal to the amount of its purchase commitments.
Pursuant to recommendations of the
Treasury Market Practices Group, which is sponsored by the Federal Reserve Bank of New York, beginning January 1, 2014, a Fund
or its counterparty generally will be required to post collateral when entering into certain forward-settling transactions, including
without limitation TBA transactions.
There can be no assurance that a security
purchased on a when issued basis will be issued or that a security purchased or sold on a delayed delivery basis or through a forward
commitment will be delivered. Also, the value of securities in these transactions on the delivery date may be more or less than
the price paid by the Fund to purchase the securities. The Fund will lose money if the value of the security in such a transaction
declines below the purchase price and will not benefit if the value of the security appreciates above the sale price during the
commitment period.
If deemed advisable as a matter of investment
strategy, a Fund may dispose of or renegotiate a commitment after it has been entered into, and may sell securities it has committed
to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss.
When a Fund engages in when-issued, TBA
or forward commitment transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result
in the Fund’s incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying
a commitment to purchase securities, and any subsequent fluctuations in their market value, is taken into account when determining
the market value of a Fund starting on the day the Fund agrees to purchase the securities. The Fund does not earn interest on the
securities it has committed to purchase until they are paid for and delivered on the settlement date.
Yields and Ratings.
The yields
on certain obligations are dependent on a variety of factors, including general market conditions, conditions in the particular
market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and
the ratings of the issue. The ratings of Moody’s, Fitch and S&P represent their respective opinions as to the quality
of the obligations they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by a
Fund, a rated security may cease to be rated. A Fund’s Manager or sub-adviser will consider such an event in determining
whether the Fund should continue to hold the security.
Zero Coupon Securities.
Zero
coupon securities are securities that are sold at a discount to par value and do not pay interest during the life of the security.
The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at
a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero coupon
security is entitled to receive the par value of the security.
While interest payments are not made on
such securities, holders of such securities are deemed to have received income (“phantom income”) annually, notwithstanding
that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a
fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the
obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions
at a rate as high as the implicit yield on the zero coupon bond, but at the same time eliminates the holder’s ability to
reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price
fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer
term zero coupon bonds are more exposed to interest rate risk than shorter term zero coupon bonds. These investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who
are willing to defer receipt of cash.
A Fund accrues income with respect to these
securities for Federal income tax and accounting purposes prior to the receipt of cash payments. Zero coupon securities may be
subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities
that pay cash interest at regular intervals.
Further, to maintain its qualification for
pass-through treatment under the Federal tax laws, a Fund is required to distribute income to its shareholders and, consequently,
may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself
by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase
in a Fund’s exposure to zero coupon securities.
In addition to the above-described risks,
there are certain other risks related to investing in zero coupon securities. During a period of severe market conditions, the
market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, a Fund’s
investment exposure to these securities and their risks, including credit risk, will increase during the time these securities
are held in the Fund’s portfolio.
Suitability (All Funds)
The economic benefit of an investment in
any Fund depends upon many factors beyond the control of the Fund, the Manager and its affiliates. Each Fund should be considered
a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase
of shares in a Fund will depend upon, among other things, such investor’s investment objectives and such investor’s
ability to accept the risks associated with investing in securities, including the risk of loss of principal.
Investment Restrictions (All Funds)
See “Investment Restrictions”
in Part I of each Fund’s Statement of Additional Information for the specific fundamental and non-fundamental investment
restrictions adopted by each Fund. In addition to those investment restrictions, each Fund is also subject to the restrictions
discussed below.
The staff of the Commission has taken the
position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, each
Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of any such transaction, the sum of the market value of OTC options currently outstanding that are held
by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding that were sold by
the Fund and margin deposits on the Fund’s existing OTC options on financial futures contracts would exceed 15% of the net
assets of the Fund, taken at market value, together with all other assets of the Fund that are determined to be illiquid. However,
if an OTC option is sold by a Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price,
then the Fund will treat as illiquid only such amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is “in-the-money” (
i.e.
, current market value of the underlying securities minus
the option’s strike price). The repurchase price with the primary dealers is typically a formula price that is generally
based on a multiple of the premium received for the option, plus the amount by which the option is “in-the-money.”
This policy as to OTC options is not a fundamental policy of any Fund and may be amended by the Board of Directors of the Fund
without the approval of the Fund’s shareholders.
Each Fund’s investments will be limited
in order to allow the Fund to qualify as a “regulated investment company” for purposes of the Code. See “Dividends
and Taxes — Taxes.” To qualify, among other requirements, each Fund will limit its investments so that, at the close
of each quarter of the taxable year, (i) at least 50% of the market value of each Fund’s assets is represented by cash, securities
of other regulated investment companies, U.S. government securities and other securities, with such other securities limited, in
respect of any one issuer, to an amount not greater than 5% of the Fund’s assets and not greater than 10% of the outstanding
voting securities of such issuer and (ii) not more than 25% of the value of its assets is invested in the securities (other than
U.S. government securities or securities of other regulated investment companies) of any one issuer, any two or more issuers of
which 20% or more of the voting stock is held by the Fund and that are determined to be engaged in the same or similar trades or
businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships (
i.e.
,
partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that
derive 90% of their income from interest, dividends, capital gains and other traditionally permitted mutual fund income). For purposes
of this restriction, the Municipal Funds generally will regard each state and each of its political subdivisions, agencies or instrumentalities
and each multi-state agency of which the state is a member as a separate issuer. Each public authority that issues securities on
behalf of a private entity generally will also be regarded as a separate issuer, except that if the security is backed only by
the assets and revenues of a non-government entity, then the entity with the ultimate responsibility for the payment of interest
and principal may be regarded as the sole issuer. Foreign government securities (unlike U.S. government securities) are not exempt
from the diversification requirements of the Code and the securities of each foreign government issuer are considered to be obligations
of a single issuer. These tax-related limitations may be changed by the Directors of a Fund to the extent necessary to comply with
changes to the Federal tax requirements. A Fund that is “diversified” under the Investment Company Act must satisfy
the foregoing 5% and 10% requirements with respect to 75% of its total assets.
Code of Ethics
Each Fund, the Manager, each Sub-Adviser
and the Distributor has adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Codes of Ethics establish
procedures for personal investing and restrict
certain transactions. Employees subject
to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased
or held by a Fund.
M
ANAGEMENT
AND
O
THER
S
ERVICE
A
RRANGEMENTS
Directors and Officers
See “Information on Directors and Officers,”
“—Biographical Information,” “— Share Ownership” and “— Compensation of Directors”
in Part I of each Fund’s Statement of Additional Information for biographical and certain other information relating to the
Directors and officers of your Fund, including Directors’ compensation.
Management Arrangements
Management Services.
The Manager provides
each Fund with investment advisory and management services. Subject to the oversight of the Board of Directors, the Manager is
responsible for the actual management of a Fund’s portfolio and reviews the Fund’s holdings in light of its own research
analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security
rests with the Manager. The Manager performs certain of the other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of each Fund.
Each Feeder Fund invests all or a portion of its
assets in shares of a Master Portfolio. To the extent a Feeder Fund invests all of its assets in a Master Portfolio, it does not
invest directly in portfolio securities and does not require management services. For such Feeder Funds, portfolio management occurs
at the Master Portfolio level.
Management Fee.
Each Fund has entered into
a Management Agreement with the Manager pursuant to which the Manager receives for its services to the Fund monthly compensation
at an annual rate based on the average daily net assets of the Fund. For information regarding specific fee rates for your Fund
and the fees paid by your Fund to the Manager for the Fund’s last three fiscal years or other applicable periods, see “Management
and Advisory Arrangements” in Part I of each Fund’s Statement of Additional Information.
For Funds that do not have an administrator, each
Management Agreement obligates the Manager to provide management services and to pay all compensation of and furnish office space
for officers and employees of a Fund in connection with investment and economic research, trading and investment management of
the Fund, as well as the fees of all Directors of the Fund who are interested persons of the Fund. Each Fund pays all other expenses
incurred in the operation of that Fund, including among other things: taxes; expenses for legal and auditing services; costs of
preparing, printing and mailing proxies, shareholder reports, prospectuses and statements of additional information, except to
the extent paid by BlackRock Investments, LLC (“BRIL” or the “Distributor”); charges of the custodian and
sub-custodian, and the transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under
Federal, state or foreign laws; fees and expenses of Directors who are not interested persons of a Fund as defined in the Investment
Company Act; accounting and pricing costs (including the daily calculations of net asset value); insurance; interest; brokerage
costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Certain accounting
services are provided to each Fund by State Street Bank and Trust Company (“State Street”) or BNY Mellon Investment
Servicing (US) Inc. (“BNY Mellon”) pursuant to an agreement between State Street or BNY Mellon, as applicable, and
each Fund. Each Fund pays a fee for these services. In addition, the Manager provides certain accounting services to each Fund
and the Fund pays the Manager a fee for such services. The Distributor pays certain promotional expenses of the Funds incurred
in connection with the offering of shares of the Funds. Certain expenses are financed by each Fund pursuant to distribution plans
in compliance with Rule 12b-1 under the Investment Company Act. See “Purchase of Shares — Distribution Plans.”
Sub-Advisory Fee.
The Manager of certain
Funds has entered into one or more sub-advisory agreements (the “Sub-Advisory Agreements”) with the sub-adviser or
sub-advisers identified in each such Fund’s prospectus (the “Sub-Adviser”) pursuant to which the Sub-Adviser
provides sub-advisory services to the Manager with respect to the Fund. For information relating to the fees, if any, paid by the
Manager to the Sub-Adviser pursuant to the Sub-Advisory Agreement for the Fund’s last three fiscal years or other applicable
periods, see “Management and Advisory Arrangements” in Part I of each Fund’s Statement of Additional Information.
Organization of the Manager.
BlackRock
Advisors, LLC is a Delaware limited liability company and BlackRock Fund Advisors is a California corporation. Each Manager is
an indirect, wholly owned subsidiary of BlackRock, Inc. BlackRock, Inc., through its subsidiaries and divisions, provides (i) investment
management services to individuals and institutional investors through separate account management, non-discretionary advisory
programs and commingled investment vehicles; (ii) risk management services, investment accounting and trade processing tools; (iii)
transition management services, and (iv) securities lending services.
Duration and Termination.
Unless earlier
terminated as described below, each Management Agreement and each Sub-Advisory Agreement will remain in effect for an initial two
year period and from year to year thereafter if approved annually (a) by the Board of Directors or by a vote of a majority of the
outstanding voting securities of a Fund and (b) by a majority of the Directors of the Fund who are not parties to such agreement
or interested persons (as defined in the Investment Company Act) of any such party. Each Management Agreement automatically terminates
on assignment and may be terminated without penalty on 60 days’ written notice at the option of either party thereto or by
the vote of the shareholders of the applicable Fund.
Other Service Arrangements
Administrative Services and Administrative
Fee.
Certain Funds have entered into an administration agreement (the “Administration Agreement”) with an administrator
identified in the Fund’s Prospectus and Part I of the Fund’s Statement of Additional Information (each an “Administrator”).
For its services to a Fund, the Administrator receives monthly compensation at the annual rate set forth in each applicable Fund’s
prospectus. For information regarding any administrative fees paid by your Fund to the Administrator for the periods indicated,
see “Management and Advisory Arrangements” in Part I of that Fund’s Statement of Additional Information.
For Funds that have an Administrator, the Administration
Agreement obligates the Administrator to provide certain administrative services to the Fund and to pay, or cause its affiliates
to pay, for maintaining its staff and personnel and to provide office space, facilities and necessary personnel for the Fund. Each
Administrator is also obligated to pay, or cause its affiliates to pay, the fees of those officers and Directors of the Fund who
are affiliated persons of the Administrator or any of its affiliates.
Duration and Termination of Administration
Agreement.
Unless earlier terminated as described below, each Administration Agreement will continue for an initial two year
period and from year to year if approved annually (a) by the Board of Directors of each applicable Fund or by a vote of a majority
of the outstanding voting securities of such Fund and (b) by a majority of the Directors of the Fund who are not parties to such
contract or interested persons (as defined in the Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days’ written notice at the option of either party thereto or by the vote of the
shareholders of the Fund.
Transfer Agency Services.
BNY Mellon Investment
Servicing (US) Inc. (in this capacity, the “Transfer Agent”), a subsidiary of The Bank of New York Mellon Corporation,
acts as each Fund’s Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the “Transfer Agency Agreement”) with the Funds. Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts.
Each Fund pays the Transfer Agent a fee for the services it receives based on the type of account and the level of services required.
Each Fund reimburses the Transfer Agent’s reasonable out-of-pocket expenses and pays a fee of 0.10% of account assets for
certain accounts that participate in certain fee-based programs sponsored by the Manager or its affiliates. For purposes of each
Transfer Agency Agreement, the term “account” includes a shareholder account maintained directly by the Transfer Agent
and any other account representing the beneficial interest of a person in the relevant share class on a recordkeeping system. Effective
July 1, 2010, the Transfer Agent ceased to be an affiliate of the Funds.
Independent Registered Public
Accounting Firm.
The Audit Committee of each Fund, the members of which are non-interested Directors of the Fund, has
selected an independent registered public accounting firm for that Fund that audits the Fund’s financial statements. Please
see the inside back cover page of your Fund’s Prospectus for information on your Fund’s independent registered public
accounting firm.
Custodian Services.
The name and address
of the custodian (the “Custodian”) of each Fund are provided on the inside back cover page of the Fund’s Prospectus.
The Custodian is responsible for safeguarding and controlling the Fund’s cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund’s investments. The Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund to be held in its offices outside the United States
and with certain foreign banks and securities depositories.
For certain Feeder Funds, the Custodian also acts
as the custodian of the Master Portfolio’s assets.
With respect to each Fund, under an arrangement
effective January 1, 2010, on a monthly basis, the Custodian nets the Fund’s daily positive and negative cash balances and
calculates a credit (“custody credit”) or a charge based on that net amount. The custodian fees, including the amount
of any overdraft charges, may be reduced by the amount of such custody credits, and any unused credits at the end of a given month
may be carried forward to a subsequent month. Any such credits unused by the end of a Fund’s fiscal year will not expire.
Net debits at the end of a given month are added to the Fund’s custody bill and paid by the Fund.
Accounting Services.
Each Fund has entered
into an agreement with State Street or BNY Mellon, pursuant to which State Street or BNY Mellon provides certain accounting services
to the Fund. Each Fund pays a fee for these services. State Street or BNY Mellon provides similar accounting services to the Master
LLCs. The Manager or the Administrator also provides certain accounting services to each Fund and each Fund reimburses the Manager
or the Administrator for these services.
See “Management and Advisory Arrangements
— Accounting Services” in Part I of each Fund’s Statement of Additional Information for information on the amounts
paid by your Fund and, if applicable, Master LLC to State Street and the Manager or, if applicable, the Administrator for the periods
indicated.
Distribution Expenses.
Each Fund has entered
into a distribution agreement with the Distributor in connection with the continuous offering of each class of shares of the Fund
(the “Distribution Agreements”). The Distribution Agreements obligate the Distributor to pay certain expenses in connection
with the offering of each class of shares of the Funds. After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of these
documents used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. Each Distribution Agreement is subject to the same renewal requirements and termination provisions
as the Management Agreement described above.
Code of Ethics
Each Fund, the Manager, each Sub-Adviser and the
Distributor has adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Codes of Ethics establish
procedures for personal investing and restrict certain transactions. Employees subject to the Code of Ethics may invest in securities
for their personal investment accounts, including securities that may be purchased or held by a Fund.
S
ELECTIVE
D
ISCLOSURE OF
P
ORTFOLIO
H
OLDINGS
The Board of Directors/Trustees each of the Funds
and the Board of Directors of the Manager have each approved Portfolio Information Distribution Guidelines (the “Guidelines”)
regarding the disclosure of the Funds’ portfolio securities, as applicable, and other portfolio information. The purpose
of the Guidelines is to ensure that (i) shareholders and prospective shareholders of the Fund have equal access to portfolio holdings
and characteristics and (ii) third parties (such as consultants, intermediaries and third-party data providers) have access to
such information no more frequently than shareholders and prospective shareholders.
Pursuant to the Guidelines, the Funds and the
Manager may, under certain circumstances as set forth below, make selective disclosure with respect to the Funds’ portfolio
holdings. The Funds’ Board has approved the adoption by the Funds of the Guidelines, and employees of the Manager are responsible
for adherence to the Guidelines. The Funds’ Board provides ongoing oversight of the Funds’ and Manager’s compliance
with the Guidelines. Examples of the types of information that may be disclosed pursuant to the Guidelines are provided below.
This information may be both material non-public information (“Confidential Information”) and proprietary information
of the
Manager. Information that is non-material or that
may be obtained from public sources (i.e., information that has been publicly disclosed via a filing with the Securities and Exchange
Commission (e.g., fund annual report), through a press release or placement on a publicly-available internet web site) shall not
be deemed Confidential Information.
Except as otherwise provided in the Guidelines,
Confidential Information relating to the Funds may not be distributed to persons not employed by the Manager unless: the Fund has
a legitimate business purpose for doing so. Confidential Information may be disclosed to the Funds’ Board members and their
counsel, outside counsel for the Funds and the Funds’ auditors, and may be disclosed to the Funds’ service providers
and other appropriate parties with the approval of the Funds’ Chief Compliance Officer, the Manager’s General Counsel,
the Manager’s Chief Compliance Officer or the designee of such persons, and in addition, in the case of disclosure to third
parties, subject to a confidentiality or non-disclosure agreement, as necessary in accordance with the Guidelines. Information
may also be disclosed as required by applicable laws and regulation.
Examples of instances in which selective disclosure
of a Fund’s portfolio securities or other portfolio information may be appropriate include: (i) disclosure for due diligence
purposes to an investment adviser that is in merger or acquisition talks with the Manager; (ii) disclosure to a newly-hired investment
adviser or sub-adviser prior to its commencing its duties; (iii) disclosure to a third-party feeder fund consistent with its agreement
with a master portfolio advised by BlackRock; (iv) disclosure to third-party service providers of legal, auditing, custody, proxy
voting, pricing and other services to the Fund; or (v) disclosure to a rating or ranking organization.
Asset and Return Information
. Data on NAVs,
asset levels (by total fund and share class), accruals, yields, capital gains, dividends and fund returns (net of fees by share
class) are generally available to shareholders, prospective shareholders, consultants and third-party data providers upon request,
as soon as such data is available. Data on number of shareholders (total and by share class) and benchmark returns (including performance
measures such as standard deviation, information ratio, Sharpe ratio, alpha, and beta) are generally available to shareholders,
prospective shareholders, consultants and third-party data providers as soon as such data is released after month-end.
Portfolio Characteristics
. Examples of
portfolio characteristics include sector allocation, credit quality breakdown, maturity distribution, duration and convexity measures,
average credit quality, average maturity, average coupon, top 10 holdings with percent of the fund held, average market capitalization,
capitalization range, ROE, P/E, P/B, P/CF, P/S and EPS.
1. Month-end portfolio characteristics are available
to shareholders, prospective shareholders, intermediaries and consultants on the fifth calendar day after month-end.
1
2. Fund Fact Sheets, which contain certain portfolio
characteristics, are available, in both hard copy and electronically, to shareholders, prospective shareholders, intermediaries
and consultants on a monthly or quarterly basis no earlier than the fifth calendar day after the end of a month or quarter.
3. Money Market Performance Reports, which contain
money market fund performance for the recent month, rolling 12-month average yields and benchmark performance, are available on
a monthly basis to shareholders, prospective shareholders, intermediaries and consultants by the tenth calendar day of the month.
This information may also be obtained electronically upon request.
Portfolio Holdings
. In addition to position
description, portfolio holdings may also include issuer name, CUSIP, ticker symbol, total shares and market value for equity portfolios
and issuer name, CUSIP, ticker symbol, coupon, maturity, current face value and market value for fixed income portfolios. Other
information that may be provided includes quantity, SEDOL, market price, yield, weighted average life, duration and convexity of
each security in the Fund as of a specific date.
The following shall not be deemed a disclosure
of Confidential Information:
-
Generally, month-end portfolio
holdings may be made available to fund shareholders, prospective shareholders, intermediaries, consultants and third party data
providers (e.
g., Lipper, Morningstar and
1
The precise number of days specified above may vary slightly from period to period depending on whether the specified calendar
day falls on a weekend or holiday.
Bloomberg) on the 20th calendar day after
the end of each month; except for BlackRock Global Allocation Fund, Inc., BlackRock Long-Horizon Equity Fund, BlackRock Global
Allocation Portfolio of BlackRock Series Fund, Inc. and BlackRock Global Allocation V.I. Fund of BlackRock Variable Series Funds,
Inc., whose holdings may be made available on the 40
th
calendar day after the end of the quarter (based on each Fund’s
fiscal year end)
1
The following information as it relates to money
market funds, unless made available to the public, shall be deemed a disclosure of Confidential Information and, subject to the
Guidelines, requires a confidentiality or non-disclosure arrangement:
-
Weekly portfolio holdings
made available to fund shareholders, prospective shareholders, intermediaries and consultants on the next business day after the
end of the weekly period.
-
Weekly portfolio holdings
and characteristics made available to third-party data providers (e.g., Lipper, Morningstar, Bloomberg, S&P, Fitch, Moody’s,
Crane Data and iMoneyNet, Inc.) on the next business day after the end of the weekly period.
Other Information.
The Guidelines shall
also apply to other Confidential Information of a Fund such as attribution analyses or security-specific information (e.g., information
about Fund holdings where an issuer has been downgraded, been acquired or declared bankruptcy).
Implementation
. All employees of the Manager
must adhere to the Guidelines when responding to inquiries from shareholders, prospective shareholders, consultants, and third-party
databases. The Funds’ Chief Compliance Officer is responsible for oversight of compliance with the Guidelines and will recommend
to the Funds’ Board any changes to the Guidelines that he or she deems necessary or appropriate to ensure the Funds’
and the Manager’s compliance.
Ongoing Arrangements
. The Manager has entered
into ongoing agreements to provide selective disclosure of Fund portfolio holdings to the following persons or entities:
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1.
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Fund’s Board of Directors and, if necessary independent Directors’ counsel and Fund counsel
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4.
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Fund’s Administrator, if applicable
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5.
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Fund’s independent registered public accounting firm
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6.
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Fund’s accounting services provider
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7.
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Independent rating agencies — Morningstar, Inc., Lipper Inc., S&P, Moody’s, Fitch
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8.
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Information aggregators — Markit on Demand, Thomson Financial and Bloomberg, eVestments Alliance,
Informa /PSN Investment Solutions, Crane Data, and iMoneyNet
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9.
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Sponsors of 401(k) plans that include BlackRock-advised funds — E.I. Dupont de Nemours and Company,
Inc.
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10.
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Consultants for pension plans that invest in BlackRock-advised funds — Rocaton Investment Advisors,
LLC, Mercer Investment Consulting, Callan Associates, Brockhouse & Cooper, Cambridge Associates, Morningstar/Investorforce,
Russell Investments (Mellon Analytical Solutions), and Wilshire Associates
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11.
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Pricing Vendors — Reuters Pricing Service, Bloomberg, FT Interactive Data (FT IDC), ITG, Telekurs
Financial, FactSet Research Systems, Inc., JP Morgan Pricing Direct (formerly Bear Stearns Pricing Service), Standard and Poor’s
Security Evaluations Service, Lehman Index Pricing, Bank of America High Yield Index, Loan Pricing Corporation (LPC), LoanX, Super
Derivatives, IBOXX Index, Barclays Euro Gov’t Inflation-
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1
The precise number of days specified above may vary slightly from period to period depending on whether the specified calendar
day falls on a weekend or holiday.
Linked Bond Index, JPMorgan Emerging
& Developed Market Index, Reuters/WM Company, Nomura BPI Index, Japan Securities Dealers Association, Valuation Research Corporate
and Murray, Devine & Co., Inc.
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12.
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Portfolio Compliance Consultants — Oracle/i-Flex Solutions, Inc.
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13.
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Third-party feeder funds — Hewitt Money Market Fund, Hewitt Series Fund, Hewitt Financial Services
LLC, Homestead, Inc., Transamerica, State Farm Mutual Fund, Sterling Capital Funds and their respective boards, sponsors, administrators
and other service providers
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14.
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Affiliated feeder funds — BlackRock Cayman Prime Money Market Fund, Ltd. and BlackRock Cayman
Treasury Money Market Fund Ltd., and their respective boards, sponsors, administrators and other service providers
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15.
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Other — Investment Company Institute
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With respect to each such arrangement, the Fund
has a legitimate business purpose for the release of information. The release of the information is subject to confidential treatment
to prohibit the entity from sharing with an unauthorized source or trading upon the information provided. The Fund, the Manager
and their affiliates do not receive any compensation or other consideration in connection with such arrangements.
The Funds and the Manager monitor, to the extent
possible, the use of Confidential Information by the individuals or firms to which it has been disclosed. To do so, in addition
to the requirements of any applicable confidentiality agreement and/or the terms and conditions of the Funds’ and Manager’s
Code of Ethics and Code of Business Conduct and Ethics — all of which require persons or entities in possession of Confidential
Information to keep such information confidential and not to trade on such information for their own benefit — the Manager’s
compliance personnel under the supervision of the Funds’ Chief Compliance Officer, monitor the Manager’s securities
trading desks to determine whether individuals or firms who have received Confidential Information have made any trades on the
basis of that information. In addition, the Manager maintains an internal restricted list to prevent trading by the personnel of
the Manager or its affiliates in securities — including securities held by the Funds — about which the Manager has
Confidential Information. There can be no assurance, however, that the Funds’ policies and procedures with respect to the
selective disclosure of Fund portfolio holdings will prevent the misuse of such information by individuals or firms that receive
such information.
Potential Conflicts of Interest
The PNC Financial Services Group, Inc.
(“PNC”) has a significant economic interest in BlackRock, Inc., the
parent of BlackRock Advisors, LLC, the
Funds’ investment adviser. PNC is
considered to be an affiliate of BlackRock, Inc., under the Investment Company
Act. Certain activities of BlackRock Advisors, LLC, BlackRock, Inc. and their
affiliates (collectively, “BlackRock”)
and PNC and its affiliates
(collectively, “PNC” and together with BlackRock, “Affiliates”),
with respect to the Funds and/or other accounts managed by BlackRock or PNC may give rise to actual or perceived conflicts of
interest such
as those described below.
BlackRock is one of the world’s largest
asset management firms. PNC is a diversified financial services organization spanning the retail, business and corporate markets.
BlackRock, PNC and their respective affiliates (including, for these purposes, their directors, partners, trustees, managing members,
officers and employees), including the entities and personnel who may be involved in the investment activities and business operations
of a Fund, are engaged worldwide in businesses, including equity, fixed income, cash management and alternative investments, and
have interests other than that of managing the Funds. These are considerations of which investors in a Fund should be aware, and
which may cause conflicts of interest that could disadvantage the Fund and its shareholders. These activities and interests include
potential multiple advisory, transactional, financial and other interests in securities and other instruments, and companies that
may be purchased or sold by a Fund.
BlackRock and its Affiliates have proprietary
interests in, and may manage or advise with respect to, accounts or funds (including separate accounts and other funds and collective
investment vehicles) that have investment objectives similar to those of a Fund and/or that engage in transactions in the same
types of securities, currencies and instruments as the Fund. One or more Affiliates are also major participants in the global currency,
equities, swap and fixed income markets, in each case both on a proprietary basis and for the accounts of customers. As such, one
or more Affiliates are or may be actively engaged
in transactions in the same securities, currencies, and instruments in which a Fund invests. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which a Fund invests, which could have an adverse impact on
the Fund’s performance. Such transactions, particularly in respect of most proprietary accounts or customer accounts, will
be executed independently of a Fund’s transactions and thus at prices or rates that may be more or less favorable than those
obtained by the Fund.
When BlackRock and its Affiliates seek to purchase
or sell the same assets for their managed accounts, including a Fund, the assets actually purchased or sold may be allocated among
the accounts on a basis determined in their good faith discretion to be equitable. In some cases, this system may adversely affect
the size or price of the assets purchased or sold for a Fund. In addition, transactions in investments by one or more other accounts
managed by BlackRock or its Affiliates may have the effect of diluting or otherwise disadvantaging the values, prices or investment
strategies of a Fund, particularly, but not limited to, with respect to small capitalization, emerging market or less liquid strategies.
This may occur when investment decisions regarding a Fund are based on research or other information that is also used to support
decisions for other accounts. When BlackRock or its Affiliates implements a portfolio decision or strategy on behalf of another
account ahead of, or contemporaneously with, similar decisions or strategies for a Fund, market impact, liquidity constraints,
or other factors could result in the Fund receiving less favorable trading results and the costs of implementing such decisions
or strategies could be increased or the Fund could otherwise be disadvantaged. BlackRock or its Affiliates may, in certain cases,
elect to implement internal policies and procedures designed to limit such consequences, which may cause a Fund to be unable to
engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do
so.
Conflicts may also arise because portfolio decisions
regarding a Fund may benefit other accounts managed by BlackRock or its Affiliates. For example, the sale of a long position or
establishment of a short position by a Fund may impair the price of the same security sold short by (and therefore benefit) one
or more Affiliates or their other accounts, and the purchase of a security or covering of a short position in a security by a Fund
may increase the price of the same security held by (and therefore benefit) one or more Affiliates or their other accounts.
BlackRock and its Affiliates and their clients
may pursue or enforce rights with respect to an issuer in which a Fund has invested, and those activities may have an adverse effect
on the Fund. As a result, prices, availability, liquidity and terms of the Fund’s investments may be negatively impacted
by the activities of BlackRock or its Affiliates or their clients, and transactions for the Fund may be impaired or effected at
prices or terms that may be less favorable than would otherwise have been the case.
The results of a Fund’s investment activities
may differ significantly from the results achieved by BlackRock and its Affiliates for their proprietary accounts or other accounts
(including investment companies or collective investment vehicles) managed or advised by them. It is possible that one or more
Affiliate-managed accounts and such other accounts will achieve investment results that are substantially more or less favorable
than the results achieved by a Fund. Moreover, it is possible that a Fund will sustain losses during periods in which one or more
Affiliates or Affiliate-managed accounts achieve significant profits on their trading for proprietary or other accounts. The opposite
result is also possible. The investment activities of one or more Affiliates for their proprietary accounts and accounts under
their management may also limit the investment opportunities for a Fund in certain emerging and other markets in which limitations
are imposed upon the amount of investment, in the aggregate or in individual issuers, by affiliated foreign investors.
From time to time, a Fund’s activities may
also be restricted because of regulatory restrictions applicable to one or more Affiliates, and/or their internal policies designed
to comply with such restrictions. As a result, there may be periods, for example, when BlackRock, and/or one or more Affiliates,
will not initiate or recommend certain types of transactions in certain securities or instruments with respect to which BlackRock
and/or one or more Affiliates are performing services or when position limits have been reached.
In connection with its management of a Fund, BlackRock
may have access to certain fundamental analysis and proprietary technical models developed by one or more Affiliates. BlackRock
will not be under any obligation, however, to effect transactions on behalf of a Fund in accordance with such analysis and models.
In addition, neither BlackRock nor any of its Affiliates will have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for other accounts managed by them, for the
benefit of the management of a Fund and it is
not anticipated that BlackRock will have access to such information for the purpose of managing the Fund. The proprietary activities
or portfolio strategies of BlackRock and its Affiliates, or the activities or strategies used for accounts managed by them or other
customer accounts could conflict with the transactions and strategies employed by BlackRock in managing a Fund.
In addition, certain principals and certain employees
of BlackRock are also principals or employees of BlackRock or another Affiliate. As a result, the performance by these principals
and employees of their obligations to such other entities may be a consideration of which investors in a Fund should be aware.
BlackRock may enter into transactions and invest
in securities, instruments and currencies on behalf of a Fund in which customers of BlackRock or its Affiliates, or, to the extent
permitted by the Commission, BlackRock or another Affiliate, serves as the counterparty, principal or issuer. In such cases, such
party’s interests in the transaction will be adverse to the interests of the Fund, and such party may have no incentive to
assure that the Fund obtains the best possible prices or terms in connection with the transactions. In addition, the purchase,
holding and sale of such investments by a Fund may enhance the profitability of BlackRock or its Affiliates. One or more Affiliates
may also create, write or issue derivatives for their customers, the underlying securities, currencies or instruments of which
may be those in which a Fund invests or which may be based on the performance of the Fund. A Fund may, subject to applicable law,
purchase investments that are the subject of an underwriting or other distribution by one or more Affiliates and may also enter
into transactions with other clients of an Affiliate where such other clients have interests adverse to those of the Fund.
At times, these activities may cause departments
of BlackRock or its Affiliates to give advice to clients that may cause these clients to take actions adverse to the interests
of the Fund. To the extent affiliated transactions are permitted, a Fund will deal with BlackRock and its Affiliates on an arms-length
basis. BlackRock or its Affiliates may also have an ownership interest in certain trading or information systems used by a Fund.
A Fund’s use of such trading or information systems may enhance the profitability of BlackRock and its Affiliates.
One or more Affiliates may act as broker, dealer,
agent, lender or adviser or in other commercial capacities for a Fund. It is anticipated that the commissions, mark-ups, mark-downs,
financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees,
compensation or profits, rates, terms and conditions charged by an Affiliate will be in its view commercially reasonable, although
each Affiliate, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to
the Affiliate and such sales personnel.
Subject to applicable law, the Affiliates (and
their personnel and other distributors) will be entitled to retain fees and other amounts that they receive in connection with
their service to the Funds as broker, dealer, agent, lender, adviser or in other commercial capacities and no accounting to the
Funds or their shareholders will be required, and no fees or other compensation payable by the Funds or their shareholders will
be reduced by reason of receipt by an Affiliate of any such fees or other amounts.
When an Affiliate acts as broker, dealer, agent,
adviser or in other commercial capacities in relation to the Funds, the Affiliate may take commercial steps in its own interests,
which may have an adverse effect on the Funds. A Fund will be required to establish business relationships with its counterparties
based on the Fund’s own credit standing. Neither BlackRock nor any of the Affiliates will have any obligation to allow their
credit to be used in connection with a Fund’s establishment of its business relationships, nor is it expected that the Fund’s
counterparties will rely on the credit of BlackRock or any of the Affiliates in evaluating the Fund’s creditworthiness.
Purchases and sales of securities for a Fund may
be bunched or aggregated with orders for other BlackRock client accounts. BlackRock and its Affiliates, however, are not required
to bunch or aggregate orders if portfolio management decisions for different accounts are made separately, or if they determine
that bunching or aggregating is not practicable, required or with cases involving client direction.
Prevailing trading activity frequently may make
impossible the receipt of the same price or execution on the entire volume of securities purchased or sold. When this occurs, the
various prices may be averaged, and the Funds will be charged or credited with the average price. Thus, the effect of the aggregation
may operate on some occasions to the disadvantage of the Funds. In addition, under certain circumstances, the Funds will not be
charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.
BlackRock may select brokers (including, without
limitation, Affiliates) that furnish BlackRock, the Funds, other BlackRock client accounts or other Affiliates or personnel, directly
or through correspondent relationships, with research or other appropriate services which provide, in BlackRock’s view, appropriate
assistance to BlackRock in the investment decision-making process (including with respect to futures, fixed-price offerings and
over-the-counter transactions). Such research or other services may include, to the extent permitted by law, research reports on
companies, industries and securities; economic and financial data; financial publications; proxy analysis; trade industry seminars;
computer data bases; research-oriented software and other services and products.
Research or other services obtained in this manner
may be used in servicing any or all of the Funds and other BlackRock client accounts, including in connection with BlackRock client
accounts other than those that pay commissions to the broker relating to the research or other service arrangements. Such products
and services may disproportionately benefit other BlackRock client accounts relative to the Funds based on the amount of brokerage
commissions paid by the Funds and such other BlackRock client accounts. For example, research or other services that are paid for
through one client’s commissions may not be used in managing that client’s account. In addition, other BlackRock client
accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with
products and services that may be provided to the Funds and to such other BlackRock client accounts. To the extent that BlackRock
uses soft dollars, it will not have to pay for those products and services itself.
BlackRock may receive research that is bundled
with the trade execution, clearing, and/or settlement services provided by a particular broker-dealer. To the extent that BlackRock
receives research on this basis, many of the same conflicts related to traditional soft dollars may exist. For example, the research
effectively will be paid by client commissions that also will be used to pay for the execution, clearing, and settlement services
provided by the broker-dealer and will not be paid by BlackRock.
BlackRock may endeavor to execute trades through
brokers who, pursuant to such arrangements, provide research or other services in order to ensure the continued receipt of research
or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time to time choose
not to engage in the above described arrangements to varying degrees. BlackRock may also enter into commission sharing arrangements
under which BlackRock may execute transactions through a broker-dealer, including, where permitted, an Affiliate, and request that
the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to BlackRock.
To the extent that BlackRock engages in commission sharing arrangements, many of the same conflicts related to traditional soft
dollars may exist.
BlackRock may utilize certain electronic crossing
networks (“ECNs”) in executing client securities transactions for certain types of securities. These ECNs may charge
fees for their services, including access fees and transaction fees. The transaction fees, which are similar to commissions or
markups/markdowns, will generally be charged to clients and, like commissions and markups/markdowns, would generally be included
in the cost of the securities purchased. Access fees may be paid by BlackRock even though incurred in connection with executing
transactions on behalf of clients, including the Funds. In certain circumstances, ECNs may offer volume discounts that will reduce
the access fees typically paid by BlackRock. This would have the effect of reducing the access fees paid by BlackRock. BlackRock
will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock has adopted policies and procedures
designed to prevent conflicts of interest from influencing proxy voting decisions that it makes on behalf of advisory clients,
including the Funds, and to help ensure that such decisions are made in accordance with BlackRock’s fiduciary obligations
to its clients. Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of BlackRock
may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock and/or its
Affiliates, provided that BlackRock believes such voting decisions to be in accordance with its fiduciary obligations. For a more
detailed discussion of these policies and procedures, see “Proxy Voting Policies and Procedures.”
It is also possible that, from time to time, BlackRock
or its Affiliates may, although they are not required to, purchase and hold shares of a Fund. Increasing a Fund’s assets
may enhance investment flexibility and diversification and may contribute to economies of scale that tend to reduce the Fund’s
expense ratio. BlackRock and its Affiliates reserve the right to redeem at any time some or all of the shares of a Fund acquired
for their own accounts. A large redemption of shares of a Fund by BlackRock or its Affiliates could significantly reduce the asset
size of the Fund, which might have an adverse
effect on the Fund’s investment flexibility, portfolio diversification and expense ratio. BlackRock will consider the effect
of redemptions on a Fund and other shareholders in deciding whether to redeem its shares.
It is possible that a Fund may invest in securities
of companies with which an Affiliate has or is trying to develop investment banking relationships as well as securities of entities
in which BlackRock or its Affiliates has significant debt or equity investments or in which an Affiliate makes a market. A Fund
also may invest in securities of companies to which an Affiliate provides or may someday provide research coverage. Such investments
could cause conflicts between the interests of a Fund and the interests of other clients of BlackRock or its Affiliates. In making
investment decisions for a Fund, BlackRock is not permitted to obtain or use material non-public information acquired by any division,
department or Affiliate of BlackRock in the course of these activities. In addition, from time to time, the activities of an Affiliate
may limit a Fund’s flexibility in purchases and sales of securities. When an Affiliate is engaged in an underwriting or other
distribution of securities of an entity, BlackRock may be prohibited from purchasing or recommending the purchase of certain securities
of that entity for a Fund.
BlackRock and its Affiliates, their personnel
and other financial service providers have interests in promoting sales of the Funds. With respect to BlackRock and its Affiliates
and their personnel, the remuneration and profitability relating to services to and sales of the Funds or other products may be
greater than remuneration and profitability relating to services to and sales of certain funds or other products that might be
provided or offered. BlackRock and its Affiliates and their sales personnel may directly or indirectly receive a portion of the
fees and commissions charged to the Funds or their shareholders. BlackRock and its advisory or other personnel may also benefit
from increased amounts of assets under management. Fees and commissions may also be higher than for other products or services,
and the remuneration and profitability to BlackRock or its Affiliates and such personnel resulting from transactions on behalf
of or management of the Funds may be greater than the remuneration and profitability resulting from other funds or products.
BlackRock and its Affiliates and their personnel
may receive greater compensation or greater profit in connection with an account for which BlackRock serves as an adviser than
with an account advised by an unaffiliated investment adviser. Differentials in compensation may be related to the fact that BlackRock
may pay a portion of its advisory fee to its Affiliate, or relate to compensation arrangements, including for portfolio management,
brokerage transactions or account servicing. Any differential in compensation may create a financial incentive on the part of BlackRock
or its Affiliates and their personnel to recommend BlackRock over unaffiliated investment advisers or to effect transactions differently
in one account over another.
BlackRock and its Affiliates may provide valuation
assistance to certain clients with respect to certain securities or other investments and the valuation recommendations made for
their clients’ accounts may differ from the valuations for the same securities or investments assigned by a Fund’s
pricing vendors, especially if such valuations are based on broker-dealer quotes or other data sources unavailable to the Fund’s
pricing vendors. While BlackRock will generally communicate its valuation information or determinations to a Fund’s pricing
vendors and/or fund accountants, there may be instances where the Fund’s pricing vendors or fund accountants assign a different
valuation to a security or other investment than the valuation for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in “Pricing
of Shares – Determination of Net Asset Value” in this Statement of Additional Information, when market quotations are
not readily available or are believed by BlackRock to be unreliable, a Fund’s investments may be valued at fair value by
BlackRock, pursuant to procedures adopted by the Funds’ Board of Directors. When determining an asset’s “fair
value,” BlackRock seeks to determine the price that a Fund might reasonably expect to receive from the current sale of that
asset in an arm’s-length transaction. The price generally may not be determined based on what a Fund might reasonably expect
to receive for selling an asset at a later time or if it holds the asset to maturity. While fair value determinations will be based
upon all available factors that BlackRock deems relevant at the time of the determination, and may be based on analytical values
determined by BlackRock using proprietary or third party valuation models, fair value represents only a good faith approximation
of the value of a security. The fair value of one or more securities may not, in retrospect, be the price at which those assets
could have been sold during the period in which the particular fair values were used in determining a Fund’s net asset value.
As a result, a Fund’s sale or redemption of its shares at net asset value, at a time when a holding or holdings are valued
by BlackRock (pursuant to Board-adopted procedures) at fair value, may have the effect of diluting or increasing the economic interest
of existing shareholders.
To the extent permitted by applicable law, a Fund
may invest all or some of its short term cash investments in any money market fund or similarly-managed private fund advised or
managed by BlackRock. In connection with any such investments, a Fund, to the extent permitted by the Investment Company Act, may
pay its share of expenses of a money market fund in which it invests, which may result in a Fund bearing some additional expenses.
BlackRock and its Affiliates and their directors,
officers and employees, may buy and sell securities or other investments for their own accounts, and may have conflicts of interest
with respect to investments made on behalf of a Fund. As a result of differing trading and investment strategies or constraints,
positions may be taken by directors, officers, employees and Affiliates of BlackRock that are the same, different from or made
at different times than positions taken for the Fund. To lessen the possibility that a Fund will be adversely affected by this
personal trading, the Fund, BRIL and BlackRock each have adopted a Code of Ethics in compliance with Section 17(j) of the Investment
Company Act that restricts securities trading in the personal accounts of investment professionals and others who normally come
into possession of information regarding the Fund’s portfolio transactions. Each Code of Ethics can be reviewed and copied
at the Commission’s Public Reference Room in Washington, D.C. Information about obtaining documents on the Commission’s
website may be obtained by calling the Commission at (800) SEC-0330. Each Code of Ethics is also available on the EDGAR Database
on the Commission’s Internet site at http://www.sec.gov, and copies may be obtained, after paying a duplicating fee, by e-mail
at publicinfo@sec.gov or by writing the Commission’s Public Reference Section, Washington, DC 20549-0102.
BlackRock and its Affiliates will not purchase
securities or other property from, or sell securities or other property to, a Fund, except that the Fund may in accordance with
rules adopted under the Investment Company Act engage in transactions with accounts that are affiliated with the Fund as a result
of common officers, directors, or investment advisers or pursuant to exemptive orders granted to the Funds and/or BlackRock by
the Commission. These transactions would be affected in circumstances in which BlackRock determined that it would be appropriate
for the Fund to purchase and another client of BlackRock to sell, or the Fund to sell and another client of BlackRock to purchase,
the same security or instrument on the same day. From time to time, the activities of a Fund may be restricted because of regulatory
requirements applicable to BlackRock or its Affiliates and/or BlackRock’s internal policies designed to comply with, limit
the applicability of, or otherwise relate to such requirements. A client not advised by BlackRock would not be subject to some
of those considerations. There may be periods when BlackRock may not initiate or recommend certain types of transactions, or may
otherwise restrict or limit their advice in certain securities or instruments issued by or related to companies for which an Affiliate
is performing investment banking, market making, advisory or other services or has proprietary positions. For example, when an
Affiliate is engaged in an underwriting or other distribution of securities of, or advisory services for, a company, the Funds
may be prohibited from or limited in purchasing or selling securities of that company. In addition, when BlackRock is engaged to
provide advisory or risk management services for a company, BlackRock may be prohibited from or limited in purchasing or selling
securities of that company on behalf of a Fund, particularly where such services result in BlackRock obtaining material non-public
information about the company. Similar situations could arise if personnel of BlackRock or its Affiliates serve as directors of
companies the securities of which the Funds wish to purchase or sell. However, if permitted by applicable law, and where consistent
with BlackRock’s policies and procedures (including the necessary implementation of appropriate information barriers), the
Funds may purchase securities or instruments that are issued by such companies, are the subject of an underwriting, distribution,
or advisory assignment by an Affiliate or are the subject of an advisory or risk management assignment by BlackRock, or where personnel
of BlackRock or its Affiliates are directors or officers of the issuer.
In certain circumstances where the Funds invest
in securities issued by companies that operate in certain regulated industries, in certain emerging or international markets, or
are subject to corporate or regulatory ownership definitions, there may be limits on the aggregate amount invested by Affiliates
(including BlackRock) for their proprietary accounts and for client accounts (including the Funds) that may not be exceeded without
the grant of a license or other regulatory or corporate consent, or, if exceeded, may cause BlackRock, the Funds or other client
accounts to suffer disadvantages or business restrictions. As a result, BlackRock on behalf of its clients (including the Funds)
may limit purchases, sell existing investments, or otherwise restrict or limit the exercise of rights (including voting rights)
when BlackRock, in its sole discretion, deems it appropriate in light of potential regulatory or other restrictions on ownership
or other consequences resulting from reaching investment thresholds.
In those circumstances where ownership thresholds
or limitations must be observed, BlackRock seeks to allocate limited investment opportunities equitably among clients (including
the Funds), taking into consideration benchmark
weight and investment strategy. When ownership
in certain securities nears an applicable threshold, BlackRock may limit purchases in such securities to the issuer's weighting
in the applicable benchmark used by BlackRock to manage the Fund. If client (including Fund) holdings of an issuer exceed an applicable
threshold and BlackRock is unable to obtain relief to enable the continued holding of such investments, it may be necessary to
sell down these positions to meet the applicable limitations. In these cases, benchmark overweight positions will be sold prior
to benchmark positions being reduced to meet applicable limitations.
In addition to the foregoing, other ownership
thresholds may trigger reporting requirements to governmental and regulatory authorities, and such reports may entail the disclosure
of the identity of a client or BlackRock’s intended strategy with respect to such security or asset.
BlackRock and its Affiliates may maintain securities
indices as part of their product offerings. Index based funds seek to track the performance of securities indices and may use the
name of the index in the fund name. Index providers, including BlackRock and its Affiliates may be paid licensing fees for use
of their index or index name. BlackRock and its Affiliates will not be obligated to license their indices to BlackRock, and BlackRock
cannot be assured that the terms of any index licensing agreement with BlackRock and its Affiliates will be as favorable as those
terms offered to other index licensees.
BlackRock and its Affiliates may serve as Authorized
Participants in the creation and redemption of exchange traded funds, including funds advised by affiliates of BlackRock. BlackRock
and its Affiliates may therefore be deemed to be participants in a distribution of such exchange traded funds, which could render
them statutory underwriters.
The custody arrangement described in “Management
and Other Service Arrangements” may lead to potential conflicts of interest with BlackRock where BlackRock has agreed to
waive fees and/or reimburse ordinary operating expenses in order to cap expenses of the Funds. This is because the custody arrangements
with the Funds’ custodian may have the effect of reducing custody fees when the Funds leave cash balances uninvested. When
a Fund’s actual operating expense ratio exceeds a stated cap, a reduction in custody fees reduces the amount of waivers and/or
reimbursements BlackRock would be required to make to the Fund. This could be viewed as having the potential to provide BlackRock
an incentive to keep high positive cash balances for Funds with expense caps in order to offset fund custody fees that BlackRock
might otherwise reimburse. However, BlackRock’s portfolio managers do not intentionally keep uninvested balances high, but
rather make investment decisions that they anticipate will be beneficial to fund performance.
Present and future activities of BlackRock and
its Affiliates, including BlackRock Advisors, LLC, in addition to those described in this section, may give rise to additional
conflicts of interest.
P
URCHASE
OF
S
HARES
Most BlackRock-advised open-end funds offer multiple
classes of shares under a plan adopted under Rule 18f-3 under the Investment Company Act. Investor A Shares are sold to investors
choosing the initial sales charge alternative and Investor B and Investor C Shares are sold to investors choosing the deferred
sales charge alternative. Effective July 1, 2009, Investor B Shares of each Fund are no longer available for purchase except through
exchanges, dividend reinvestments, and for purchase by certain employer-sponsored retirement plans. Shareholders with investments
in Investor B Shares as of July 1, 2009 may continue to hold such shares until they automatically convert to Investor A Shares
under the existing conversion schedule. All other features of Investor B Shares, including the Rule 12b-1 distribution and service
fees, contingent deferred sales charge schedules and conversion features, remain unchanged and continue in effect. Institutional
Shares and Institutional Daily Shares are sold to certain eligible investors without a sales charge. Certain Funds offer Class R
Shares, which are available only to certain employer-sponsored retirement plans and are sold without a sales charge. In addition,
certain Funds offer Service Shares, BlackRock Shares and/or Class K Shares that are available only to certain eligible investors.
Please see the appropriate Prospectus for your Fund to determine which classes are offered by your Fund and under what circumstances.
Each class has different exchange privileges. See “Shareholder Services — Exchange Privilege.”
The applicable offering price for purchase orders
is based on the net asset value of a Fund next determined after receipt of the purchase order by a dealer or other financial intermediary
(“Selling Dealer”) that has been authorized by the Distributor by contract to accept such orders. As to purchase orders
received by Selling Dealers prior to the
close of business on the New York Stock Exchange
(“NYSE”) (generally, the NYSE closes at 4:00 p.m. Eastern time), on the day the order is placed, including orders received
after the close of business on the previous day, the applicable offering price is based on the net asset value determined as of
the close of business on the NYSE on that day. If the purchase orders are not received by the Selling Dealer before the close of
business on the NYSE, such orders are deemed received on the next business day. It is the responsibility of brokers to transmit
purchase orders and payment on a timely basis. Generally, if payment is not received within the period described in the prospectuses,
the order will be canceled, notice thereof will be given, and the broker and its customers will be responsible for any loss to
the Fund or its shareholders. Orders of less than $500 may be mailed by a broker to the Transfer Agent.
The minimum investment for the initial purchase
of shares is set forth in the prospectus for each Fund. The minimum initial investment for employees of a Fund, a Fund’s
Manager, Sub-Advisers or BRIL or employees of their affiliates is $100, unless payment is made through a payroll deduction program
in which case the minimum investment is $25.
Each Fund has lower investment minimums for other
categories of shareholders eligible to purchase Institutional and Institutional Daily Shares, including selected fee-based programs.
Each Fund may permit a lower initial investment for certain investors if their purchase, combined with purchases by other investors
received together by the Fund, meets the minimum investment requirement. Each Fund may reject any purchase order, modify or waive
the minimum initial or subsequent investment requirements and suspend and resume the sale of any share class of any Fund at any
time.
Under certain circumstances, each Fund may permit
certain firms to convert shares of a Fund from one class of shares to another class of shares of the same Fund. Shareholders should
consult with their own tax advisors regarding any tax consequences relating to such conversions.
Each Fund or the Distributor may suspend the continuous
offering of the Fund’s shares of any class at any time in response to conditions in the securities markets or otherwise and
may resume offering the shares from time to time. Any order may be rejected by a Fund or the Distributor. Neither the Distributor,
the securities dealers nor other financial intermediaries are permitted to withhold placing orders to benefit themselves by a price
change.
The term “purchase,” as used in the
Prospectus and this Statement of Additional Information, refers to (i) a single purchase by an individual, (ii) concurrent
purchases by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his, her
or their own account, and (iii) single purchases by a trustee or other fiduciary purchasing shares for a single trust estate
or single fiduciary account although more than one beneficiary may be involved. The term “purchase” also includes purchases
by any “company,” as that term is defined in the Investment Company Act, but does not include purchases by (i) any
company that has not been in existence for at least six months, (ii) a company that has no purpose other than the purchase
of shares of a Fund or shares of other registered investment companies at a discount, or (iii) any group of individuals whose
sole organizational nexus is that its participants are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
In-Kind Purchases.
Payment for shares
of a Fund may, at the discretion of BlackRock, be made in the form of securities that are permissible investments for the Fund
and that meet the investment objective, policies and limitations of the Fund as described herein. In connection with an in-kind
securities payment, the Fund may require, among other things, that the securities: (i) be valued on the day of purchase in accordance
with the pricing methods used by the Fund; (ii) be accompanied by satisfactory assurance that the Fund will have good and marketable
title to such securities; (iii) not be subject to any restrictions upon resale by the Fund; (iv) be in proper form for transfer
to the Fund; and (v) be accompanied by adequate information concerning the basis and other tax matters relating to the securities.
All dividends, interest, subscription or other rights pertaining to such securities shall become the property of the Fund engaged
in the in-kind purchase transaction and must be delivered to the Fund by the investor upon receipt from the issuer. Shares purchased
in exchange for securities generally cannot be redeemed until the transfer has settled.
Institutional Shares and Institutional Daily
Shares
Institutional and Institutional Daily Shares may
be purchased at net asset value without a sales charge. Only certain investors are eligible to purchase Institutional Shares. Investors
who are eligible to purchase Institutional Shares
should purchase Institutional Shares
because they are not subject to any sales charge and have lower ongoing expenses than Investor A, Investor A1, Investor B, Investor
B1, Investor B3, Investor C, Investor C1, Investor C2, Investor C3, Class R or Service Shares. A Fund may in its discretion waive
or modify any minimum investment amount, may reject any order for any class of shares and may suspend and resume the sale of shares
of any Fund at any time.
Eligible Institutional Share Investors.
Institutional
Shares of the Funds may be purchased by customers of broker-dealers and agents that have established a servicing relationship with
the Fund on behalf of their customers. These broker-dealers and agents may impose additional or different conditions on the purchase
or redemption of Fund shares by their customers and may charge their customers transaction, account or other fees on the purchase
and redemption of Fund shares. Each broker-dealer or agent is responsible for transmitting to its customers a schedule of any such
fees and information regarding any additional or different conditions regarding purchases and redemptions. Shareholders who are
customers of such broker-dealers or agents should consult them for information regarding these fees and conditions.
Payment for Institutional Shares must normally
be made in Federal funds or other funds immediately available by 4 p.m. (Eastern time) on the first business day following receipt
of the order. Payment may also, in the discretion of the Fund, be made in the form of securities that are permissible investments
for the Fund. If payment for a purchase order is not received by the prescribed time, an investor may be liable for any resulting
losses or expenses incurred by the Fund.
Payment for Institutional Daily Shares must normally
by made in Federal funds or other funds immediately available by the close of the Federal funds wire (normally 6:00 p.m. Eastern
time) on the same business day as the receipt of the order. Payment may also, in the discretion of the Fund, be made in the form
of securities that are permissible investments for the Fund. If payment for a purchase order is not received by the prescribed
time, the order will generally be canceled and the investor may be liable for any resulting losses or expenses incurred by the
Fund.
Investors who currently own Institutional
Shares or Institutional Daily Shares in a shareholder account are entitled to purchase additional Institutional Shares or Institutional
Daily Shares of a Fund in that account. In addition, the following investors may purchase Institutional Shares or Institutional
Daily Shares: employees, officers and directors/trustees of BlackRock, Inc., BlackRock Funds, Bank of America Corporation (“BofA
Corp.”), The PNC Financial Services Group Inc., Barclays PLC or their respective affiliates and any trust, pension, profit-sharing
or other benefit plan for such persons; institutional and individual retail investors with a minimum investment of $2 million
who purchase through certain broker-dealers or directly from the Fund; certain employer-sponsored retirement plans (which, for
this purpose, do not include SEP IRAs, SIMPLE IRAs or SARSEPs); investors in selected fee based programs; clients of registered
investment advisers who have $250,000 invested in the Funds; clients of the trust departments of PNC Bank and Bank of America,
N.A. and their affiliates for whom they (i) act in a fiduciary capacity (excluding participant directed employee benefit
plans); (ii) otherwise have investment discretion; or (iii) act as custodian for at least $2 million in assets; unaffiliated
banks, thrifts or trust companies that have agreements with the Distributor; certain state sponsored 529 college savings plans;
and holders of certain BofA Corp. sponsored unit investment trusts (UITs) who reinvest dividends received from such UITs in shares
of a Fund.
Purchase Privileges of Certain
Persons.
Employees, officers, directors/trustees of BlackRock, Inc., BlackRock Funds, BofA Corp., The PNC Financial
Services Group Inc., or their respective affiliates; and any trust, pension, profit-sharing or other benefit plan for such persons
may purchase Institutional or Institutional Daily Shares at lower investment minimums than stated in each Fund’s prospectus.
In addition, employees, officers, directors/trustees previously associated with PNC Global Investment Servicing (U.S.) Inc. in
its capacity as the Funds' former Transfer Agent and/or accounting agent, and who, prior to July 1, 2010, acquired Investor A
Shares in a Fund without paying a sales charge based on a waiver for such persons previously in effect, may continue to buy Investor
A Shares in such Fund without paying a sales charge. A Fund realizes economies of scale and reduction of sales-related expenses
by virtue of the familiarity of these persons with the Fund. Employees, directors, and board members of other funds wishing to
purchase shares of a Fund must satisfy the Fund’s suitability standards.
Initial Sales Charge Alternative — Investor
A Shares
Investors who prefer an initial sales charge alternative
may elect to purchase Investor A Shares. Investor A1 Shares generally are not continuously offered but are offered (i) for purchase
by certain employer-sponsored retirement plans and (ii) to certain investors who currently hold Investor A1 Shares for dividend
and capital gain reinvestment only. For ease of reference, Investor A and Investor A1 Shares are sometimes referred to herein as
“front-end load shares.”
Investors qualifying for significantly
reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed in connection with investments in Investor B,
Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares (sometimes referred to herein as “CDSC
shares”). Investors who do not qualify for reduced initial sales charges and who expect to maintain their investment for
an extended period of time also may elect to purchase Investor A Shares, because over time the accumulated ongoing service and
distribution fees on CDSC shares may exceed the front-end load shares’ initial sales charge and service fee. Although some
investors who previously purchased Institutional Shares may no longer be eligible to purchase Institutional Shares of other Funds,
those previously purchased Institutional Shares, together with all BlackRock front-end load and CDSC share holdings, will count
toward a right of accumulation that may qualify the investor for a reduced initial sales charge on new initial sales charge purchases.
In addition, the ongoing CDSC shares service and distribution fees will cause CDSC shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares. The ongoing front-end load shares’ service
fees will cause Investor A, Investor A1 and Service Shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Institutional Shares.
See “Information on Sales Charges and Distribution
Related Expenses — Investor A Sales Charge Information” in Part I of each Fund’s Statement of Additional Information
for information about amounts paid to the Distributor in connection with Investor A and Investor A1 Shares for the periods indicated.
The Distributor may reallow discounts to selected
securities dealers and other financial intermediaries and retain the balance over such discounts. At times a Distributor may reallow
the entire sales charge to such dealers. Since securities dealers and other financial intermediaries selling front-end load shares
of a Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities
Act.
Reduced Initial Sales Charges
Certain investors may be eligible for a reduction
in or waiver of a sales load due to the nature of the investors and/or the reduced sales efforts necessary to obtain their investments.
Reinvested Dividends.
No sales charges
are imposed upon shares issued as a result of the automatic reinvestment of dividends.
Rights of Accumulation.
Investors have a “right of accumulation” under which the current value of an investor’s existing Investor A,
Investor A1, Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Institutional Shares
in most BlackRock Funds and the investment in the BlackRock College Advantage 529 Program by the investor or by or on behalf of
the investor’s spouse and minor children may be combined with the amount of the current purchase in determining whether
an investor qualifies for a breakpoint and a reduced front-end sales charge. Financial intermediaries may value current holdings
of their customers differently for purposes of determining whether an investor qualifies for a breakpoint and a reduced front-end
sales charge, although customers of the same financial intermediary will be treated similarly. In order to use this right, the
investor must alert BlackRock to the existence of any previously purchased shares.
Letter of Intent.
An investor may qualify
for a reduced front-end sales charge immediately by signing a “Letter of Intent” stating the investor’s intention
to buy a specified amount of Investor A, Investor B, Investor C or Institutional Shares in one or more BlackRock Funds within the
next 13 months that would, if bought all at once, qualify the investor for a reduced sales charge. The initial investment must
meet the minimum initial purchase requirement. The 13-month Letter of Intent period commences on the day that the Letter of Intent
is received by the Fund, and the investor must tell the Fund that later purchases are subject to the Letter of Intent. Purchases
submitted prior to the date the Letter of Intent is received by the Fund are not counted toward the sales charge reduction. During
the term of the Letter of Intent, the Fund will hold Investor A Shares representing up to 5% of the indicated amount in an escrow
account for payment of a higher sales load if the full amount indicated in the Letter of Intent is not purchased. If the full amount
indicated is not purchased within the 13-month period, and the investor does not
pay the higher sales load within 20 days, the
Fund will redeem enough of the Investor A Shares held in escrow to pay the difference.
Purchase Privileges of Certain Persons.
BlackRock may pay placement fees to
dealers on purchases of Investor A Shares of all Funds, which may depend on the policies, procedures and trading platforms of
your financial intermediary.
Except as noted below these placement fees may
be up to the following amounts:
|
$1 million but less than $3 million
|
1.00%
|
|
$3 million but less than $15 million
|
0.50%
|
|
$15 million and above
|
0.25%
|
With respect to BlackRock Balanced Capital
Fund, BlackRock U.S. Mortgage Portfolio and BlackRock Managed Volatility Portfolio the placement fees may be up to the following
amounts:
|
$1 million but less than $3 million
|
0.75%
|
|
$3 million but less than $15 million
|
0.50%
|
|
$15 million and above
|
0.25%
|
With respect to Franklin Templeton Total
Return FDP Fund the placement fees may be up to the following amounts:
|
$1 million but less than $3 million
|
0.50%
|
|
$3 million but less than $15 million
|
0.25%
|
|
$15 million and above
|
0.15%
|
For the tables above, the placement
fees indicated will apply up to the indicated breakpoint (so that, for example, a sale of $4 million worth of Franklin Templeton
Total Return FDP Fund Investor A Shares will result in a placement fee of up to 0.50% on the first $3 million and 0.25% on the
final $1 million).
Other
. The following persons may
also buy Investor A Shares without paying a sales charge: (a) certain employer-sponsored retirement plans (for purposes of this
waiver, employer-sponsored retirement plans do not include SEP IRAs, SIMPLE IRAs or SARSEPs); (b) rollovers of current investments
through certain employer-sponsored retirement plans provided the shares are transferred to the same BlackRock Fund as either a
direct rollover, or subsequent to distribution, the rolled-over proceeds are contributed to a BlackRock IRA through an account
directly with the Fund; or purchases by IRA programs that are sponsored by financial intermediary firms provided the financial
intermediary firm has entered into a Class A Net Asset Value agreement with respect to such program with the Distributor; (c) insurance
company separate accounts; (d) registered investment advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Fund; (e) persons participating in a fee-based program (such as
a wrap account) under which they pay advisory fees to a broker-dealer or other financial institution; (f) financial intermediaries
who have entered into an agreement with the Distributor and have been approved by the Distributor to offer Fund shares to self-directed
investment brokerage accounts that may or may not charge a transaction fee; (g) state sponsored 529 college savings plans; and
(h) persons involuntarily liquidated from a Fund, who within 60 days of liquidation buy new shares of another BlackRock Fund (but
only up to the amount that was liquidated). The following persons associated with the Funds, the Fund’s Manager, Sub-Advisers,
Transfer Agent, Distributor, fund accounting agents, Barclays PLC and their affiliates may buy Investor A Shares of each of the
Funds without paying a sales charge to the extent permitted by these firms including: (a) officers, directors and partners; (b)
employees and retirees; (c) employees of firms who have entered into selling agreements to distribute shares of BlackRock-advised
funds; (d) immediate family members of such persons (“immediate family members” shall be defined as the investor, the
investor’s spouse or domestic partner, children, parents and siblings); and (e) any trust, pension, profit-sharing or other
benefit plan for any of the persons set forth in (a) through (d). Investors who qualify for any of these exemptions from the sales
charge should purchase Investor A Shares. The availability of Investor A Shares sales charge waivers may depend upon the policies,
procedures and trading platforms of your financial intermediary; consult your financial adviser.
If you invest $1,000,000 ($250,000 for BlackRock
Short-Term Municipal Fund of BlackRock Municipal Bond Fund, Inc., $500,000 for BlackRock Low Duration Bond Portfolio, BlackRock
Floating Rate Income Portfolio,
BlackRock Secured Credit Portfolio
and BlackRock Strategic Income Opportunities Portfolio of BlackRock Funds II) or more in Investor A or Investor A1 Shares, you
may not pay an initial sales charge. However, if you redeem your Investor A or Investor A1 Shares within eighteen months after
purchase, you may be charged a deferred sales charge. The deferred sales charge on Investor A Shares is not charged in connection
with: (a) redemptions of Investor A Shares purchased through certain employer-sponsored retirement plans and rollovers of current
investments in a Fund through such plans; (b) exchanges described in “Exchange Privilege” below; (c) redemptions made
in connection with minimum required distributions due to the shareholder reaching age 70
1
/2 from IRA and 403(b)(7)
accounts; (d) certain post-retirement withdrawals from an IRA or other retirement plan if you are over 59
1
/2 years
old and you purchased your shares prior to October 2, 2006; (e) redemptions made with respect to certain retirement plans sponsored
by a Fund, BlackRock or its affiliates; (f) redemptions (i) within one year of a shareholder’s death or, if later, the receipt
of a certified probate settlement (including in connection with the distribution of account assets to a beneficiary of the decedent)
or (ii) in connection with a shareholder’s disability (as defined in the Code) subsequent to the purchase of Investor A
Shares; (g) involuntary redemptions of Investor A Shares in accounts with low balances; (h) certain redemptions made pursuant
to the Systematic Withdrawal Plan (described below); (i) redemptions related to the payment of BNY Mellon Investment Servicing
Trust Company custodial IRA fees; and (j) redemptions when a shareholder can demonstrate hardship, in the absolute discretion
of a Fund.
With respect to certain employer-sponsored
retirement plans, if a dealer waives its right to receive a placement fee, the Fund may, at its own discretion, waive the CDSC
(as defined below) related to purchases of $1,000,000 ($250,000 for BlackRock Short-Term Municipal Fund of BlackRock Municipal
Bond Fund, Inc., and $500,000 for BlackRock Low Duration Bond Portfolio, BlackRock Floating Rate Income Portfolio, BlackRock Secured
Credit Portfolio and BlackRock Strategic Income Opportunities Portfolio of BlackRock Funds II) or more of Investor A Shares. This
may depend upon the policies, procedures and trading platforms of your financial intermediary; consult your financial adviser.
Investor A Shares are also available at net asset
value to investors that, for regulatory reasons, are required to transfer investment positions from a foreign registered investment
company advised by BlackRock or its affiliates to a U.S. registered BlackRock-advised fund.
Acquisition of Certain Investment Companies.
Investor A Shares may be offered at net asset value in connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company.
Purchases Through Certain Financial Intermediaries.
Reduced sales charges may be applicable for purchases of Investor A or Investor A1 Shares of a Fund through certain financial
advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Manager
from time to time.
Deferred Sales Charge Alternative — Investor
B and Investor C Shares
Investor B, Investor B1 and Investor
B3 Shares generally are not continuously offered but are offered by exchange (Investor B Shares only) and also to certain investors
who currently hold Investor B, Investor B1 or Investor B3 Shares for dividend and capital gain reinvestment. In addition, certain
employer-sponsored retirement plans that currently hold Investor B, Investor B1 or Investor B3 Shares may purchase additional
Investor B, Investor B1 or Investor B3 Shares or effect exchanges between Funds in those classes.
Investors choosing the deferred sales charge alternative
should consider Investor C Shares if they are uncertain as to the length of time they intend to hold their assets in a Fund. If
you select Investor C Shares, you do not pay an initial sales charge at the time of purchase. A Fund will not accept a purchase
order of $500,000 or more for Investor C Shares.
If you select Investor C, Investor C1, Investor
C2 or Investor C3 Shares, you do not pay an initial sales charge at the time of purchase. Investor C1, Investor C2 and Investor
C3 Shares generally are not continuously offered but are offered (i) for purchase by certain employer-sponsored retirement plans
and (ii) to certain investors who currently hold Investor C1, Investor C2 or Investor C3 Shares for dividend and capital gain reinvestment.
The deferred sales charge alternatives
may be particularly appealing to investors who do not qualify for the reduction in initial sales charges. CDSC shares are subject
to ongoing service fees and distribution fees; however, these fees potentially may be offset to the extent any return is realized
on the additional funds initially invested in CDSC shares. In addition, certain Investor B, Investor B1 and Investor B3 Shares
will be converted into Investor A or Investor A1 Shares, as set forth in each Fund’s prospectus, of a Fund after a conversion
period of approximately eight years, and, thereafter, investors will be subject to lower ongoing fees.
BlackRock compensates financial advisers and other
financial intermediaries for selling CDSC shares at the time of purchase from its own funds. Proceeds from the CDSC (as defined
below) and the distribution fee are paid to the Distributor and are used by the Distributor to defray the expenses of securities
dealers or other financial intermediaries related to providing distribution-related services to each Fund in connection with the
sale of the CDSC shares. The combination of the CDSC and the ongoing distribution fee facilitates the ability of each Fund to sell
the CDSC shares without a sales charge being deducted at the time of purchase. See “Distribution Plans” below. Imposition
of the CDSC and the distribution fee on CDSC shares is limited by the NASD asset-based sales charge rule. See “Limitations
on the Payment of Deferred Sales Charges” below.
Dealers will generally receive commissions
equal to 4.00% of Investor B Shares sold by them plus ongoing fees under the Fund’s Distribution and Service Plan. Dealers
may not receive a commission in connection with sales of Investor B, Investor B1 or Investor B3 Shares to certain employer-sponsored
retirement plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees under the Distribution and Service Plan.
These commissions and payments may be different than the reallowances, placement fees and commissions paid to dealers in connection
with sales of Investor A, Investor A1, Investor C, Investor C1, Investor C2 and Investor C3 Shares.
Dealers will generally immediately
receive commissions equal to 1.00% of the Investor C Shares sold by them plus ongoing fees under the Fund’s Distribution
and Service Plan. Dealers may not receive a commission in connection with sales of Investor C, Investor C1, Investor C2 or Investor
C3 Shares to certain employer-sponsored retirement plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees
under the Amended and Restated Distribution and Service Plan. These commissions and payments may be different than the reallowances,
placement fees and commissions paid to dealers in connection with sales of Investor A, Investor A1, Investor B, Investor B1 and
Investor B3 Shares. These may depend upon the policies, procedures and trading platforms of your financial intermediary; consult
your financial adviser.
Contingent Deferred Sales Charges
— Investor B, Investor B1 and Investor B3 Shares.
If you redeem Investor B, Investor B1 or Investor B3 Shares
within six years of purchase, you may be charged a contingent deferred sales charge (“CDSC”) at the rates indicated
in the Fund’s Prospectus and below. The CDSC will be calculated in a manner that results in the lowest applicable rate being
charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition,
no CDSC will be assessed on shares acquired through reinvestment of dividends. The order of redemption will be first of shares
held for over six years or three years, as applicable, in the case of Investor B Shares, next of shares acquired pursuant to reinvestment
of dividends, and finally of shares in the order of those held longest. The same order of redemption will apply if you transfer
shares from your account to another account. If you exchange your Investor B or Investor B1 Shares for Investor B Shares of another
fund, the CDSC schedule that applies to the shares that you originally purchased will continue to apply to the shares you acquire
in the exchange.
The following table sets forth the
CDSC schedule that applies to the Investor B Shares:
Years Since Purchase
Payment Made
|
CDSC as a Percentage
of Dollar Amount
Subject to Charge*
|
|
0 — 1
|
4.50%
|
|
1 — 2
|
4.00%
|
|
2 — 3
|
3.50%
|
|
3 — 4
|
3.00%
|
|
4 — 5
|
2.00%
|
|
5 — 6
|
1.00%
|
|
6 and thereafter
|
None
|
The following table sets forth the
CDSC schedule that applies to the Investor B1 Shares and Investor B3 Shares:
Years Since Purchase
Payment Made
|
CDSC as a Percentage
of Dollar Amount
Subject to Charge*
|
|
0 — 1
|
4.00%
|
|
1 — 2
|
4.00%
|
|
2 — 3
|
3.00%
|
|
3 — 4
|
3.00%
|
|
4 — 5
|
2.00%
|
|
5 — 6
|
1.00%
|
|
6 and thereafter
|
None
|
To provide an example, assume an
investor purchased 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value
per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such
time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to a CDSC because
they were issued through dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 3.00% (the applicable rate in the third year after purchase).
|
|
*
|
The percentage charge will apply to the lesser of the original cost of the shares being redeemed or
the proceeds of your redemption. Shares acquired through reinvestment of dividends are not subject to a deferred sales charge.
Not all BlackRock funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund,
the original charge will apply.
|
Conversion of Investor B Shares, Investor
B1 and Investor B3 Shares to Investor A Shares or A1 Shares.
Approximately eight years after purchase (the “Conversion
Period”), Investor B, Investor B1 and Investor B3 Shares of each Fund will convert automatically into Investor A or Investor
A1 Shares, as set forth in each Fund’s prospectus, of that Fund (the “Conversion”). The Conversion will occur
at least once each month (on the “Conversion Date”) on the basis of the relative net asset value of the shares of the
two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. The Conversion will not be deemed
a purchase or sale of the shares for Federal income tax purposes.
Shares acquired through reinvestment
of dividends on Investor B, Investor B1 or Investor B3 Shares will also convert automatically to Investor A or Investor A1 Shares,
as set forth in each Fund’s prospectus. The Conversion Date for dividend reinvestment shares will be calculated taking into
account the length of time the shares underlying the dividend reinvestment shares were outstanding.
In general, Investor B Shares of
equity funds will convert approximately eight years after initial purchase and Investor B, Investor B1 or Investor B3 Shares of
taxable and tax-exempt fixed income Funds will convert approximately ten years after initial purchase. A seven year Conversion
Period will apply to certain shares of certain Funds issued in connection with the acquisition of another fund. If you exchange
Investor B, Investor B1 or Investor B3 Shares with an eight-year Conversion Period for Investor B Shares with a ten-year Conversion
Period, or vice versa, the Conversion Period that applies to the shares you acquire in the exchange will apply and the holding
period for the shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period also may
be modified for investors that participate in certain fee-based programs. See “Shareholder Services — Fee-Based Programs.”
If you own shares of a Fund that,
in the past, issued stock certificates and you continue to hold such stock certificates, you must deliver any certificates for
Investor B Shares of the Fund to be converted to the Transfer Agent at least one week prior to the Conversion Date applicable
to those shares. If the Transfer Agent does not receive the certificates at least one week prior to the Conversion Date, your
Investor B, Investor B1 or Investor B3 Shares will convert to Investor A or Investor A1 Shares, as set forth in each Fund’s
prospectus, on the next scheduled Conversion Date after the certificates are delivered.
Contingent
Deferred Sales Charge — Investor C Shares
Investor C, Investor C1, Investor C2 and
Investor C3 Shares that are redeemed within one year of purchase may be subject to a 1.00% CDSC charged as a percentage of the
dollar amount subject thereto. In determining whether an Investor C, Investor C1, Investor C2 or Investor C3 Shares CDSC is applicable
to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. The charge
will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial purchase price of Investor C, Investor C1, Investor C2
and Investor C3 Shares. In addition, no CDSC will be assessed on Investor C, Investor C1, Investor C2 and Investor C3 Shares acquired
through reinvestment of dividends. It will be assumed that the redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A transfer of shares from a shareholder’s
account to another account will be assumed to be made in the same order as a redemption.
See “Information on Sales Charges
and Distribution Related Expenses — Investor B and Investor C Sales Charge Information” in Part I of each Fund’s
Statement of Additional Information for information about amounts paid to the Distributor in connection with CDSC shares for the
periods indicated.
Investor
B and Investor C Shares — Contingent Deferred Sales Charge Waivers and Reductions
The CDSC on Investor B, Investor
B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares is not charged in connection with: (1) redemptions
of Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares purchased through certain
employer-sponsored retirement plans and rollovers of current investments in the Fund through such plans; (2) exchanges described
in “Exchange Privilege” below; (3) redemptions made in connection with minimum required distributions due to the shareholder
reaching age 70 1/2 from IRA and 403(b)(7) accounts; (4) certain post-retirement withdrawals from an IRA or other retirement plan
if you are over 59 1/2 years old and you purchased your shares prior to October 2, 2006; (5) redemptions made with respect to
certain retirement plans sponsored by the Fund, BlackRock or its affiliates; (6) redemptions in connection with a shareholder’s
death as long as the waiver request is made within one year of death or, if later, reasonably promptly following completion of
probate (including in connection with the distribution of account assets to a beneficiary of the decedent) or disability (as defined
in the Code) subsequent to the purchase of Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares; (7) withdrawals resulting from shareholder disability (as defined in the Code) as long as the disability arose subsequent
to the purchase of the shares; (8) involuntary redemptions of Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor
C2 or Investor C3 Shares in accounts with low balances as described in “Redemption of Shares” below; (9) redemptions
made pursuant to a systematic withdrawal plan, subject to the limitations set forth under “Systematic Withdrawal Plan”
below; (10) redemptions related to the payment of BNY Mellon Investment Servicing Trust Company custodial IRA fees; and (11) redemptions
when a shareholder can demonstrate hardship, in the absolute discretion of the Fund. In addition, no CDSC is charged on Investor
B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares acquired through the reinvestment of dividends
or distributions.
Class R Shares
Certain of the Funds offer Class R Shares
as described in each such Fund’s Prospectus. Class R Shares are available only to certain employer-sponsored retirement plans.
Class R Shares are not subject to an initial sales charge or a CDSC but are subject to an ongoing distribution fee of 0.25% per
year and an ongoing service fee of 0.25% per year. Distribution fees are used to support the Fund’s marketing and distribution
efforts, such as compensating financial advisers and other financial intermediaries, advertising and promotion. Service fees are
used to compensate securities dealers and other financial intermediaries for service activities.
If Class R Shares are held over time, these
fees may exceed the maximum sales charge that an investor would have paid as a shareholder of one of the other share classes.
Class K Shares
Certain of the Funds offer Class K Shares
as described in each such Fund’s Prospectus. Class K Shares are available only to (i) qualified recordkeepers with a distribution
and/or fund servicing agreement (establishing an omnibus trading relationship) maintained with the Fund’s distributor, or
(ii) defined benefit plans, defined contribution plans, endowments and foundations with greater than $10 million in a qualified
tax-exempt plan, or (iii) employers with greater than $10 million in the aggregate between qualified and non-qualified plans that
they sponsor.
Service Shares
Certain Funds offer Service Shares, which
are available only to certain investors, including: (i) certain financial institutions, such as banks and brokerage firms, acting
on behalf of their customers; (ii) certain persons who were shareholders of the Compass Capital Group of Funds at the time of its
combination with The PNC® Fund in 1996; and (iii) participants in the Capital DirectionsSM asset allocation program. Service
Shares are not subject to an initial sales charge or a CDSC but are subject to an ongoing service fee of 0.25% per year.
BlackRock Shares
Certain Funds offer BlackRock Shares, which
are available only to certain investors. BlackRock Shares are offered without a sales charge to institutional investors, registered
investment advisers and certain fee-based programs.
Distribution Plans
Each Fund has entered into a distribution
agreement with BRIL under which BRIL, as agent, offers shares of each Fund on a continuous basis. BRIL has agreed to use appropriate
efforts to effect sales of the shares, but it is not obligated to sell any particular amount of shares. BRIL’s principal
business address is 40 East 52nd Street, New York, NY 10022. BRIL is an affiliate of BlackRock.
Pursuant to the distribution plans
of the Investor A, Investor A1, Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class
R Shares (each, a “Plan”), the Fund may pay BRIL and/or BlackRock or any other affiliate or significant shareholder
of BlackRock fees for distribution and sales support services. Currently, as described further below, only Investor B, Investor
B1, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class R Shares bear the expense of distribution fees under
a Plan. In addition, the Fund may pay to brokers, dealers, financial institutions and industry professionals (including BlackRock,
BRIL, PNC, Barclays and their affiliates) (collectively, “Service Organizations”) fees for the provision of personal
services to shareholders. In the past, BlackRock or BRIL has retained a portion of the shareholder servicing fees paid by the
Fund.
Each Fund’s Plans are subject to the
provisions of Rule 12b-1 under the Investment Company Act. In their consideration of a Plan, the Directors must consider all factors
they deem relevant, including information as to the benefits of the Plan to the Fund and the related class of shareholders. In
approving a Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is reasonable likelihood that
the Plan will benefit the Fund and its related class of shareholders.
The Plan provides, among other things, that:
(i) the Board of Directors shall receive quarterly reports regarding the amounts expended under the Plan and the purposes for which
such expenditures were made; (ii) the Plan will continue in effect for so long as its continuance is approved at least annually
by the Board of Directors in accordance with Rule 12b-1 under the Investment Company Act; (iii) any material amendment thereto
must be approved by the Board of Directors, including the directors who are not “interested persons” of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect financial interest in the operation of the Plan or any
agreement entered into in connection with the Plan (the “12b-1 Directors”), acting in person at a meeting called for
said purpose; (iv) any amendment to increase materially the costs which any class of shares may bear for distribution services
pursuant to the Plan shall be effective only upon approval by a vote of a majority of the outstanding shares of such class and
by a majority of the 12b-1 Directors; and (v) while the Plan remains in effect, the selection and nomination of the Fund’s
Directors who are not “interested persons” of the Fund shall be committed to the discretion of the Fund’s non-interested
Directors. Rule 12b-1 further requires that each Fund preserve copies of each Plan and any report made pursuant to such plan for
a period of not less than six years from the date of the Plan or such report, the first two years in an easily accessible place.
Payments under the Plans are based on a
percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred. As a result, distribution-related
revenues from the Plans may be more or less
than distribution-related expenses of the
related class. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their
consideration quarterly. Distribution-related revenues consist of the service fees, the distribution fees and the CDSCs. Distribution-related
expenses consist of financial adviser compensation, branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses and interest expense. Distribution-related revenues paid with respect
to one class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares.
The Plan is terminable as to any class of
shares without penalty at any time by a vote of a majority of the 12b-1 Directors, or by vote of the holders of a majority of the
shares of such class.
See “Distribution Related Expenses”
in Part I of each Fund’s Statement of Additional Information for information relating to the fees paid by your Fund to the
Distributor under each Plan during the Fund’s most recent fiscal year.
Limitations on the Payment of Deferred
Sales Charges
The maximum sales charge rule in the Conduct
Rules of the NASD imposes a limitation on certain asset-based sales charges such as the distribution fee borne by Class R Shares,
and the distribution fee and the CDSC borne by the CDSC shares. This limitation does not apply to the service fee. The maximum
sales charge rule is applied separately to each class and limits the aggregate of distribution fee payments and CDSCs payable by
a Fund to (1) 6.25% of eligible gross sales of CDSC shares and Class R Shares, computed separately (excluding shares issued pursuant
to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately,
at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution
fee and the CDSC).
See Part I, Section V “Information
on Sales Charges and Distribution Related Expenses” of each Fund’s Statement of Additional Information for comparative
information as of your Fund’s most recent fiscal year end with respect to the CDSC shares and, if applicable, Class R Shares
of your Fund.
Other Compensation to Selling Dealers
Pursuant to each Fund’s Distribution
Agreements and Distribution and Service Plans (the “Plans”), each Fund may pay BRIL and/or BlackRock or any other affiliate
of BlackRock fees for distribution and sales support services. In addition, each Fund may pay to brokers, dealers, financial institutions
and industry professionals (including BlackRock, Merrill Lynch, Hilliard Lyons and their affiliates) (collectively, “Service
Organizations”) fees for the provision of personal services to shareholders. In the past, BlackRock has retained a portion
of the shareholder servicing fees paid by a Fund.
With respect to Class R Shares, the front-end
sales charge and the applicable distribution fee payable under the Plan are used to pay commissions and other fees payable to Service
Organizations and other broker/dealers who sell Class R Shares.
With respect to Investor B, Investor
B1 and Investor B3 Shares, Service Organizations and other broker/dealers receive commissions from BRIL for selling Investor B,
Investor B1 and Investor B3 Shares, which are paid at the time of the sale. The applicable distribution fees payable under the
Plans are intended to cover the expense to BRIL of paying such up-front commissions, as well as to cover ongoing commission payments
to broker-dealers or other Service Organizations. The contingent deferred sales charge is calculated to charge the investor with
any shortfall that would occur if Investor B, Investor B1 or Investor B3 Shares are redeemed prior to the expiration of the conversion
period, after which Investor B, Investor B1 and Investor B3 Shares automatically convert to Investor A Shares or Investor A1 Shares,
as applicable.
With respect to Investor C, Investor C1,
Investor C2 and Investor C3 Shares, Service Organizations and other broker-dealers receive commissions from BRIL for selling Investor
C, Investor C1, Investor C2 and Investor C3 Shares, which are paid at the time of the sale. The applicable distribution fees payable
under the Plans are intended to cover the expense to BRIL of paying such up-front commissions, as well as to cover ongoing commission
payments to the broker-dealers or other Service Organizations. The contingent deferred sales charge is calculated to charge the
investor with any shortfall that would occur if Investor C, Investor C1, Investor C2 or Investor C3 Shares are redeemed within
12 months of purchase.
From time to time BRIL and/or BlackRock
and their affiliates may voluntarily waive receipt of distribution fees under each Plan, which waivers may be terminated at any
time. Payments are made by the Fund pursuant to each Plan regardless of expenses incurred by BRIL or BlackRock.
The Funds currently do not make distribution
payments with respect to Investor A, Investor A1, Service, Institutional, Institutional Daily or BlackRock Shares under the Plans.
However, the Plans permit BRIL, BlackRock and certain of their affiliates to make payments relating to distribution and sales
support activities out of their past profits or other sources available to them (and not as an additional charge to the Fund).
From time to time, BRIL, BlackRock or their affiliates may compensate affiliated and unaffiliated Service Organizations for the
sale and distribution of shares of a Fund or for services to a Fund and its shareholders. These non-Plan payments would be in
addition to a Fund’s payments described in this Statement of Additional Information for distribution and shareholder servicing.
These non-Plan payments may take the form of, among other things, “due diligence” payments for a dealer’s examination
of the Funds and payments for providing extra employee training and information relating to Funds; “listing” fees
for the placement of the Funds on a dealer’s list of mutual funds available for purchase by its customers; “finders”
fees for directing investors to the Fund; “distribution and marketing support” fees or “revenue sharing”
for providing assistance in promoting the sale of the Funds’ shares; payments for the sale of shares and/or the maintenance
of share balances; CUSIP fees; maintenance fees; and set-up fees regarding the establishment of new accounts. The payments made
by BRIL, BlackRock and their affiliates may be a fixed dollar amount or may be based on a percentage of the value of shares sold
to, or held by, customers of the Service Organization involved, and may be different for different Service Organizations. The
payments described above are made from BRIL’s, BlackRock’s or their affiliates’ own assets pursuant to agreements
with Service Organizations and do not change the price paid by investors for the purchase of the Fund’s shares or the amount
the Fund will receive as proceeds from such sales.
As of the date of this Statement of Additional
Information, as amended or supplemented from time to time, the following Service Organizations are receiving such payments: Ameriprise
Financial Services, AXA Advisors, Cetera Advisor Networks LLC, Cetera Advisors LLC, Cetera Financial Specialists LLC, Cetera Investment
Services LLC, Chase Investment Services Corp, CCO Investment Services, Commonwealth Equity Services (Commonwealth Financial Network),
Donegal Securities, FSC Securities Corporation, ING Financial Partners, Investacorp, Inc., LPL Financial Corporation, Merrill Lynch,
MetLife Securities, Morgan Stanley Smith Barney, New England Securities Corporation, Oppenheimer & Co., PFS Investments, Raymond
James, RBC Capital Markets, Robert W. Baird & Co., Royal Alliance Associates, SagePoint Financial, Securities America, State
Farm VP Management Corp., Tower Square Securities, Triad Advisors, Inc., UBS Financial Services, U.S. Bancorp Investments, Walnut
Street Securities, Wells Fargo, Woodbury Financial Services, Inc. and/or broker dealers and other financial services firms under
common control with the above organizations (or their successors or assignees). The level of payments made to these Service Organizations
in any year will vary, may be limited to specific Funds or share classes, and normally will not exceed the sum of (a) 0.25% of
such year’s Fund sales by that Service Organization, and (b) 0.21% of the assets attributable to that Service Organization
invested in a Fund. In certain cases, the payments described in the preceding sentence are subject to certain minimum payment levels.
In addition, from time to time BRIL, BlackRock or certain of their affiliates may make fixed dollar amount payments to certain
Service Organizations listed above that are not based on the value of the shares sold to, or held by, the Service Organization’s
customers and may be different for different Service Organizations.
Other Distribution Arrangements
Certain Funds and BlackRock have entered
into a distribution agreement with UBS AG whereby UBS AG may, in certain circumstances, sell certain shares of the Funds in certain
jurisdictions. The level of payments made to UBS AG in any year for the sale and distribution of a Fund’s shares will vary
and normally will not exceed the sum of the service fee payable on the assets attributable to UBS AG plus an additional fee equal
to a percentage of such assets which shall range up to 0.25%.
In lieu of payments pursuant to the foregoing,
BRIL, BlackRock, PNC or their affiliates may make payments to the above named Service Organizations of an agreed-upon amount which,
subject to certain agreed-upon minimums, will generally not exceed the amount that would have been payable pursuant to the formula,
and may also make similar payments to other Service Organizations.
If investment advisers, distributors or
affiliates of mutual funds pay bonuses and incentives in differing amounts, financial firms and their financial consultants may
have financial incentives for recommending a particular mutual fund over other mutual funds. In addition, depending on the arrangements
in place at any particular time, a financial
firm and its financial consultants may also
have a financial incentive for recommending a particular share class over other share classes.
You should consult your financial
adviser and review
carefully any disclosure by the financial firm as to compensation received by
your financial adviser
for more information about the payments described above.
Furthermore, BRIL, BlackRock and their affiliates
may contribute to various non-cash and cash incentive arrangements to promote the sale of shares, and may sponsor various contests
and promotions subject to applicable FINRA regulations in which participants may receive prizes such as travel awards, merchandise
and cash. Subject to applicable FINRA regulations, BRIL, BlackRock and their affiliates may also: (i) pay for the travel expenses,
meals, lodging and entertainment of broker/dealers, financial institutions and their salespersons in connection with educational
and sales promotional programs, (ii) sponsor speakers, educational seminars and charitable events and (iii) provide other sales
and marketing conferences and other resources to broker-dealers, financial institutions and their salespersons.
BlackRock, Inc., the parent company of BlackRock,
has agreed to pay PNC Bank, National Association and certain of its affiliates fees for administration and servicing with respect
to assets of the Fund attributable to shares held by customers of such entities. These assets are predominantly in the Institutional
Share class of a Fund, with respect to which the Fund does not pay shareholder servicing fees under a Plan. The fees are paid according
to the following schedule: certain money market funds — 0.15% of net assets; certain fixed income funds — 0.20% of
net assets; and certain equity funds — 0.25% of net assets (except that with respect to the Index Equity Fund, the fee is
0.04% of net assets).
Service Organizations may charge their clients
additional fees for account-related services. Service Organizations may charge their customers a service fee in connection with
the purchase or redemption of Fund shares. The amount and applicability of such a fee is determined and disclosed to its customers
by each individual Service Organization. Service fees typically are fixed, nominal dollar amounts and are in addition to the sales
and other charges described in the Prospectuses and this Statement of Additional Information. Your Service Organization will provide
you with specific information about any service fees you will be charged.
Pursuant to the Plans, each Fund
enters into service arrangements with Service Organizations pursuant to which Service Organizations will render certain support
services to their customers (“Customers”) who are the beneficial owners of Service, Investor A, Investor A1, Investor
B, Investor B1, Investor C, Investor C1, Investor C2 and Class R Shares. Such services will be provided to Customers who are the
beneficial owners of shares of such classes and are intended to supplement the services provided by the Fund’s Administrators
and Transfer Agent to the Fund’s shareholders of record. In consideration for payment of the applicable service fee Service
Organizations may provide general shareholder liaison services, including, but not limited to: (i) answering customer inquiries
regarding account status and history, the manner in which purchases, exchanges and redemptions of shares may be effected and certain
other matters pertaining to the Customers’ investments; and (ii) assisting Customers in designating and changing dividend
options, account designations and addresses.
To the extent a shareholder is not associated
with a Service Organization, the shareholder servicing fees will be paid to BlackRock, and BlackRock will provide services. In
addition to, rather than in lieu of, distribution and shareholder servicing fees that a Fund may pay to a Service Organization
pursuant to the Plan and fees the Fund pays to its transfer agent, the Fund may enter into non-Plan agreements with Service Organizations
pursuant to which the Fund will pay a Service Organization for administrative, networking, recordkeeping, sub-transfer agency and
shareholder services. These non-Plan payments are generally based on either: (1) a percentage of the average daily net assets of
Fund shareholders serviced by a Service Organization or (2) a fixed dollar amount for each account serviced by a Service Organization.
The aggregate amount of these payments may be substantial. From time to time, BlackRock, BRIL or their affiliates also may pay
a portion of the fees for administrative, networking, omnibus, operational and recordkeeping, sub-transfer agency and shareholder
services described above at its or their own expense and out of its or their legitimate profits.
For information regarding the purchase of
shares of the
BlackRock Basic Value V.I. Fund, BlackRock Capital Appreciation V.I. Fund,
BlackRock Equity Dividend V.I. Fund, BlackRock Global Allocation V.I. Fund, BlackRock Global Opportunities V.I. Fund, BlackRock
High Yield V.I. Fund, BlackRock International V.I. Fund, BlackRock Large Cap Core V.I. Fund, BlackRock Large Cap Growth V.I. Fund,
BlackRock Large Cap Value V.I. Fund, BlackRock Managed Volatility V.I. Fund, BlackRock Money Market V.I. Fund, BlackRock S&P
500 Index V.I. Fund, BlackRock Total Return V.I. Fund, BlackRock U.S. Government Bond V.I. Fund and BlackRock Value Opportunities
V.I. Fund, each a series of BlackRock Variable Series
Funds,
Inc., and the BlackRock Balanced Capital Portfolio, BlackRock Capital Appreciation Portfolio, BlackRock Global Allocation Portfolio,
BlackRock High Yield Portfolio, BlackRock U.S. Government Bond Portfolio, BlackRock Large Cap Core Portfolio, BlackRock Money
Market Portfolio and BlackRock Total Return Portfolio, each a series of BlackRock Series Fund, Inc., please see the “Purchase
of Shares” section of Part I of this SAI.
R
EDEMPTION
OF
S
HARES
Shares normally will be redeemed
for cash upon receipt of a request in proper form, although each Fund retains the right to redeem some or all of its shares in-kind
under unusual circumstances (valued in the same way as they would be valued for purposes of computing a Fund’s NAV), in
order to protect the interests of remaining shareholders, or to accommodate a request by a particular shareholder that does not
adversely affect the interest of the remaining shareholders, by delivery of securities selected from the Fund’s assets at
its discretion. In-kind payment means payment will be made in portfolio securities rather than cash. If this occurs, the redeeming
shareholder might incur brokerage or other transaction costs to convert the securities to cash. Each Fund has elected, however,
to be governed by Rule 18f-1 under the Investment Company Act so that the Fund is obligated to redeem its shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day period for any shareholder of the Fund. The redemption
price is the net asset value per share next determined after the initial receipt of proper notice of redemption. The value of
shares of each Fund at the time of redemption may be more or less than your cost at the time of purchase, depending in part on
the market value of the securities held by the Fund at such time. Except for any CDSC that may be applicable, there will be no
redemption charge if your redemption request is sent directly to the Transfer Agent. If you are liquidating your holdings you
will receive all dividends reinvested through the date of redemption.
The right to redeem shares may be suspended or
payment upon redemption may be delayed for more than seven days only (i) for any period during which trading on the NYSE is restricted
as determined by the Commission or during which the NYSE is closed (other than customary weekend and holiday closings), (ii) for
any period during which an emergency exists, as defined by the Commission, as a result of which disposal of portfolio securities
or determination of the net asset value of the Fund is not reasonably practicable, or (iii) for such other periods as the Commission
may by order permit for the protection of shareholders of the Fund. (A Fund may also suspend or postpone the recordation of the
transfer of its shares upon the occurrence of any of the foregoing conditions.)
Each Fund, with other investment companies advised
by the Manager, has entered into a joint committed line of credit with a syndicate of banks that is intended to provide the Fund
with a temporary source of cash to be used to meet redemption requests from shareholders in extraordinary or emergency circumstances.
The Fund may redeem shares involuntarily to
reimburse a Fund for any loss sustained by reason of the failure of a shareholder to make full-payment for shares purchased by
the shareholder or to collect any charge relating to a transaction effected for the benefit of a shareholder. The Fund reserves
the express right to redeem shares of each Fund involuntarily at any time if the Fund’s Board determines, in its sole discretion,
that failure to do so may have adverse consequences to the holders of shares in the Fund. Upon such redemption the holders of shares
so redeemed shall have no further right with respect thereto other than to receive payment of the redemption price.
Redemption
Investor, Institutional, Institutional Daily
and Class R Shares
Redeem by Telephone
: You may sell Investor
Shares held at BlackRock by telephone request if certain conditions are met and if the amount being sold is less than (i) $100,000
for payments by check or (ii) $250,000 for payments through the Automated Clearing House Network (“ACH”) or wire transfer.
Certain redemption requests, such as those in excess of these amounts, and those where (i) the Fund does not have verified
banking information on file; or (ii) the proceeds are not paid to the record owner at the record address, must be in writing
with a medallion signature guarantee provided by any “eligible guarantor institution” as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934 (the “Exchange Act”), whose existence and validity may be verified by the
Transfer Agent through the use of industry publications. For Institutional Shares, certain redemption requests may require written
instructions with a medallion signature guarantee. Call (800) 441-7762 for details. You can obtain a medallion
signature guarantee stamp from a bank, securities
dealer, securities broker, credit union, savings and loan association, national securities exchange or registered securities association.
The three recognized medallion programs are Securities Transfer Agent Medallion Program, Stock Exchanges Medallion Program and
New York Stock Exchange, Inc. Medallion Signature Program. Signature guarantees which are not a part of these programs will not
be accepted. A notary public seal will not be acceptable. Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however, other documents may be necessary. Additional documentary
evidence of authority is required by BNY Mellon in the event redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
If you make a redemption request before a Fund
has collected payment for the purchase of shares, the Fund may delay mailing your proceeds. This delay will usually not exceed
ten days. A Fund, its Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. Telephone redemption requests will not be honored if: (i) the accountholder is deceased, (ii) the
proceeds are to be sent to someone other than the shareholder of record, (iii) a Fund does not have verified information on
file, (iv) the request is by an individual other than the accountholder of record, (v) the account is held by joint tenants
who are divorced, (vi) the address on the account has changed within the last 30 days or share certificates have been
issued on the account, or (vii) to protect against fraud, if the caller is unable to provide the account number, the name
and address registered on the account and the social security number registered on the account. The Fund and its service providers
will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed
to be genuine in accordance with such procedures. Before telephone requests will be honored, signature approval from all shareholders
of record on the account must be obtained. The Fund may refuse a telephone redemption request if it believes it is advisable to
do so. During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Please find
below alternative redemption methods.
Redemption
orders for Institutional Shares placed prior to 4:00 p.m. (Eastern time) on a business day will be priced at the NAV determined
that day. If redemption orders are received by 4:00 p.m. (Eastern time) on a business day, payment for redeemed Institutional Shares
will normally be wired in Federal Funds on the next business day. If the Federal Reserve Bank of Philadelphia is not open on the
business day following receipt of the redemption order, the redemption order will be accepted and processed the next succeeding
business day when the Federal Reserve Bank of Philadelphia is open, provided that the Fund’s custodian is also open for business.
Redemption
orders for Institutional Daily Shares placed prior to 12:00 p.m. (Eastern time) on a business day will be priced at the NAV determined
that day. If redemption orders are received by 12:00 p.m. (Eastern time) on a business day, payment for redeemed Institutional
Daily Shares will normally be wired in Federal Funds on that same day, provided that the Fund’s custodian is also open for
business. If the Federal Reserve Bank of Philadelphia is not open on that business day, the redemption order will be accepted and
processed the next succeeding business day when the Federal Reserve Bank of Philadelphia is open, provided that the Fund’s
custodian is also open for business.
Redeem by VRU
: Investor Shares may also
be redeemed by use of a Fund’s automated voice response unit service (“VRU”). Payment for Investor Shares redeemed
by VRU may be made for non-retirement accounts in amounts up to $25,000, either through check, ACH or wire.
Redeem by Internet:
You may redeem in your
account, by logging onto the BlackRock website at www.blackrock.com/funds. Proceeds from Internet redemptions may be sent via check,
ACH or wire to the bank account of record. Payment for Investor Shares redeemed by Internet may be made for non-retirement accounts
in amounts up to $25,000, either through check, ACH or wire. Different maximums may apply to investors in Institutional Shares.
Redeem in Writing:
If you hold shares with
the Transfer Agent you may redeem such shares without charge by writing to BlackRock, P.O. Box 9819, Providence, Rhode Island 02940-8019.
Redemption requests delivered other than by mail should be sent to BlackRock, 4400 Computer Drive, Westborough, Massachusetts 01588.
If you hold share certificates issued by your Fund, the letter must be accompanied by certificates for the shares. All shareholders
on the account must sign the letter. A medallion signature guarantee will generally be required but may be waived in certain limited
circumstances. You can obtain a medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union,
savings and loan association, national securities exchange or registered securities association. A notary public seal will not
be acceptable. If you hold stock certificates, return the
certificates with the letter. Proceeds from redemptions
may be sent via check, ACH or wire to the bank account of record.
The Funds or the Transfer Agent may temporarily
suspend telephone transactions at any time.
If you redeem shares directly with the Transfer
Agent, payments will generally be mailed within seven days of receipt of the proper notice of redemption. A Fund may delay the
mailing of a redemption check until good payment (that is, cash, Federal funds or certified check drawn on a U.S. bank) has been
collected for the purchase of Fund shares, which delay will usually not exceed 10 days. If your account is held directly with the
Transfer Agent and contains a fractional share balance following a redemption, the fractional share balance will be automatically
redeemed by the Fund.
Note on Low Balance Accounts.
Because of
the high cost of maintaining smaller shareholder accounts, BlackRock has set a minimum balance of $500 in each Fund position you
hold within your account (“Fund Minimum”), and may take one of two actions if the balance in your Fund falls below
the Fund Minimum.
First, the Fund may redeem the shares in your
account (without charging any deferred sales charge) if the net asset value of your account falls below $250 for any reason, including
market fluctuation. You will be notified that the value of your account is less than $250 before the Fund makes an involuntary
redemption. The notification will provide you with a 90 calendar day period to make an additional investment in order to bring
the value of your account to at least $250 before the Fund makes an involuntary redemption or to the Fund Minimum in order not
to be assessed an annual low balance fee of $20, as set forth below. This involuntary redemption may not apply to accounts of certain
employer-sponsored retirement plans, selected fee-based programs, accounts established under the Uniform Gifts or Transfers to
Minors Acts, and certain intermediary accounts.
Second, the Fund charges an annual $20 low balance
fee on all Fund accounts that have a balance below the Fund Minimum for any reason, including market fluctuation. The fee will
be deducted from the Fund account only once per calendar year. You will be notified that the value of your account is less than
the Fund Minimum before the fee is imposed. You will then have a 90 calendar day period to make an additional investment to bring
the value of your account to the Fund Minimum before the Fund imposes the low balance fee. This low balance fee does not apply
to accounts of certain employer-sponsored retirement plans, selected fee-based programs, or accounts established under the Uniform
Gifts or Transfers to Minors Acts.
Repurchase
A Fund normally will accept orders to repurchase
shares from Selling Dealers for their customers. Shares will be priced at the net asset value of the Fund next determined after
receipt of the repurchase order by a Selling Dealer that has been authorized by the Distributor by contract to accept such orders.
As to repurchase orders received by Selling Dealers prior to the close of business on the NYSE (generally, the NYSE closes at 4:00
p.m. Eastern time), on the day the order is placed, which includes orders received after the close of business on the previous
day, the repurchase price is the net asset value determined as of the close of business on the NYSE on that day. If the orders
for repurchase are not received by the Selling Dealer before the close of business on the NYSE, such orders are deemed received
on the next business day.
These repurchase arrangements are for your convenience
and do not involve a charge by the Fund (other than any applicable CDSC). However, Selling Dealers may charge a processing fee
in connection with such transactions. In addition, securities firms that do not have selected dealer agreements with the Distributor
may impose a transaction charge for transmitting the notice of repurchase to the Fund. Each Fund reserves the right to reject any
order for repurchase. A shareholder whose order for repurchase is rejected by a Fund, however, may redeem shares as set out above.
Reinstatement Privilege — Investor A
Shares
Upon redemption of Investor A, Investor A1 or
Institutional Shares, as applicable, shareholders may reinvest all or a portion of their redemption proceeds (after paying any
applicable CDSC) in Investor A Shares of the same or another BlackRock fund without paying a front-end sales charge. This right
may be exercised once a year and within 60 days of the redemption, provided that the Investor A Shares of that fund is currently
open to new investors or the
shareholder has a current account in that closed
fund. Shares will be purchased at the NAV calculated at the close of trading on the day the request is received in good order.
To exercise this privilege, the Transfer Agent must receive written notification from the shareholder of record or the registered
representative of record, at the time of purchase. Investors should consult a tax adviser concerning the tax consequences of exercising
this reinstatement privilege.
S
HAREHOLDER
S
ERVICES
Each Fund offers one or more of the shareholder
services described below that are designed to facilitate investment in its shares. You can obtain more information about these
services from each Fund by calling the telephone number on the cover page, or from the Distributor, your financial adviser, your
selected securities dealer or other financial intermediary. Certain of these services are available only to U.S. investors.
Investment Account
If your account is maintained at the Transfer
Agent (an “Investment Account”) you will receive statements, at least quarterly, from the Transfer Agent. These statements
will serve as confirmations for automatic investment purchases and the reinvestment of dividends. The statements also will show
any other activity in your Investment Account since the last statement. You also will receive separate confirmations for each purchase
or sale transaction other than automatic investment purchases and the reinvestment of dividends. If your Investment Account is
held at the Transfer Agent you may make additions to it at any time by mailing a check directly to the Transfer Agent. You may
also maintain an account through a selected securities dealer or other financial intermediary. If you transfer shares out of an
account maintained with a selected securities dealer or other financial intermediary, an Investment Account in your name may be
opened automatically at the Transfer Agent.
You may transfer Fund shares from a selected securities
dealer or other financial intermediary to another securities dealer or other financial intermediary that has entered into an agreement
with the Distributor. Certain shareholder services may not be available for the transferred shares. All future trading of these
assets must be coordinated by the new firm. If you wish to transfer your shares to a securities dealer or other financial intermediary
that has not entered into an agreement with the Distributor, you must either (i) redeem your shares, paying any applicable CDSC
or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. You also may request that the new securities
dealer or other financial intermediary maintain the shares in an account at the Transfer Agent registered in the name of the securities
dealer or other financial intermediary for your benefit whether the securities dealer or other financial intermediary has entered
into a selected dealer agreement or not. In the interest of economy and convenience and because of the operating procedures of
each Fund, share certificates will not be issued physically. Shares are maintained by each Fund on its register maintained by the
Transfer Agent and the holders thereof will have the same rights and ownership with respect to such shares as if certificates had
been issued.
If you are considering transferring a tax-deferred
retirement account, such as an individual retirement account, from one selected securities dealer to another securities dealer
or other financial intermediary, you should be aware that if the new firm will not take delivery of shares of the Fund, you must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm,
or you must continue to maintain a retirement account at the original selected securities dealer for those shares.
Exchange Privilege
U.S. shareholders of Investor A,
Investor A1, Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2, Investor C3, Institutional and Institutional
Daily Shares of each Fund have an exchange privilege with certain other Funds. However, Investor A1, Investor B1, Investor B3,
Investor C1, Investor C2 and Investor C3 Shares may only exchange out. The minimum amount for exchanges of Investor class shares
is $1,000, although you may exchange less than $1,000 if you already have an account in the Fund into which you are exchanging.
You may only exchange into a share class and a Fund that are open to new investors or in which you have a current account if the
class or fund is closed to new investors. If you held the shares used in the exchange for 30 days or less, you may be charged
a redemption fee at the time of the exchange. Before effecting an exchange, you should obtain a currently effective prospectus
of the fund into which you wish to make the exchange. Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
Exchanges of Investor A, Investor A1, Institutional
and Institutional Daily Shares.
Institutional and Institutional Daily Shares are exchangeable with Institutional or Institutional
Daily Shares of other Funds. Investor A and Investor A1 Shares are exchangeable for Investor A Shares of other Funds.
Exchanges of Institutional or Institutional Daily
Shares outstanding for Institutional or Institutional Daily Shares of a second fund or for shares of a money market fund are effected
on the basis of relative net asset value per Institutional or Institutional Daily Share, as applicable. Exchanges of Investor A
or Investor A1 Shares outstanding (“outstanding Investor A Shares”) for Investor A Shares of a second fund, or for
shares of a money market fund (“new Investor A Shares”) are effected on the basis of relative net asset value per share.
Exchanges of Investor B, Investor
B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares.
Shareholders of certain Funds with Investor
B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares outstanding (“outstanding Investor
B or Investor C Shares”) may exchange their shares for Investor B or Investor C Shares, respectively, of a second fund or
for shares of a money market fund (“new Investor B or Investor C Shares”) on the basis of relative net asset value
per Investor B or Investor C share, without the payment of any CDSC. Certain funds impose different CDSC schedules. If you exchange
your Investor B Shares for shares of a fund with a different CDSC schedule, the CDSC schedule that applies to the shares exchanged
will continue to apply. For purposes of computing the CDSC upon redemption of new Investor B or Investor C Shares, the time you
held both the exchanged Investor B or Investor C Shares and the new Investor B Shares or Investor C Shares will count towards
the holding period of the new Investor B or Investor C Shares. For example, if you exchange Investor B Shares of a Fund for those
of a second Fund after having held the first Fund’s Investor B Shares for two-and-a-half years, the 3.00% CDSC that generally
would apply to a redemption would not apply to the exchange. Four years later if you decide to redeem the Investor B Shares of
the second Fund and receive cash, there will be no CDSC due on this redemption since by adding the two-and-a-half year holding
period of the first Fund’s Investor B Shares to the four year holding period for the second Fund’s Investor B Shares,
you will be deemed to have held the second Fund’s Investor B Shares for more than six years
.
Exchanges of Service and BlackRock
Shares.
Service Shares and BlackRock Shares can be exchanged for Service Shares or BlackRock Shares, respectively,
of Funds that are covered by selected dealer agreements with the Distributor.
Exchanges for Shares of a Money
Market Fund.
You may exchange any class of Investor shares for shares of an affiliated money market fund. If you exchange
into BlackRock Summit Cash Reserves Fund (“Summit”), a series of BlackRock Financial Institutions Series Trust, you
will receive one of two classes of shares: exchanges of Investor A, Investor A1 and Institutional Shares of a Fund will receive
Investor A Shares of Summit and exchanges of Investor B, Investor B1, Investor B3, Investor C, Investor C1, Investor C2 and Investor
C3 Shares of a Fund will receive Investor B Shares of Summit. You may exchange Investor A Shares of Summit back into Investor
A or Institutional Shares of a Fund. You may exchange Investor B Shares of Summit back into Investor B or Investor C Shares of
a Fund and, in the event of such an exchange, the period of time that you held Investor B Shares of Summit will count toward satisfaction
of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any Conversion Period with respect
to Investor B Shares. Investor B Shares of Summit are subject to a distribution fee at an annual rate of 0.75% of average daily
net assets of such Investor B Shares. Exchanges of Investor B or Investor C Shares of a money market fund other than Summit for
Investor B or Investor C Shares of a Fund will be exercised at net asset value. However, a CDSC may be charged in connection with
any subsequent redemption of the Investor B or Investor C Shares of the Fund received in the exchange. In determining the holding
period for calculating the CDSC payable on redemption of Investor B and Investor C Shares of the Fund received in the exchange,
the holding period of the money market fund Investor B or Investor C Shares originally held will be added to the holding period
of the Investor B or Investor C Shares acquired through exchange.
Exchanges by Participants in Certain Programs.
The exchange privilege may be modified with respect to certain participants in mutual fund advisory programs and other fee-based
programs sponsored by the Manager, an affiliate of the Manager, or selected securities dealers or other financial intermediaries
that have an agreement with a Distributor. See “Fee-Based Programs” below.
Exercise of the Exchange Privilege.
To
exercise the exchange privilege, you should contact your financial adviser or the Transfer Agent, who will advise each Fund of
the exchange. If you do not hold share certificates, you may
exercise the exchange privilege by wire through
your securities dealer or other financial intermediary. Each Fund reserves the right to require a properly completed exchange application.
A shareholder who wishes to make an exchange may
do so by sending a written request to the Fund c/o the Transfer Agent at the following address: P.O. Box 9819, Providence, RI 02940-8019.
Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the
Application that they do not wish to use this privilege. To add this feature to an existing account that previously did not provide
this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer
Agent. Once this election has been made, the shareholder may simply contact the Fund by telephone at (800) 441-7762 to request
the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders
may have to submit exchange requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently
own shares of the investment portfolio whose shares are being acquired, a new account will be established with the same registration,
dividend and capital gain options and broker of record as the account from which shares are exchanged, unless otherwise specified
in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as defined below. In order to
participate in the Automatic Investment Program or establish a Systematic Withdrawal Plan for the new account, however, an exchanging
shareholder must file a specific written request.
Any share exchange must satisfy the requirements
relating to the minimum initial investment requirement, and must be legally available for sale in the state of the investor’s
residence. For Federal income tax purposes, a share exchange is a taxable event and, accordingly, a capital gain or loss may be
realized. Before making an exchange request, shareholders should consult a tax or other financial adviser and should consider the
investment objective, policies and restrictions of the investment portfolio into which the shareholder is making an exchange. Brokers
may charge a fee for handling exchanges.
The Funds reserve the right to suspend, modify
or terminate the exchange privilege at any time. Notice will be given to shareholders of any material modification or termination
except where notice is not required. The Funds reserve the right to reject any telephone exchange request. Telephone exchanges
may be subject to limitations as to amount or frequency, and to other restrictions that may be established from time to time to
ensure that exchanges do not operate to the disadvantage of any portfolio or its shareholders.
The Funds, the Administrators and BRIL will employ
reasonable procedures to confirm that instructions communicated by telephone are genuine. The Funds, the Administrators and BRIL
will not be liable for any loss, liability, cost or expense for acting upon telephone instructions reasonably believed to be genuine
in accordance with such procedures. By use of the exchange privilege, the investor authorizes the Fund’s transfer agent to
act on telephonic or written exchange instructions from any person representing himself to be the investor and believed by the
Fund’s transfer agent to be genuine. The records of the Fund’s transfer agent pertaining to such instructions are binding.
The exchange privilege may be modified or terminated at any time upon 60 days’ notice to affected shareholders. The exchange
privilege is only available in states where the exchange may legally be made.
Each Fund reserves the right to limit the number
of times an investor may exercise the exchange privilege. Certain Funds may suspend the continuous offering of their shares to
the general public at any time and may resume such offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made. The exchange privilege may be applicable to other new mutual funds
whose shares may be distributed by the Distributor.
Fee-Based Programs
If you participate in certain fee-based programs
offered by BlackRock or an affiliate of BlackRock, or selected securities dealers or other financial intermediaries that have agreements
with the Distributor or in certain fee-based programs in which BlackRock participates, you may be able to buy Institutional or
Institutional Daily Shares, including by exchanges from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances. You generally cannot transfer shares held through a fee-based program into another
account. Instead, you will have to redeem your shares held through the program and purchase shares of
another class, which may be subject
to distribution and service fees. This may be a taxable event and you will pay any applicable sales charges.
Shareholders that participate in
a fee-based program generally have two options at termination. The program can be terminated and the shares liquidated or the
program can be terminated and the shares held in an account. In general, when a shareholder chooses to continue to hold the shares,
whatever share class was held in the program can be held after termination. Shares that have been held for less than specified
periods within the program may be subject to a fee upon redemption. Shareholders that held Investor A, Institutional or Institutional
Daily Shares in the program are eligible to purchase additional shares of the respective share class of a Fund, but may be subject
to upfront sales charges with respect to Investor A Shares. Additional purchases of Institutional or Institutional Daily Shares
are available only if you have an existing position at the time of purchase or are otherwise eligible to purchase Institutional
or Institutional Daily Shares.
Details about these features
and the relevant charges are included in the client agreement for each fee-based program and are available from your financial
professional, selected securities dealer or other financial intermediary.
Retirement and Education Savings Plans
Individual retirement accounts and other retirement
and education savings plans are available from your financial intermediary. Under these plans, investments may be made in a Fund
(other than a Municipal Fund) and certain of the other mutual funds sponsored by the Manager or its affiliates as well as in other
securities. There may be fees associated with investing through these plans. Information with respect to these plans is available
on request from your financial intermediary.
Dividends received in each of the plans referred
to above are exempt from Federal taxation until distributed from the plans and, in the case of Roth IRAs and education savings
plans, may be exempt from taxation when distributed as well. Investors considering participation in any retirement or education
savings plan should review specific tax laws relating to the plan and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
Automatic Investment Plans
Investor Share shareholders and certain Service
Share shareholders who were shareholders of the Compass Capital Group of Funds at the time of its combination with The PNC®
Fund in 1996 may arrange for periodic investments in that Fund through automatic deductions from a checking or savings account.
The minimum pre-authorized investment amount is $50. If you buy shares of a Fund through certain accounts, no minimum charge to
your bank account is required. Contact your financial adviser or other financial intermediary for more information.
Automatic Dividend Reinvestment Plan
Each Fund will distribute substantially
all of its net investment income and net realized capital gains, if any, to shareholders. All distributions are reinvested at
net asset value in the form of additional full and fractional shares of the same class of shares of the relevant Fund unless a
shareholder elects otherwise. Such election, or any revocation thereof, must be made in writing to the Transfer Agent, and will
become effective with respect to dividends paid after its receipt by the Transfer Agent.
Systematic Withdrawal Plans
Shareholders may receive regular distributions
from their accounts via a Systematic Withdrawal Plan (“SWP”). Upon commencement of the SWP, the account must have a
current value of $10,000 or more in a Fund. Shareholders may elect to receive automatic cash payments of $50 or more at any interval.
You may choose any day for the withdrawal. If no day is specified, the withdrawals will be processed on the 25th day of the month
or, if such day is not a business day, on the prior business day and are paid promptly thereafter. An investor may utilize the
SWP by completing the Systematic Withdrawal Plan Application Form which may be obtained by visiting our website at www.blackrock.com/funds.
Shareholders should realize that if withdrawals
exceed income dividends their invested principal in the account will be depleted. To participate in the SWP, shareholders must
have their dividends automatically reinvested.
Shareholders may change or cancel
the SWP at any time, upon written notice to the Fund, or by calling the Fund at (800) 441-7762. Purchases of additional Investor
A Shares of the Fund concurrently with withdrawals may be disadvantageous to investors because of the sales charges involved and,
therefore, are discouraged. No CDSC will be assessed on redemptions of Investor B, Investor B1, Investor B3, Investor C, Investor
C1, Investor C2 or Investor C3 Shares made through the SWP that do not exceed 12% of the original investment on an annualized
basis. For example, monthly, quarterly and semi-annual SWP redemptions of Investor B, Investor B1, Investor B3, Investor C, Investor
C1, Investor C2 or Investor C3 Shares will not be subject to the CDSC if they do not exceed 1% (monthly), 3% (quarterly) and 6%
(semi-annually), respectively, of an account’s net asset value on the redemption date. SWP redemptions of Investor B, Investor
B1, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares in excess of this limit are still subject to the applicable
CDSC.
For this reason, a shareholder may not participate
in the Automatic Investment Plan described above (see “How to Buy, Sell, Transfer and Exchange Shares” in the Fund’s
Prospectus) and the SWP at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders
to elect to have all their dividends and any other distributions from any Eligible Fund (which means funds so designated by the
Distributor from time to time) automatically invested at net asset value in one other such Eligible Fund designated by the shareholder,
provided the account into which the dividends and distributions are directed is initially funded with the requisite minimum amount.
P
RICING
OF
S
HARES
Determination of Net Asset Value
Valuation of Shares.
The net asset value
for each class of shares of each Fund is generally calculated as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each business day the NYSE is open.
Valuation of securities held by each Fund is as
follows:
Equity Investments.
Equity securities traded
on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that
provides contemporaneous transaction pricing information (an “Exchange”) are valued via independent pricing services
generally at the Exchange closing price or if an Exchange closing price is not available, the last traded price on that Exchange
prior to the time as of which the assets or liabilities are valued, however, under certain circumstances other means of determining
current market value may be used. If an equity security is traded on more than one Exchange, the current market value of the security
where it is primarily traded generally will be used. In the event that there are no sales involving an equity security held by
a Fund on a day on which the Fund values such security, the last bid (long positions) or ask (short positions) price, if available,
will be used as the value of such security. If a Fund holds both long and short positions in the same security, the last bid price
will be applied to securities held long and the last ask price will be applied to securities sold short. If no bid or ask price
is available on a day on which a Fund values such security, the prior day’s price will be used, unless BlackRock determines
that such prior day’s price no longer reflects the fair value of the security, in which case such asset would be treated
as a fair value asset.
Fixed Income Investments.
Fixed income
securities for which market quotations are readily available are generally valued using such securities’ most recent bid
prices provided directly from one or more broker-dealers, market makers, or independent third-party pricing services which may
use matrix pricing and valuation models to derive values, each in accordance with valuation procedures approved by the Fund’s
Board. The amortized cost method of valuation may be used with respect to debt obligations with sixty days or less remaining to
maturity unless the Manager and/or Sub-Adviser determine such method does not represent fair value. Loan participation notes are
generally valued at the mean of the last available bid prices from one or more brokers or dealers as obtained from independent
third-party pricing services. Certain fixed income investments including asset-backed and mortgage-related securities may be valued
based on valuation models that consider the estimated cash flows of each tranche of the entity, establish a benchmark yield and
develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche. Fixed income
securities for which market quotations are not readily available may be valued by third-party pricing services that make a valuation
determination by securing transaction data (e.g., recent representative bids), credit quality information, perceived market movements,
news, and other
relevant information and by other methods, which
may include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions.
Options, Futures, Swaps and Other Derivatives.
Exchange-traded equity options for which market quotations are readily available are valued at the mean of the last bid and ask
prices as quoted on the Exchange or the board of trade on which such options are traded. In the event that there is no mean price
available for an exchange traded equity option held by a Fund on a day on which the Fund values such option, the last bid (long
positions) or ask (short positions) price, if available, will be used as the value of such option. If no bid or ask price is available
on a day on which a Fund values such option, the prior day’s price will be used, unless BlackRock determines that such prior
day’s price no longer reflects the fair value of the option in which case such option will be treated as a fair value asset.
OTC derivatives may be valued using a mathematical model which may incorporate a number of market data factors. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at their last sale price or settle price as of the close
of such exchanges. Swap agreements and other derivatives are generally valued daily based upon quotations from market makers or
by a pricing service in accordance with the valuation procedures approved by the Board.
Underlying Funds.
Shares of underlying
open-end funds are valued at net asset value. Shares of underlying exchange-traded closed-end funds or other exchange-traded funds
will be valued at their most recent closing price.
General Valuation Information
In determining the market value of portfolio investments,
the Fund may employ independent third party pricing services, which may use, without limitation, a matrix or formula method that
takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the securities
being valued at a price different from the price that would have been determined had the matrix or formula method not been used.
All cash, receivables and current payables are carried on each Fund’s books at their face value.
Prices obtained from independent third party pricing
services, broker-dealers or market makers to value each Fund’s securities and other assets and liabilities are based on information
available at the time the Fund values its assets and liabilities. In the event that a pricing service quotation is revised or updated
subsequent to the day on which the Fund valued such security, the revised pricing service quotation generally will be applied prospectively.
Such determination shall be made considering pertinent facts and circumstances surrounding such revision.
In the event that application of the methods of
valuation discussed above result in a price for a security which is deemed not to be representative of the fair market value of
such security, the security will be valued by, under the direction of or in accordance with a method specified by the Fund’s
Board as reflecting fair value. All other assets and liabilities (including securities for which market quotations are not readily
available) held by a Fund (including restricted securities) are valued at fair value as determined in good faith by the Fund’s
Board or by BlackRock (its delegate). Any assets and liabilities which are denominated in a foreign currency are translated into
U.S. dollars at the prevailing rates of exchange.
Certain of the securities acquired by the Funds
may be traded on foreign exchanges or over-the-counter markets on days on which a Fund’s net asset value is not calculated.
In such cases, the net asset value of a Fund’s shares may be significantly affected on days when investors can neither purchase
nor redeem shares of the Fund.
Fair Value.
When market quotations are
not readily available or are believed by BlackRock to be unreliable, a Fund’s investments are valued at fair value (“Fair
Value Assets”). Fair Value Assets are valued by BlackRock in accordance with procedures approved by the Fund’s Board.
BlackRock may conclude that a market quotation is not readily available or is unreliable if a security or other asset or liability
does not have a price source due to its complete lack of trading, if BlackRock believes a market quotation from a broker-dealer
or other source is unreliable (e.g., where it varies significantly from a recent trade, or no longer reflects the fair value of
the security or other asset or liability subsequent to the most recent market quotation), where the security or other asset or
liability is only thinly traded or due to the occurrence of a significant event subsequent to the most recent market quotation.
For this purpose, a “significant event” is deemed to occur if BlackRock determines, in its business judgment prior
to or at the time of pricing a Fund’s assets or liabilities, that it is likely that the event will cause a material change
to the last exchange closing price or closing market price of one or more assets or liabilities held by the Fund. On any date the
NYSE is open and the primary exchange on which a foreign asset or liability is traded is closed, such asset or liability will be
valued using the prior day’s price, provided that BlackRock is not aware of any significant event or
other information that would cause such price
to no longer reflect the fair value of the asset or liability, in which case such asset or liability would be treated as a Fair
Value Asset. For certain foreign securities, a third-party vendor supplies evaluated, systematic fair value pricing based upon
the movement of a proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair value pricing
methodology is designed to correlate the prices of foreign securities following the close of the local markets to the price that
might have prevailed as of a Fund’s pricing time.
BlackRock, with input from the BlackRock Portfolio
Management Group, will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets
to BlackRock’s Valuation Committee. The Valuation Committee may accept, modify or reject any recommendations. In addition,
the Funds’ accounting agent periodically endeavors to confirm the prices it receives from all third party pricing services,
index providers and broker-dealers, and, with the assistance of BlackRock, to regularly evaluate the values assigned to the securities
and other assets and liabilities held by the Funds. The pricing of all Fair Value Assets is subsequently reported to and ratified
by the Board or a Committee thereof.
When determining the price for a Fair Value Asset,
the BlackRock Valuation Committee (or the Pricing Group) shall seek to determine the price that a Fund might reasonably expect
to receive from the current sale of that asset or liability in an arm’s-length transaction. The price generally may not be
determined based on what a Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds
the asset or liability to maturity. Fair value determinations shall be based upon all available factors that the Valuation Committee
(or Pricing Group) deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock
using proprietary or third party valuation models.
Fair value represents a good faith approximation
of the value of an asset or liability. The fair value of one or more assets or liabilities may not, in retrospect, be the price
at which those assets or liabilities could have been sold during the period in which the particular fair values were used in determining
a Fund’s net asset value. As a result, a Fund’s sale or redemption of its shares at net asset value, at a time when
a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing
shareholders.
Each Fund’s annual audited financial statements,
which are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”),
follow the requirements for valuation set forth in Financial Accounting Standards Board Accounting Standards Codification Topic
820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines and establishes a framework for
measuring fair value under US GAAP and expands financial statement disclosure requirements relating to fair value measurements.
Generally, ASC 820 and other accounting rules
applicable to mutual funds and various assets in which they invest are evolving. Such changes may adversely affect a Fund. For
example, the evolution of rules governing the determination of the fair market value of assets or liabilities to the extent such
rules become more stringent would tend to increase the cost and/or reduce the availability of third-party determinations of fair
market value. This may in turn increase the costs associated with selling assets or affect their liquidity due to the Fund’s
inability to obtain a third-party determination of fair market value.
P
ORTFOLIO
T
RANSACTIONS
AND
B
ROKERAGE
Transactions in Portfolio Securities
Subject to policies established by the Board of
Directors, BlackRock is primarily responsible for the execution of a Fund’s portfolio transactions and the allocation of
brokerage. BlackRock does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results
for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution, operational facilities of the firm and the firm’s risk and skill in positioning blocks
of securities. While BlackRock generally seeks reasonable trade execution costs, a Fund does not necessarily pay the lowest spread
or commission available, and payment of the lowest commission or spread is not necessarily consistent with obtaining the best price
and execution in particular transactions. Subject to applicable legal requirements, BlackRock may select a broker based partly
upon brokerage or research services provided to BlackRock and its clients, including a Fund. In return for such services, BlackRock
may cause a Fund to pay a higher commission than other brokers would charge if BlackRock determines in good faith that the commission
is reasonable in relation to the services provided.
In the case of Feeder Funds, because each Feeder
Fund generally invests exclusively in beneficial interests of a Master Portfolio, it is expected that all transactions in portfolio
securities will be entered into by the Master Portfolio.
In selecting brokers or dealers to execute portfolio
transactions, the Manager and sub-advisers seek to obtain the best price and most favorable execution for a Fund, taking into account
a variety of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in
which it is purchased or sold; (ii) the desired timing of the transaction; (iii) BlackRock’s knowledge of the expected commission
rates and spreads currently available; (iv) the activity existing and expected in the market for the particular security or instrument,
including any anticipated execution difficulties; (v) the full range of brokerage services provided; (vi) the broker’s or
dealer’s capital (vii) the quality of research and research services provided; (viii) the reasonableness of the commission,
dealer spread or its equivalent for the specific transaction; and (ix) BlackRock’s knowledge of any actual or apparent operational
problems of a broker or dealer.
Section 28(e) of the Exchange Act (“Section
28(e)”) permits an investment adviser, under certain circumstances, to cause an account to pay a broker or dealer a commission
for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction
in recognition of the value of brokerage and research services provided by that broker or dealer. This includes commissions paid
on riskless principal transactions under certain conditions. Brokerage and research services include: (1) furnishing advice as
to the value of securities, including pricing and appraisal advice, credit analysis, risk measurement analysis, performance and
other analysis, as well as the advisability of investing in, purchasing or selling securities, and the availability of securities
or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing
functions incidental to securities transactions (such as clearance, settlement, and custody). BlackRock believes that access to
independent investment research is beneficial to its investment decision-making processes and, therefore, to the Funds.
BlackRock may participate in client commission
arrangements under which BlackRock may execute transactions through a broker-dealer and request that the broker-dealer allocate
a portion of the commissions or commission credits to another firm that provides research to BlackRock. BlackRock believes that
research services obtained through soft dollar or commission sharing arrangements enhance its investment decision-making capabilities,
thereby increasing the prospects for higher investment returns. BlackRock will engage only in soft dollar or commission sharing
transactions that comply with the requirements of Section 28(e). BlackRock regularly evaluates the soft dollar products and services
utilized, as well as the overall soft dollar and commission sharing arrangements to ensure that trades are executed by firms that
are regarded as best able to execute trades for client accounts, while at the same time providing access to the research and other
services BlackRock views as impactful to its trading results.
BlackRock may utilize soft dollars and related
services, including research (whether prepared by the broker-dealer or prepared by a third-party and provided to BlackRock by the
broker-dealer) and execution or brokerage services within applicable rules and BlackRock’s policies to the extent that such
permitted services do not compromise BlackRock’s ability to seek to obtain best execution. In this regard, the portfolio
management investment and/or trading teams may consider a variety of factors, including the degree to which the broker-dealer:
(a) provides access to company management; (b) provides access to their analysts; (c) provides meaningful/insightful research notes
on companies or other potential investments; (d) facilitates calls on which meaningful or insightful ideas about companies or potential
investments are discussed; (e) facilitates conferences at which meaningful or insightful ideas about companies or potential investments
are discussed; or (f) provides research tools such as market data, financial analysis, and other third party related research and
brokerage tools that aid in the investment process.
Research-oriented services for which BlackRock
might pay with Fund commissions may be in written form or through direct contact with individuals and may include information as
to particular companies or industries and securities or groups of securities, as well as market, economic, or institutional advice
and statistical information, political developments and technical market information that assists in the valuation of investments.
Except as noted immediately below, research services furnished by brokers may be used in servicing some or all client accounts
and not all services may be used in connection with the Fund or account that paid commissions to the broker providing such services.
In some cases, research information received from brokers by mutual fund management personnel, or personnel principally responsible
for BlackRock’s individually managed portfolios, is not necessarily shared by and
between such personnel. Any investment advisory
or other fees paid by a Fund to BlackRock are not reduced as a result of BlackRock’s receipt of research services. In some
cases, BlackRock may receive a service from a broker that has both a “research” and a “non-research” use.
When this occurs BlackRock makes a good faith allocation, under all the circumstances, between the research and non-research uses
of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while
BlackRock will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this
good faith allocation, BlackRock faces a potential conflict of interest, but BlackRock believes that its allocation procedures
are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research
uses.
Payments of commissions to brokers who are affiliated
persons of the Fund, or the Master Portfolio with respect to the Feeder Fund (or affiliated persons of such persons), will be made
in accordance with Rule 17e-1 under the Investment Company Act. Subject to policies established by the Board of Directors of the
Master Portfolio, BlackRock is primarily responsible for the execution of the Master Portfolio’s portfolio transactions and
the allocation of brokerage.
From time to time, a Fund may purchase new issues
of securities in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition
to selling securities, provide BlackRock with research services. FINRA has adopted rules expressly permitting these types of arrangements
under certain circumstances. Generally, the broker will provide research “credits” in these situations at a rate that
is higher than that available for typical secondary market transactions. These arrangements may not fall within the safe harbor
of Section 28(e).
BlackRock does not consider sales of shares of
the mutual funds it advises as a factor in the selection of brokers or dealers to execute portfolio transactions for a Fund; however,
whether or not a particular broker or dealer sells shares of the mutual funds advised by BlackRock neither qualifies nor disqualifies
such broker or dealer to execute transactions for those mutual funds.
Each Fund anticipates that its brokerage transactions
involving foreign securities generally will be conducted primarily on the principal stock exchanges of the applicable country.
Foreign equity securities may be held by a Fund in the form of depositary receipts, or other securities convertible into foreign
equity securities. Depositary receipts may be listed on stock exchanges, or traded in over-the-counter markets in the United States
or Europe, as the case may be. American Depositary Receipts, like other securities traded in the United States, will be subject
to negotiated commission rates. Because the shares of each Fund are redeemable on a daily basis in U.S. dollars, each Fund intends
to manage its portfolio so as to give reasonable assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. Under present conditions, it is not believed that these considerations will have a significant
effect on a Fund’s portfolio strategies.
See “Portfolio Transactions and Brokerage”
in the Statement of Additional Information for information about the brokerage commissions paid by your Fund, including commissions
paid to affiliates, if any, for the periods indicated.
Each Fund may invest in certain securities traded
in the OTC market and intends to deal directly with the dealers who make a market in the particular securities, except in those
circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated
with a Fund and persons who are affiliated with such affiliated persons are prohibited from dealing with the Fund as principal
in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since
transactions in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Funds
will not deal with affiliated persons, including PNC and its affiliates, in connection with such transactions. However, an affiliated
person of a Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the
fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, a Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which PNC is a member or in a private placement in which PNC serves as placement
agent except pursuant to procedures approved by the Board of Directors that either comply with rules adopted by the Commission
or with interpretations of the Commission staff.
Over-the-counter issues, including most fixed
income securities such as corporate debt and U.S. Government securities, are normally traded on a “net” basis without
a stated commission, through dealers acting for their own account and not as brokers. The Funds will primarily engage in transactions
with these dealers or deal directly with the issuer unless a better price or execution could be obtained by using a broker. Prices
paid to a dealer with respect to both foreign and domestic securities will generally include a “spread,” which is the
difference between the prices at which the dealer is willing to purchase and sell the specific security at the time, and includes
the dealer’s normal profit.
Purchases of money market instruments by a Fund
are made from dealers, underwriters and issuers. The Funds do not currently expect to incur any brokerage commission expense on
such transactions because money market instruments are generally traded on a “net” basis with dealers acting as principal
for their own accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer.
Each Money Market Fund intends to purchase only securities with remaining maturities of 13 months or less as determined in accordance
with the rules of the Commission. As a result, the portfolio turnover rates of a Money Market Fund will be relatively high. However,
because brokerage commissions will not normally be paid with respect to investments made by a Money Market Fund, the turnover rates
should not adversely affect the Fund’s net asset values or net income.
Securities purchased in underwritten offerings
include a fixed amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount.
When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Manager or sub-advisers may seek to obtain
an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the repurchase of such securities
from a Fund prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities),
if it believes that a Fund’s anticipated need for liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that a Fund would incur a capital loss in liquidating commercial paper, especially if interest rates have
risen since acquisition of such commercial paper.
Investment decisions for each Fund and for other
investment accounts managed by the Manager or sub-advisers are made independently of each other in light of differing conditions.
BlackRock allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in
making such allocations. These factors include: (i) investment objectives or strategies for particular accounts, including sector,
industry, country or region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or investment concentration
parameters for an account, (iv) supply or demand for a security at a given price level, (v) size of available investment, (vi)
cash availability and liquidity requirements for accounts, (vii) regulatory restrictions, (viii) minimum investment size of an
account, (ix) relative size of account, and (x) such other factors as may be approved by BlackRock’s general counsel. Moreover,
investments may not be allocated to one client account over another based on any of the following considerations: (i) to favor
one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce
greater performance compensation to BlackRock, (iii) to develop or enhance a relationship with a client or prospective client,
(iv) to compensate a client for past services or benefits rendered to BlackRock or to induce future services or benefits to be
rendered to BlackRock, or (v) to manage or equalize investment performance among different client accounts.
Equity securities will generally be allocated
among client accounts within the same investment mandate on a pro rata basis. This pro-rata allocation may result in a Fund receiving
less of a particular security than if pro-ration had not occurred. All allocations of equity securities will be subject, where
relevant, to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be
over-subscribed and subsequently trade at a premium in the secondary market. When BlackRock is given an opportunity to invest in
such an initial offering or “new” or “hot” issue, the supply of securities available for client accounts
is often less than the amount of securities the accounts would otherwise take. In order to allocate these investments fairly and
equitably among client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate
to BlackRock’s trading desk their level of interest in a particular offering with respect to eligible clients accounts for
which that team is responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular
client accounts that are managed by portfolio teams who have indicated interest in the offering based on market capitalization
of the issuer of the security and the investment mandate of the client account and in the case of
international equity securities, the country where
the offering is taking place and the investment mandate of the client account. Generally, shares received during the initial public
offering will be allocated among participating client accounts within each investment mandate on a pro rata basis. In situations
where supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate
such investment opportunities among one or more accounts so long as the rotation system provides for fair access for all client
accounts over time. Other allocation methodologies that are considered by BlackRock to be fair and equitable to clients may be
used as well.
Because different accounts may have differing
investment objectives and policies, BlackRock may buy and sell the same securities at the same time for different clients based
on the particular investment objective, guidelines and strategies of those accounts. For example, BlackRock may decide that it
may be entirely appropriate for a growth fund to sell a security at the same time a value fund is buying that security. To the
extent that transactions on behalf of more than one client of BlackRock or its affiliates during the same period may increase the
demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. For example,
sales of a security by BlackRock on behalf of one or more of its clients may decrease the market price of such security, adversely
impacting other BlackRock clients that still hold the security. If purchases or sales of securities arise for consideration at
or about the same time that would involve a Fund or other clients or funds for which BlackRock or an affiliate act as investment
manager, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed
equitable to all.
In certain instances, BlackRock may find it efficient
for purposes of seeking to obtain best execution, to aggregate or “bunch” certain contemporaneous purchases or sale
orders of its advisory accounts. In general, all contemporaneous trades for client accounts under management by the same portfolio
manager or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client
with an opportunity to achieve a more favorable execution at a potentially lower execution cost. The costs associated with a bunched
order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager
or management team is filled at several different prices through multiple trades, all accounts participating in the order will
receive the average price except in the case of certain international markets where average pricing is not permitted. While in
some cases this practice could have a detrimental effect upon the price or value of the security as far as a Fund is concerned,
in other cases it could be beneficial to the Fund. Transactions effected by BlackRock on behalf of more than one of its clients
during the same period may increase the demand for securities being purchased or the supply of securities being sold, causing an
adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able
to provide the best execution of the order. Orders for purchase or sale of securities will be placed within a reasonable amount
of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
A Fund will not purchase securities during the
existence of any underwriting or selling group relating to such securities of which BlackRock, PNC, BRIL or any affiliated person
(as defined in the Investment Company Act) thereof is a member except pursuant to procedures adopted by the Board of Directors
in accordance with Rule 10f-3 under the Investment Company Act. In no instance will portfolio securities be purchased from or sold
to BlackRock, PNC, BRIL or any affiliated person of the foregoing entities except as permitted by Commission exemptive order or
by applicable law.
Portfolio Turnover
While a Fund generally does not expect to engage
in trading for short term gains, it will effect portfolio transactions without regard to any holding period if, in Fund management’s
judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular
industry or in general market, economic or financial conditions. The portfolio turnover rate is calculated by dividing the lesser
of a Fund’s annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. government securities
and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax consequences, such as increased
capital gain dividends and/or ordinary income dividends, and in correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by a Fund.
D
IVIDENDS
AND
T
AXES
Dividends
Each Fund intends to distribute substantially
all of its net investment income, if any. Dividends from such net investment income are paid as set forth in each Fund’s
prospectus. Each Fund will also distribute all net realized capital gains, if any, as set forth in such Fund’s prospectus.
From time to time, a Fund may declare a special distribution at or about the end of the calendar year in order to comply with Federal
tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year. If in any fiscal
year, a Fund has net income from certain foreign currency transactions, such income will be distributed at least annually.
For information concerning the manner in which
dividends may be reinvested automatically in shares of each Fund, see “Shareholder Services — Automatic Dividend Reinvestment
Plan.” Shareholders may also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders,
as discussed below, whether they are reinvested in shares of the Fund or received in cash. The per share dividends on front-end
load shares, CDSC shares and Service Shares will be lower than the per share dividends on Institutional Shares as a result of the
service, distribution and higher transfer agency fees applicable to CDSC shares, the service fees applicable to front-end load
shares and Service Shares, and the service and distribution fees applicable to Class R Shares. Similarly, the per share dividends
on CDSC shares and Class R Shares will be lower than the per share dividends on front-end load shares and Service Shares as a result
of the distribution fees and higher transfer agency fees applicable to CDSC shares and the distribution fees applicable to Class
R Shares, and the per share dividends on CDSC shares will be lower than the per share dividends on Class R Shares as a result of
the higher distribution fees and higher transfer agency fees applicable to CDSC shares.
Taxes
Each Fund intends to continue to qualify for the
special tax treatment afforded to regulated investment companies (“RICs”) under the Code. As long as a Fund so qualifies,
the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its investment company taxable income
and net realized capital gains that it distributes to its shareholders in years in which it distributes at least 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any, for the year. To qualify as a RIC, a Fund must meet
certain requirements regarding the source of its income and the composition and diversification of its assets. See Part II,
“Investment Risks and Considerations—Investment Restrictions (All Funds)” for a discussion of the asset diversification
requirements. In the case of a Feeder Fund, such Fund may look to the underlying assets of the Master Portfolio in which it has
invested for purposes of satisfying the asset diversification requirement and various other requirements of the Code applicable
to RICs.
Each Fund intends to distribute substantially
all of such income and gains. If, in any taxable year, a Fund fails to qualify as a RIC under the Code, notwithstanding the availability
of certain relief provisions, such Fund would be taxed in the same manner as an ordinary corporation and all distributions from
earnings and profits (as determined under Federal income tax principles) to its shareholders would be taxable as ordinary dividend
income eligible for taxation at a reduced tax rate for non-corporate shareholders and the dividends-received deduction for corporate
shareholders. However, a Municipal Fund’s distributions derived from income on tax-exempt obligations, as defined herein,
would no longer qualify for treatment as exempt interest. Each Fund that is a series of a RIC that consists of multiple series
is treated as a separate corporation for Federal income tax purposes, and therefore is considered to be a separate entity in determining
its treatment under the rules for RICs. Losses in one series of a RIC do not offset gains in another, and the requirements (other
than certain organizational requirements) for qualifying for RIC status will be determined at the level of the individual series.
In the following discussion, the term “Fund” means each individual series, if applicable.
The Code requires a RIC to pay a nondeductible
4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a
calendar year basis, and 98.2% of its capital gain net income, determined, in general, as if the RIC’s taxable year ended
on October 31, plus certain undistributed amounts from the previous years. While each Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax, there can be no assurance that a sufficient amount
of the Fund’s taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event,
a Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements.
Dividends paid by a Fund from its ordinary income
or from an excess of net short-term capital gain over net long-term capital loss (together referred to as “ordinary income
dividends”) are taxable to shareholders as ordinary
income. Distributions made from an excess of net
long-term capital gain over net short-term capital loss (including gains or losses from certain transactions in futures and options)
(“capital gain dividends”) are taxable to shareholders as long-term capital gains, regardless of the length of time
the shareholder has owned Fund shares. Distributions paid by a Fund that are reported as exempt-interest dividends will not be
subject to regular Federal income tax. Certain dividend income and long-term capital gains are eligible for taxation at a reduced
rate that applies to non-corporate shareholders. Under these rules, the portion of ordinary income dividends constituting “qualified
dividend income” when paid by a RIC to non-corporate shareholders may be taxable to such shareholders at long-term capital
gain rates. However, to the extent a Fund’s distributions are derived from income on debt securities, certain types of preferred
stock treated as debt for Federal income tax purposes and short-term capital gains, such distributions will not constitute “qualified
dividend income.”
Beginning in 2013, a 3.8% Medicare
contribution tax is imposed on net investment income, including interest, dividends, and net gain, of U.S. individuals with income
exceeding $200,000 (or $250,000 if married filing jointly), and of estates and trusts.
A Fund’s net capital gain (the excess of
net long-term capital gains over net short-term capital losses) is not subject to the 90% distribution requirement for taxation
as a RIC, described above. If a Fund retains net capital gain, it is subject to tax on that gain, and may designate the retained
amount as undistributed capital gain in a notice to its shareholders, who will be required to include in income, as long-term capital
gain, their proportionate shares of such undistributed net capital gain, will be deemed to have paid and may claim as a credit
against their Federal income tax liability (and as a refund to the extent it exceeds that liability) their proportionate shares
of the tax paid by the Fund on that gain, and may increase the basis of their shares in the Fund by the excess of the amount included
in income over the amount allowed as a credit against their taxes.
Distributions in excess of a Fund’s current
and accumulated earnings and profits will first constitute nontaxable returns of capital and will reduce the adjusted tax basis
of a holder’s shares and after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming
the shares are held as a capital asset). Distributions in excess of a Fund’s minimum distribution requirements but not in
excess of a Fund’s earnings and profits will be taxable to shareholders and will not constitute nontaxable returns of capital.
A Fund’s capital loss carryovers, if any, carried from taxable years beginning before 2011 do not reduce current earnings
and profits, even if such carryforwards offset current year realized gains. Any loss upon the sale or exchange of Fund shares held
for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder.
Ordinary income and capital gain dividends are
taxable to shareholders even if they are reinvested in additional shares of a Fund. Distributions by a Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends received deduction allowed to corporations under the
Code. If a Fund pays a dividend in January that was declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received
by its shareholders on December 31 of the year in which the dividend was declared.
No gain or loss will be recognized by Investor
B or Investor B1 shareholders on the conversion of their Investor B Shares into Investor A Shares or Investor B1 Shares into Investor
A1 Shares. A shareholder’s tax basis in the Investor A or Investor A1 Shares acquired upon conversion will be the same as
the shareholder’s tax basis in the converted Investor B or Investor B1 Shares, and the holding period of the acquired Investor
A or Investor A1 Shares will include the holding period for the converted Investor B or Investor B1 Shares.
If a shareholder of a Fund exercises an exchange
privilege within 90 days of acquiring the shares of a Fund, prior to January 31 of the following year, then the loss that the shareholder
recognizes on the exchange will be reduced (or the gain increased) to the extent any sales charge paid on the exchanged shares
reduces any sales charge the shareholder would have owed upon the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares
of a Fund will be disallowed if other substantially identical shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date on which the shares are
sold or exchanged. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Certain Funds may invest in derivative contracts
such as options, futures contracts, forward contracts and swap agreements. The federal income tax treatment of a derivative contract
may not be as favorable as a direct investment
in the underlying security and may adversely
affect the timing, character and amount of income the Fund realizes from its investments. As a result, a larger portion of the
Fund's distributions may be treated as ordinary income rather than capital gains. In addition, “section 1256 contracts”
held by a Fund at the end of each taxable year (and, for purposes of the 4% excise tax, certain other dates as prescribed under
the Code) are generally “marked-to-market,” and unrealized gains or losses are treated as though they were realized,
which may increase the amount that must be distributed to meet distribution requirements and avoid the excise tax. In addition,
the tax treatment of derivative contracts, such as swap agreements, is unsettled and may be subject to future legislation, regulation
or administrative pronouncements issued by the IRS. If such future guidance limits the Fund’s ability to use derivatives,
the Fund may have to find other ways of achieving its investment objectives.
A provision added to the Code by the Dodd-Frank
Wall Street Reform and Consumer Protection Act clarifies that certain swap agreements, including exchange-traded swap agreements,
are treated as notional principal contracts rather than as section 1256 contracts. This can affect the type of income earned by
such swap agreements. Although all of the income on a notional principal contract is ordinary income, only some of the income on
a section 1256 contract is short-term capital gain, which is generally taxable at ordinary income rates. The rest is long-term
capital gain, which may be taxable at more favorable rates than ordinary income. Recently proposed regulations interpret what types
of swap agreements are to be treated as notional principal contracts rather than as section 1256 contracts. When finalized, these
regulations could result in the Fund having to treat more of its income on swap agreements and more of the distributions made to
shareholders as ordinary income and less as long-term capital gains.
Certain Funds may invest in zero coupon U.S. Treasury
bonds and other debt securities that are issued at a discount or provide for deferred interest. Even though a Fund receives no
actual interest payments on these securities, it will be deemed to receive income equal, generally, to a portion of the excess
of the face value of the securities over their issue price (“original issue discount”) each year that the securities
are held. Since the original issue discount income earned by a Fund in a taxable year may not be represented by cash income, the
Fund may have to dispose of securities, which it might otherwise have continued to hold, or borrow to generate cash in order to
satisfy its distribution requirements. In addition, a Fund’s investment in foreign currencies or foreign currency denominated
or referenced debt securities, certain asset-backed securities and contingent payment and inflation-indexed debt instruments also
may increase or accelerate the Fund’s recognition of income, including the recognition of taxable income in excess of cash
generated by such investments.
Ordinary income dividends paid to shareholders
who are nonresident aliens or foreign entities generally will be subject to a 30% U.S. withholding tax under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law.
A 30% withholding tax will be imposed
on U.S.-source dividends, interest and other income items paid after June 30, 2014, and proceeds from the sale of property producing
U.S.-source dividends and interest paid after December 31, 2016, to (i) foreign financial institutions, including non-U.S. investment
funds, unless they agree to collect and disclose to the IRS information regarding their direct and indirect U.S. account holders
and (ii) certain other foreign entities, unless they certify certain information regarding their direct and indirect U.S. owners.
To avoid withholding, foreign financial institutions will need to (i) enter into agreements with the IRS that state that they
will provide the IRS information, including the names, addresses and taxpayer identification numbers of direct and indirect U.S.
account holders, comply with due diligence procedures with respect to the identification of U.S. accounts, report to the IRS certain
information with respect to U.S. accounts, agree to withhold tax on certain payments made to non-compliant foreign financial institutions
or to account holders that fail to provide the required information, and determine certain other information concerning their
account holders, or (ii) in the event that an applicable intergovernmental agreement and implementing legislation are adopted,
provide local revenue authorities with similar account holder information. Other foreign entities will need to either provide
the name, address, and taxpayer identification number of each substantial U.S. owner or certifications of no substantial U.S.
ownership unless certain exceptions apply.
Foreign shareholders of a Fund must generally
treat a distribution attributable to gain from a Fund’s sale of an interest in a REIT as real property gain if 50% or more
of the value of a Fund’s assets is invested in REITs. The Fund is required to withhold a 35% tax on a distribution to a foreign
shareholder attributable to real property gain, and such a distribution may subject a foreign shareholder to a U.S. tax filing
obligation and create a branch profits tax liability for foreign corporate shareholders. Under a de minimis exception to this rule,
if the foreign shareholder
has not held more than 5% of a class of stock
at any time during the one-year period ending on the date of the distribution, the foreign shareholder is not treated as receiving
real property gain. There are also certain additional restrictions regarding the use of wash sales and substitute payments.
Shareholders that are nonresident aliens or foreign
entities are urged to consult their own tax advisers concerning the particular tax consequences to them of an investment in a Fund.
Under certain provisions of the Code,
some shareholders may be subject to a 28% withholding tax on ordinary income dividends, capital gain dividends and redemption
payments (“backup withholding”). Generally, shareholders subject to backup withholding will be non-corporate shareholders
for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund’s knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amount
withheld generally may be allowed as a refund or a credit against a shareholder’s Federal income tax liability, provided
that the required information is timely forwarded to the IRS.
If a shareholder recognizes a loss with respect
to a Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder
in any single taxable year (or a greater amount in any combination of taxable years), the shareholder must file a disclosure statement
on Form 8886 with the IRS. Direct shareholders of portfolio securities are in many cases exempted. That a loss is reportable under
these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders
should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Dividends and interest received by a Fund may
give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain foreign countries and the
United States may reduce or eliminate such taxes. Shareholders of a Fund more than 50% by value of the assets of which at the close
of a taxable year are foreign securities may be able to claim U.S. foreign tax credits with respect to such foreign taxes paid
by the Fund, subject to certain requirements and limitations contained in the Code. For example, certain retirement accounts and
certain tax-exempt organizations cannot claim foreign tax credits on investments in foreign securities held in a Fund. In addition,
a foreign tax credit may be claimed with respect to withholding tax on payments with respect to a security only if the holder of
the security meets certain holding period requirements. Both the shareholder and the Fund must meet these holding period requirements,
and if a Fund fails to do so, it will not be able to “pass through” to shareholders the ability to claim a credit or
a deduction for the related foreign taxes paid by the Fund. Further, to the extent that a Fund engages in securities lending with
respect to a security paying income subject to foreign taxes, it may not be able to pass through to its shareholders the ability
to take a foreign tax credit for those taxes. If a Fund satisfies the applicable requirements, such Fund will be eligible to file
an election with the IRS pursuant to which shareholders of the Fund will be required to include their proportionate shares of such
foreign taxes in their U.S. income tax returns as gross income, treat such proportionate shares as taxes paid by them, and deduct
such proportionate shares in computing their taxable incomes or, alternatively, use them as foreign tax credits against their U.S.
income taxes. No deductions for foreign taxes, however, may be claimed by noncorporate shareholders who do not itemize deductions.
A shareholder that is a nonresident alien individual or a foreign corporation may be subject to U.S. withholding tax on the income
resulting from a Fund’s election described in this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder. A Fund will report annually to its shareholders
the amount per share of such foreign taxes and other information needed to claim the foreign tax credit.
Certain transactions entered into by the Funds
are subject to special tax rules of the Code that may, among other things, (a) affect the character of gains and losses realized,
(b) disallow, suspend or otherwise limit the allowance of certain losses or deductions, and (c) accelerate the recognition of income
without a corresponding receipt of cash (with which to make the necessary distributions to satisfy distribution requirements applicable
to RICs). Operation of these rules could, therefore, affect the character, amount and timing of distributions to shareholders.
Special tax rules also may require a Fund to mark to market certain types of positions in its portfolio (
i.e.
, treat them
as sold on the last day of the taxable year), and may result in the recognition of income without a corresponding receipt of cash.
Funds engaging in transactions affected by these provisions intend to monitor their transactions, make appropriate tax elections
and make appropriate entries in their books and records to lessen the effect of these tax rules and avoid any possible disqualification
from the special treatment afforded RICs under the Code.
A Fund that invests in commodities-linked instruments
may take certain positions through a wholly-owned (or majority-owned), foreign subsidiary (the “Subsidiary”). Based
on the anticipated structure and activities of the Subsidiary, it is expected that the Subsidiary will be a “controlled foreign
corporation” and that all of its net income will be “subpart F income” for U.S. federal income tax purposes.
If that is the case, the Fund will be required to report all of the Subsidiary’s net income as ordinary income regardless
of whether that income would be treated differently (for example, as capital gain) at the Subsidiary level and regardless of whether
that income is distributed to the Fund. (Previously taxed income will not, however, be taxable again when distributed). If a net
loss is realized by the Subsidiary in any taxable year, the loss will generally not be available to offset the Fund’s other
income for that year. It is not expected that the Subsidiary will be subject to an entity level tax.
If a Fund purchases shares of an investment company
(or similar investment entity) organized under foreign law, the Fund will generally be treated as owning shares in a passive foreign
investment company (“PFIC”) for Federal income tax purposes. A Fund may be subject to Federal income tax, and interest
charges (at the rate applicable to tax underpayments) on tax liability treated as having been deferred with respect to certain
distributions from such a company and on gain from the disposition of the shares of such a company (collectively referred to as
“excess distributions”), even if such excess distributions are paid by the Fund as a dividend to its shareholders.
However, a Fund may elect to “mark to market” at the end of each taxable year shares that it holds in PFICs. The election
is made separately for each PFIC held and, once made, would be effective for all subsequent taxable years, unless revoked with
consent from the IRS. Under this election, a Fund would recognize as ordinary income any increase in the value of its shares as
of the close of the taxable year over their adjusted tax basis and as ordinary loss any decrease in such value, but only to the
extent of previously recognized “mark-to-market” gains. By making the mark-to-market election, a Fund could avoid imposition
of the interest charge with respect to excess distributions from PFICs, but in any particular year might be required to recognize
income in excess of the distributions it received from PFICs.
If the Fund were to invest in a PFIC and elect
to treat the PFIC as a “qualified electing fund” under the Code, in lieu of the foregoing requirements, the Fund would
be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund,
even if not distributed to the Fund, and such amounts would be subject to the 90% and excise tax distribution requirements described
above. In order to make this election, the Fund would be required to obtain certain annual information from the PFICs in which
it invests, which may be difficult or impossible to obtain.
Municipal Funds
Each Municipal Fund intends to qualify to pay
“exempt-interest dividends” as defined in Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of a Fund’s taxable year, at least 50% of the value of the Fund’s total assets consists of obligations exempt
from Federal income tax (“tax-exempt obligations”) under Section 103(a) of the Code (relating generally to obligations
of a state or local governmental unit), the Fund shall be qualified to pay exempt-interest dividends to holders of all outstanding
classes of its shares (together the “shareholders”). Exempt-interest dividends are dividends or any part thereof paid
by a Fund that are attributable to interest on tax-exempt obligations and reported by the Fund as exempt-interest dividends. A
Fund will allocate interest from tax-exempt obligations (as well as ordinary income, capital gains and tax preference items discussed
below) among the Fund’s shareholders according to a method (that it believes is consistent with the Commission rule permitting
the issuance and sale of multiple classes of shares) that is based upon the gross income that is allocable to each class of shareholders
during the taxable year, or such other method as the IRS may prescribe.
Exempt-interest dividends will be excludable from
a shareholder’s gross income for Federal income tax purposes. Exempt-interest dividends are included, however, in determining
the portion, if any, of a person’s social security and railroad retirement benefits subject to Federal income taxes. Interest
on indebtedness incurred or continued to purchase or carry shares of a RIC paying exempt-interest dividends, such as the Fund,
will not be deductible by the investor for Federal income tax purposes to the extent attributable to exempt-interest dividends.
Shareholders are advised to consult their tax advisers with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if a shareholder would be treated as a “substantial user” or “related person” under
Code Section 147(a) with respect to property financed with the proceeds of an issue of PABs, if any, held by a Fund.
All or a portion of a Fund’s gains from
the sale or redemption of tax-exempt obligations purchased at a market discount will be treated as ordinary income rather than
capital gain. This rule may increase the amount of ordinary income dividends received by shareholders. Distributions in excess
of a Fund’s earnings and profits will first reduce the adjusted tax basis of a holder’s shares and, after such adjusted
tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Any
loss upon the sale or exchange of Fund shares held for six months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not disallowed under the rule stated above will be treated
as long-term capital loss to the extent of any capital gain dividends received by the shareholder.
The Code subjects interest received on certain
otherwise tax-exempt securities to a Federal alternative minimum tax. The alternative minimum tax applies to interest received
on certain “PABs” issued after August 7, 1986. PABs are bonds that, although tax-exempt, are used for purposes other
than those generally performed by governmental units and that benefit non-governmental entities (
e.g.
, bonds used for industrial
development or housing purposes). Income received on such bonds is classified as an item of “tax preference,” which
could subject certain investors in such bonds, including shareholders of a Fund, to a Federal alternative minimum tax. A Fund will
purchase such “PABs” and will report to shareholders after the close of the calendar year-end the portion of the Fund’s
dividends declared during the year that constitute an item of tax preference for alternative minimum tax purposes. The Code further
provides that corporations are subject to a Federal alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation’s “adjusted current earnings,” which more closely
reflect a corporation’s economic income. Because an exempt-interest dividend paid by a Fund will be included in adjusted
current earnings, a corporate shareholder may be required to pay alternative minimum tax on exempt-interest dividends paid by the
Fund.
Each Municipal Fund may engage in interest rate
swap transactions. The Federal income tax rules governing the taxation of interest rate swaps are not entirely clear and may require
a Fund to treat payments received under such arrangements as ordinary income and to amortize payments made under certain circumstances.
Because payments received by a Fund in connection with swap transactions will be taxable rather than tax-exempt, they may result
in increased taxable distributions to shareholders.
Please see Part I of your Fund’s Statement
of Additional Information for certain state tax information relevant to an investment in BlackRock California Municipal Bond Fund,
BlackRock New Jersey Municipal Bond Fund, BlackRock New York Municipal Bond Fund and BlackRock Pennsylvania Municipal Bond Fund,
as well as information on economic conditions within each applicable state.
The foregoing is a general and abbreviated summary
of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should
be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations
are subject to change by legislative, judicial or administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may
also be subject to state and local taxes. Certain states exempt from state income taxation dividends paid by RICs that are derived
from interest on U.S. government obligations. State law varies as to whether dividend income attributable to U.S. government obligations
is exempt from state income tax.
Shareholders of each Fund are urged to consult
their tax advisers regarding specific questions as to Federal, foreign, state or local taxes with respect to their Fund. Foreign
investors should consider applicable foreign taxes in their evaluation of an investment in a Fund.
In the case of a Feeder Fund, such Fund is entitled
to look to the underlying assets of the Master Portfolio in which it has invested for purposes of satisfying various qualification
requirements of the Code applicable to RICs. Each Master Portfolio is classified either as a partnership or a separate disregarded
entity (depending on the particular Master Portfolio) for U.S. Federal income tax purposes. If applicable tax provisions were to
change, then the Board of Directors of a Feeder Fund will determine, in its discretion, the appropriate course of action for the
Feeder Fund. One possible course of action would be to withdraw the Feeder Fund’s investments from the Master Portfolio and
to retain an investment manager to manage the Feeder Fund’s assets in accordance with the investment policies applicable
to the Feeder Fund.
The foregoing general discussion of Federal income
tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this Statement of Additional
Information. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed
in this discussion, and any such changes or decisions may have a retroactive effect.
An investment in a Fund may have consequences
under state, local or foreign tax law, about which investors should consult their tax advisors.
P
ERFORMANCE
D
ATA
From time to time a Fund may include its average
annual total return and other total return data, and, if applicable, yield and tax-equivalent yield in advertisements or information
furnished to present or prospective shareholders. Total return, yield and tax-equivalent yield each is based on a Fund’s
historical performance and is not intended to indicate future performance. Average annual total return is determined separately
for each class of shares in accordance with a formula specified by the Commission.
Quotations of average annual total return, before
tax, for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income
and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each period. Average annual total return before taxes
is computed assuming all dividends are reinvested and taking into account all applicable recurring and nonrecurring expenses, including
the maximum sales charge, in the case of front-end load shares, and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of CDSC shares, but does not take into account taxes payable on
dividends or on redemption.
Quotations of average annual total return, after
taxes, on dividends for the specified periods are computed by finding the average annual compounded rates of return that would
equate the initial amount invested to the ending value of such investment at the end of each period assuming payment of taxes on
dividends received during such period. Average annual total return after taxes on dividends is computed assuming all dividends,
less the taxes due on such dividends, are reinvested and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge, in the case of front-end load shares and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of CDSC shares. The taxes due on dividends are calculated by applying
to each dividend the highest applicable marginal Federal individual income tax rates in effect on the reinvestment date for that
dividend. The rates used correspond to the tax character (including eligibility for the maximum 20% tax rate applicable to qualified
dividend income) of each dividend. The taxable amount and tax character of each dividend are specified by each Fund on the dividend
declaration date, but may be adjusted to reflect subsequent recharacterizations of distributions. The applicable tax rates may
vary over the measurement period. The effects of state and local taxes are not reflected. Applicable tax credits, such as foreign
credits, are taken into account according to Federal law. The ending value is determined assuming complete redemption at the end
of the applicable periods with no tax consequences associated with such redemption.
Quotations of average annual total return, after
taxes, on both dividends and redemption for the specified periods are computed by finding the average annual compounded rates of
return that would equate the initial amount invested to the ending value of such investment at the end of each period assuming
payment of taxes on dividends received during such period as well as on complete redemption. Average annual total return after
taxes on distributions and redemption is computed assuming all dividends, less the taxes due on such dividends, are reinvested
and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of front-end
load shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period
in the case of CDSC shares and assuming, for all classes of shares, complete redemption and payment of taxes due on such redemption.
The ending value is determined assuming complete redemption at the end of the applicable periods, subtracting capital gains taxes
resulting from the redemption and adding the presumed tax benefit from capital losses resulting from redemption. The taxes due
on dividends and on the deemed redemption are calculated by applying the highest applicable marginal Federal individual income
tax rates in effect on the reinvestment and/or the redemption date. The rates used correspond to the tax character (including eligibility
for the maximum 20% tax rate applicable to qualified dividend income) of each component of each dividend and/or the
redemption payment. The applicable tax rates may
vary over the measurement period. The effects of state and local taxes are not reflected.
A Fund also may quote annual, average annual and
annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical
investment of $1,000 or some other amount, for various periods other than those noted in Part I of each Fund’s Statement
of Additional Information. Such data will be computed as described above, except that (1) as required by the periods of the quotations,
actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance
data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
Yield quotations will be computed based on a 30-day
period by dividing (a) the net income based on the yield of each security earned during the period by (b) the average daily number
of shares outstanding during the period that were entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. Tax equivalent yield quotations will be computed by dividing (a) the part of a Fund’s yield
that is tax-exempt by (b) one minus a stated tax rate and adding the result to that part, if any, of the Fund’s yield that
is not tax-exempt.
A Fund’s total return will vary depending
on market conditions, the securities comprising a Fund’s portfolio, a Fund’s operating expenses and the amount of realized
and unrealized net capital gains or losses during the period. The value of an investment in a Fund will fluctuate and an investor’s
shares, when redeemed, may be worth more or less than their original cost.
In order to reflect the reduced sales charges
in the case of front-end load shares or the waiver of the CDSC in the case of CDSC shares applicable to certain investors, as described
under “Purchase of Shares” and “Redemption of Shares,” respectively, the total return data quoted by a
Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may take
into account the CDSC waiver and, therefore, may reflect greater total return since, due to the reduced sales charges or the waiver
of sales charges, a lower amount of expenses is deducted.
On occasion, a Fund may compare its performance
to, among other things, the Fund’s benchmark index indicated in the Prospectus, the Value Line Composite Index, the Dow Jones
Industrial Average, or to other published indices, or to performance data published by Lipper Inc., Morningstar, Inc. (“Morningstar”),
Money Magazine, U.S. News & World Report, BusinessWeek, Forbes Magazine,
Fortune Magazine
or other industry publications.
When comparing its performance to a market index, a Fund may refer to various statistical measures derived from the historical
performance of a Fund and the index, such as standard deviation and beta. As with other performance data, performance comparisons
should not be considered indicative of a Fund’s relative performance for any future period. In addition, from time to time
a Fund may include the Fund’s Morningstar risk-adjusted performance ratings assigned by Morningstar in advertising or supplemental
sales literature. From time to time a Fund may quote in advertisements or other materials other applicable measures of Fund performance
and may also make reference to awards that may be given to the Manager. Certain Funds may also compare their performance to composite
indices developed by Fund management.
A Fund may provide information designed to help
investors understand how the Fund is seeking to achieve its investment objectives. This may include information about past, current
or possible economic, market, political or other conditions, descriptive information or general principles of investing such as
asset allocation, diversification and risk tolerance, discussion of a Fund’s portfolio composition, investment philosophy,
strategy or investment techniques, comparisons of the Fund’s performance or portfolio composition to that of other funds
or types of investments, indices relevant to the comparison being made, or to a hypothetical or model portfolio. A Fund may also
quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures
to those of other funds or types of investments.
P
ROXY
V
OTING
P
OLICIES
AND
P
ROCEDURES
With respect to each of the Funds except MFS Research
International FDP Fund, Marsico Growth FDP Fund, Invesco Value FDP Fund and Franklin Templeton Total Return FDP Fund, each a series
of FDP Series, Inc. (the “FDP Series Funds”), the Board of Directors of the Funds has delegated the voting of proxies
for the Funds’ securities to the Manager pursuant to the Manager’s proxy voting guidelines. Under these guidelines,
the Manager will vote proxies related to Fund securities in the best interests of the Fund and its stockholders. From time to time,
a vote may present a conflict between the interests of the Fund’s stockholders, on the one hand, and those of the Manager,
or any affiliated person of the Fund or the Manager, on the other. The Manager maintains policies and procedures that are designed
to prevent undue influence on the Manager’s proxy voting activity that might stem from any relationship between the issuer
of a proxy (or any dissident shareholder) and the Manager, the Manager’s affiliates, a Fund or a Fund’s affiliates.
Most conflicts are managed through a structural separation of the Manager’s Corporate Governance Group from the Manager’s
employees with sales and client responsibilities. In addition, the Manager maintains procedures to ensure that all engagements
with corporate issuers or dissident shareholders are managed consistently and without regard to the Manager’s relationship
with the issuer of the proxy or dissident shareholder. In certain instances, BlackRock may determine to engage an independent fiduciary
to vote proxies as a further safeguard to avoid potential conflicts of interest or as otherwise required by applicable law. A copy
of the Funds’ Proxy Voting Policies is attached as Appendix B.
With respect to the FDP Series Funds, the FDP Series Funds’
Board of Directors has delegated to each Sub-Adviser authority to vote all proxies relating to the applicable Fund’s portfolio
securities pursuant to the policies and procedures of the respective Sub-Adviser as part of its general management of the applicable
Fund, subject to the Board of Directors’ continuing oversight. The proxy voting procedures of the Sub-Advisers are included
in Appendices B, C, D and E to this Statement of Additional Information.
Information on how each Fund voted proxies relating
to portfolio securities during the most recent 12-month period ended June 30 is available without charge, (i) at www.blackrock.com
and (ii) on the Commission’s website at http://www.sec.gov.
G
ENERAL
I
NFORMATION
Description of Shares
Shareholders of a Fund are entitled to one vote
for each full share held and fractional votes for fractional shares held in the election of Directors and generally on other matters
submitted to the vote of shareholders of the Fund. Shareholders of a class that bears distribution and/or service expenses have
exclusive voting rights with respect to matters relating to such distribution and service expenditures (except that Investor B
and Investor B1 shareholders may vote upon any material changes to such expenses charged under the Investor A Distribution Plan).
Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of Directors can, if
they choose to do so, elect all the Directors of a Fund, in which event the holders of the remaining shares would be unable to
elect any person as a Director.
No Fund intends to hold annual meetings of shareholders
in any year in which the Investment Company Act does not require shareholders to act upon any of the following matters: (i) election
of Directors; (ii) approval of a management agreement; (iii) approval of a distribution agreement; and (iv) ratification of selection
of independent accountants. Shares issued are fully paid and non-assessable and have no preemptive rights. Redemption and conversion
rights are discussed elsewhere herein and in each Fund’s Prospectus. Each share of each class of Common Stock is entitled
to participate equally in dividends and distributions declared by a Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities.
For Funds organized as Maryland corporations,
the by-laws of the Fund require that a special meeting of shareholders be held upon the written request of a minimum percentage
of the outstanding shares of the Fund entitled to vote at such meeting, if they comply with applicable Maryland law.
Certain of the Funds are organized as “Massachusetts
business trusts.” Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally
liable as partners for its obligations. However, the
Declaration of Trust establishing a trust, a copy
of which for each applicable Fund, together with all amendments thereto (the “Declaration of Trust”), is on file in
the office of the Secretary of the Commonwealth of Massachusetts, contains an express disclaimer of shareholder liability for acts
or obligations of the trust and provides for indemnification and reimbursement of expenses out of the trust property for any shareholder
held personally liable for the obligations of the trust. The Declaration of Trust also provides that a trust may maintain appropriate
insurance (for example, fidelity bond and errors and omissions insurance) for the protection of the trust, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the trust itself
was unable to meet its obligations.
Certain Funds are organized as Delaware statutory
trusts.
See “Additional Information — Description
of Shares” in Part I of each Fund’s Statement of Additional Information for additional capital stock information for
your Fund.
Additional Information
Under a separate agreement, BlackRock
has granted certain Funds the right to use the “BlackRock” name and has reserved the right to (i) withdraw its consent
to the use of such name by a Fund if the Fund ceases to retain BlackRock Advisors, LLC or BlackRock Fund Advisors, as applicable,
as investment adviser and (ii) to grant the use of such name to any other company.
See “Additional Information — Principal
Shareholders” in Part I of each Fund’s Statement of Additional Information for information on the holders of 5% or
more of any class of shares of your Fund.
APPENDIX A
Description of Bond Ratings
A Description of Moody’s
Investors Service, Inc.’s (“Moody’s”) Global Rating Scales
Ratings
assigned on Moody’s global long-term and short-term rating scales are forward-looking opinions of the relative credit risks
of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance
vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one
year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss
suffered in the event of default.
Short-term ratings are assigned
to obligations with an original maturity of thirteen months or less and reflect the likelihood of a default on contractually promised
payments.
Description of Moody’s
Long-Term Obligation Ratings
|
Aaa
|
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of 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 judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
|
|
Ba
|
Obligations rated Ba are judged to be speculative 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 speculative 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 and are typically in default, with little prospect for recovery of principal or interest.
|
Note
:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aaa 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.
Hybrid
Indicator (hyb)
The
hybrid indicator (hyb) is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities
firms. By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which
can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable
write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating
assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Description
of Short-Term Obligation Ratings
Moody’s
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.
|
Description of Moody’s
US Municipal Short-Term Obligation Ratings
The
Municipal Investment Grade (“MIG”) scale is used to rate US municipal bond anticipation notes of up to three years
maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing
received prior to note maturity. MIG ratings expire at the maturity of the obligation, and the issuer’s long-term rating
is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels—MIG 1 through MIG 3—while
speculative grade short-term obligations are designated SG.
|
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.
|
Description of Moody’s
Demand Obligation Ratings
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 Moody’s evaluation of risk associated with scheduled
principal and interest payments. The second element represents Moody’s evaluation of risk associated with the ability to
receive purchase price upon demand (“demand feature”). The second element uses a rating from a variation of the MIG
scale called the Variable Municipal Investment Grade (“VMIG”) scale.
|
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.
|
Description of Standard
& Poor’s, a Division of The McGraw-Hill Companies, Inc. (“Standard & Poor’s”), Issue Credit Ratings
A Standard
& Poor's issue credit rating is a forward-looking opinion about 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
opinion reflects Standard & Poor's view of the obligor's capacity and willingness to meet its financial commitments as they
come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event
of default.
Issue
credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than
365 days—including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with
respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put
feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
Issue
credit ratings are based, in varying degrees, on Standard & Poor’s analysis of the following considerations:
|
|
·
|
Likelihood
of payment—capacity and willingness of the obligor to meet its financial commitment
on an obligation in accordance with the terms of the obligation;
|
|
|
·
|
Nature
of and provisions of the obligation;
|
|
|
·
|
Protection
afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization,
or other arrangement under the laws of bankruptcy and other laws affecting creditors’
rights.
|
Long-Term Issue Credit
Ratings*
|
AAA
|
An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.
|
|
AA
|
An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.
|
|
A
|
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
|
|
BBB
|
An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
|
BB
B
CCC
CC
C
|
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
|
|
BB
|
An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
|
|
B
|
An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.
|
|
CCC
|
An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
|
|
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 instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
|
|
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, unless Standard & Poor’s believes that such payments will be made within five business days, irrespective of any grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation’s rating is lowered to ‘D’ upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
|
|
NR
|
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor’s does not rate a particular obligation as a matter of policy.
|
*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.
Short-Term Issue Credit
Ratings
|
A-1
|
A short-term obligation rated ‘A-1’ is rated in the highest category by Standard & Poor’s. The obligor’s 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 obligor’s capacity to meet its financial commitment on these obligations is extremely strong.
|
|
A-2
|
A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.
|
|
A-3
|
A short-term obligation rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
|
|
B
|
A short-term obligation rated ‘B’ is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitments.
|
|
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, unless Standard & Poor’s believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. 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.
|
Description of Standard
& Poor’s Municipal Short-Term Note Ratings
A Standard
& Poor’s U.S. municipal note rating reflects Standard & Poor’s opinion about the liquidity factors and market
access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity
of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign,
Standard & Poor’s analysis will review the following considerations:
|
|
·
|
Amortization
schedule—the larger the final maturity relative to other maturities, the more likely
it will be treated as a note; and
|
|
|
·
|
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.
|
Standard
& Poor’s municipal short-term note rating symbols are as follows:
|
SP-1
|
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
|
|
SP-2
|
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
|
|
SP-3
|
Speculative capacity to pay principal and interest.
|
Description of Fitch
Ratings’ (“Fitch’s”) Credit Ratings Scales
Fitch’s
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. Credit ratings are used by investors as indications
of the likelihood of receiving the money owed to them in accordance with the terms on which they invested.
The
terms “investment grade” and “speculative grade” have established themselves over time as shorthand to
describe the categories ‘AAA’ to ‘BBB’ (investment grade) and ‘BB’ to ‘D’ (speculative
grade). The terms “investment grade” and “speculative grade” are market conventions, and do not imply
any recommendation or endorsement of a specific security for investment purposes. “Investment grade” categories indicate
relatively low to moderate credit risk, while ratings in the “speculative” categories either signal a higher level
of credit risk or that a default has already occurred.
Fitch’s
credit ratings do not directly address any risk other than credit risk. In particular, ratings do not deal with the risk of a
market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in
terms of payment obligation on the rated liability, market risk may be considered to the extent that it influences the
ability
of an issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that they influence the
size or other conditionality of the
obligation
to pay upon a commitment (for example, in the case of index-linked bonds).
In the
default components of ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood
of non-payment or default in accordance with the terms of that instrument’s documentation. In limited cases, Fitch may include
additional considerations (
i.e.
, rate to a higher or lower standard than that implied in the obligation’s documentation).
In such cases, the agency will make clear the assumptions underlying the agency’s opinion in the accompanying rating commentary.
Description of Fitch’s
Long-Term Corporate Finance Obligations Rating Scales
Fitch
long-term obligations rating scales are as follows:
|
AAA
|
Highest credit quality. ‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
|
|
AA
|
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
|
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 adverse business or economic conditions than is the case for higher ratings.
|
|
BBB
|
Good credit quality. ‘BBB’ ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
|
|
BB
|
Speculative. ‘BB’ ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available to allow financial commitments to be met.
|
|
B
|
Highly speculative. ‘B’ ratings indicate that material credit risk is present.
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CCC
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‘CCC’ ratings indicate that substantial credit risk is present.
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CC
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‘CC’ ratings indicate very high levels of credit risk.
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C
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‘C’ ratings indicate exceptionally high levels of credit risk.
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NR
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This designation is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
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WD
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This designation indicates that the rating has been withdrawn and the issue or issuer is no longer rated by Fitch.
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Note:
The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the ‘AAA’ obligation rating category, or to corporate finance obligation
ratings in the categories below ‘B’.
Description of Fitch’s
Short-Term Ratings
A short-term
issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream
and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation.
Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short term” based on market convention.
Typically, this means up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations
in U.S. public finance markets.
Fitch
short-term ratings are as follows:
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F1
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Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.
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F2
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Good short-term credit quality.
Good intrinsic capacity for timely payment of financial commitments.
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F3
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Fair short-term credit quality.
The intrinsic capacity for timely payment of financial commitments is adequate.
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B
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Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
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C
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High short-term default risk.
Default is a real possibility.
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RD
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Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity ratings only.
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D
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Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
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NR
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This designation is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
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WD
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This designation indicates that the rating has been withdrawn and the issue or issuer is no longer rated by Fitch.
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Appendix B
BlackRock
U.S. Registered Funds
Proxy Voting Policy
Procedures Governing Delegation of Proxy
Voting to Fund Adviser
July 1, 2011
Revised May 9, 2012
I.
INTRODUCTION
The Trustees/Directors
(“Directors”) of the BlackRock-Advised Funds other than the iShares Funds
1
(the “Funds”) have
the responsibility for voting proxies relating to portfolio securities of the Funds, and have determined that it is in the best
interests of the Funds and their shareholders to delegate that responsibility to BlackRock Advisors, LLC and its affiliated U.S.
registered investment advisers (“BlackRock”), the investment adviser to the Funds, as part of BlackRock’s authority
to manage, acquire and dispose of account assets. The Directors hereby direct BlackRock to vote such proxies in accordance with
this Policy, and any proxy voting guidelines that the Adviser determines are appropriate and in the best interests of the Funds’
shareholders and which are consistent with the principles outlined in this Policy. Individual series of the Funds may be specifically
excluded from this Policy by the Directors by virtue of the adoption of alternative proxy voting policy for such series. The Directors
have authorized BlackRock to utilize unaffiliated third-parties as agents to vote portfolio proxies in accordance with this Policy
and to maintain records of such portfolio proxy voting.
Rule 206(4)-6
under the Investment Advisers Act of 1940 requires, among other things, that an investment adviser that exercises voting authority
over clients’ proxy voting adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in
the best interests of clients, discloses to its clients information about those policies and procedures and also discloses to
clients how they may obtain information on how the adviser has voted their proxies.
BlackRock
has adopted guidelines and procedures that are consistent with the principles of this Policy. BlackRock’s corporate governance
committee structure (the “Committee”), oversees the proxy voting function on behalf of BlackRock and its clients,
including the Funds. The Committee is comprised of senior members of BlackRock’s Portfolio Management and Administration
Groups and is advised by BlackRock’s Legal and Compliance Department.
BlackRock
votes (or refrains from voting) proxies for each Fund in a manner that BlackRock, in the exercise of its independent business
judgment, concludes is in the best economic interests of such Fund. In some cases, BlackRock may determine that it is in the best
economic interests of a Fund to refrain from exercising the Fund’s proxy voting rights (such as, for example, proxies on
certain non-U.S. securities that might impose costly or time-consuming in-person voting requirements). With regard to the relationship
between securities lending and proxy voting, BlackRock’s approach is also driven by our clients’ economic interests.
The evaluation of the economic desirability of recalling loans involves balancing the revenue producing value of loans against
the likely economic value of casting votes. Based on our evaluation of this relationship, BlackRock believes that the likely economic
value of casting a vote generally is less than the securities lending income, either because the votes will not have significant
economic consequences or because the outcome of the vote would not be affected by BlackRock recalling loaned securities in order
to ensure they are voted. Periodically, BlackRock analyzes the process and benefits of voting proxies for securities on loan,
and will consider whether any modification of its proxy voting policies or procedures are necessary in light of any regulatory
changes.
BlackRock
will normally vote on specific proxy issues in accordance with BlackRock’s proxy voting guidelines. BlackRock’s proxy
voting guidelines provide detailed guidance as to how to
1
The U.S. iShares Funds have adopted a separate Proxy Voting Policy.
vote proxies
on certain important or commonly raised issues. BlackRock may, in the exercise of its business judgment, conclude that the proxy
voting guidelines do not cover the specific matter upon which a proxy vote is requested, or that an exception to the proxy voting
guidelines would be in the best economic interests of a Fund. BlackRock votes (or refrains from voting) proxies without regard
to the relationship of the issuer of the proxy (or any shareholder of such issuer) to the Fund, the Fund’s affiliates (if
any), BlackRock or BlackRock’s affiliates. When voting proxies, BlackRock attempts to encourage companies to follow practices
that enhance shareholder value and increase transparency and allow the market to place a proper value on their assets.
II.
PROXY VOTING POLICIES
A.
Boards of Directors
The Funds
generally support the board’s nominees in the election of directors and generally support proposals that strengthen the
independence of boards of directors. As a general matter, the Funds believe that a company’s board of directors (rather
than shareholders) is most likely to have access to important, nonpublic information regarding a company’s business and
prospects, and is therefore best-positioned to set corporate policy and oversee management. The Funds therefore believe that the
foundation of good corporate governance is the election of responsible, qualified, independent corporate directors who are likely
to diligently represent the interests of shareholders and oversee management of the corporation in a manner that will seek to
maximize shareholder value over time. In individual cases, consideration may be given to a director nominee’s history of
representing shareholder interests as a director of the company issuing the proxy or other companies, or other factors to the
extent deemed relevant by the Committee.
B.
Auditors
These
proposals concern those issues submitted to shareholders related to the selection of auditors. As a general matter, the Funds
believe that corporate auditors have a responsibility to represent the interests of shareholders and provide an independent view
on the propriety of financial reporting decisions of corporate management. While the Funds anticipate that BlackRock will generally
defer to a corporation’s choice of auditor, in individual cases, consideration may be given to an auditors’ history
of representing shareholder interests as auditor of the company issuing the proxy or other companies, to the extent deemed relevant.
C.
Compensation and Benefits
These
proposals concern those issues submitted to shareholders related to management compensation and employee benefits. As a general
matter, the Funds favor disclosure of a company’s compensation and benefit policies and oppose excessive compensation, but
believe that compensation matters are normally best determined by a corporation’s board of directors, rather than shareholders.
Proposals to “micro-manage” a company’s compensation practices or to set arbitrary restrictions on compensation
or benefits should therefore generally not be supported.
D.
Capital Structure
These
proposals relate to various requests, principally from management, for approval of amendments that would alter the capital structure
of a company, such as an increase in
authorized
shares. As a general matter, the Funds expect that BlackRock will support requests that it believes enhance the rights of common
shareholders and oppose requests that appear to be unreasonably dilutive.
E.
Corporate Charter and By-Laws
These
proposals relate to various requests for approval of amendments to a corporation’s charter or by-laws. As a general matter,
the Funds generally vote against anti-takeover proposals and proposals that would create additional barriers or costs to corporate
transactions that are likely to deliver a premium to shareholders.
F.
Environmental and Social Issues
These
are shareholder proposals addressing either corporate social and environmental policies or requesting specific reporting on these
issues. The Funds generally do not support proposals on social issues that lack a demonstrable economic benefit to the issuer
and the Fund investing in such issuer. BlackRock seeks to make proxy voting decisions in the manner most likely to protect and
promote the long-term economic value of the securities held in client accounts. We intend to support economically advantageous
corporate practices while leaving direct oversight of company management and strategy to boards of directors. We seek to avoid
micromanagement of companies, as we believe that a company’s board of directors is best positioned to represent shareholders
and oversee management on shareholders behalf. Issues of corporate social and environmental responsibility are evaluated on a
case-by-case basis within this framework.
III.
CONFLICTS MANAGEMENT
BlackRock
maintains policies and procedures that are designed to prevent any relationship between the issuer of the proxy (or any shareholder
of the issuer) and a Fund, a Fund’s affiliates (if any), BlackRock or BlackRock’s affiliates, from having undue influence
on BlackRock’s proxy voting activity. In certain instances, BlackRock may determine to engage an independent fiduciary to
vote proxies as a further safeguard against potential conflicts of interest or as otherwise required by applicable law. The independent
fiduciary may either vote such proxies or provide BlackRock with instructions as to how to vote such proxies. In the latter case,
BlackRock votes the proxy in accordance with the independent fiduciary’s determination.
IV.
REPORTS TO THE BOARD
BlackRock
will report to the Directors on proxy votes it has made on behalf of the Funds at least annually.
PART C. OTHER INFORMATION
Item 28.
Exhibits.
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Exhibit
Number
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Description
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1
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Articles of Incorporation
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(a)
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Declaration of Trust of the Registrant dated December 22, 1988 is incorporated herein by reference to
Exhibit (1)(a) of Post-Effective Amendment No. 33 to Registrant’s Registration Statement on Form N-1A (File No. 33-26305) (the “Registration Statement”) filed on January 27, 1998.
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(b)
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Amendment No. 1 to Declaration of Trust dated May 4, 1989 is incorporated herein by reference to Exhibit (1)(b) of Post-Effective Amendment No. 33 to Registrant’s Registration Statement filed on January 27, 1998.
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(c)
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Amendment No. 2 to the Declaration of Trust dated December 23, 1993 is incorporated herein by reference to Exhibit (1)(c) of Post-Effective Amendment No. 33 to Registrant’s Registration Statement filed on January 27, 1998.
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(d)
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Amendment No. 3 to the Declaration of Trust dated January 5, 1996 is incorporated herein by reference to
Exhibit 1(d) of Post-Effective Amendment No. 23 to Registrant’s Registration Statement filed on October 18, 1996.
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(e)
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Amendment No. 4 to the Declaration of Trust dated December 23, 1997 is incorporated herein by reference to Exhibit (1)(e) of Post-Effective Amendment No. 33 to Registrant’s Registration Statement filed on January 27, 1998.
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(f)
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Certification of Classification of Shares dated September 15, 2008 is incorporated by reference to Exhibit 1(g) of Post-Effective Amendment No. 116 to Registrant’s Registration Statement filed on November 24, 2009.
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(g)
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Certification of Classification of Shares dated March 10, 2009 is incorporated herein by reference to Exhibit 1(f) of Post-Effective Amendment No. 116 to Registrant’s Registration Statement filed on November 24, 2009.
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(h)
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Certification of Classification of Shares dated May 21, 2010 is incorporated herein by reference to Exhibit 1(h) of Post-Effective Amendment No. 134 to Registrant’s Registration Statement filed on May 25, 2010.
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(i)
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Certification of Classification of Shares dated November 16, 2010 is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 163 to Registrant’s Registration Statement filed on April 29, 2011.
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(j)
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Certification of Classification of Shares dated September 23, 2011 is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 186 to Registrant’s Registration Statement filed on September 29, 2011.
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(k)
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Certification of Classification of Shares dated May 15, 2012 is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 219 to Registrant’s Registration Statement filed on May 15, 2012.
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(l)
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Certification of Classification of Shares dated July 31, 2012 is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
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(m)
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Certification of Classification of Shares dated September 21, 2012 is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
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Exhibit
Number
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Description
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(n)
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Certification of Classification of Shares dated March 11, 2013 is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 282 to Registrant’s Registration Statement filed on March 13, 2013.
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(o)
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Certification of Classification of Shares dated April 25, 2013 is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
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(p)
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Certification of Classification of Shares dated June 28, 2013 is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 302 to Registrant’s Registration Statement filed on July 9, 2013.
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(q)
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Certification of Classification of Shares dated August 16, 2013 incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 308 to Registrant’s Registration Statement filed on August 16, 2013.
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(r)
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Certification
of Classification of Shares to be filed by amendment.
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2
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By-laws
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(a)
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Amended and Restated Code of Regulations of the Registrant, effective December 2008 is incorporated by reference to Exhibit 2 of Post-Effective Amendment No. 116 to Registrant’s Registration Statement filed on November 24, 2009.
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3
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Instruments Defining Rights of Security Holders
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(a)
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Sections V, VIII and IX of Registrant’s Declaration of Trust dated December 22, 1988 are incorporated herein by reference to Exhibit (1)(a) of Post-Effective Amendment No. 33 to Registrant’s Registration Statement filed on January 27, 1998; Article II of Registrant’s Code of Regulations is incorporated herein by reference to Exhibit 2(a) of Post-Effective Amendment No. 116 to Registrant’s Registration Statement filed on November 24, 2009.
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4
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Investment Advisory Contracts.
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(a)
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Form of Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC relating to existing Portfolios except Index Equity Portfolio is incorporated herein by reference to Exhibit 4(a) of Post-Effective Amendment No. 100 to Registrant’s Registration Statement filed on October 13, 2006.
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(b)
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Form of Addendum No. 2 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to Exhibit 4(c) of Post-Effective Amendment No. 110 to Registrant’s Registration Statement filed on September 24, 2008.
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(c)
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Form of Addendum No. 3 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to Exhibit 4(c) of Post-Effective Amendment No. 134 to Registrant’s Registration Statement filed on May 25, 2010.
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(d)
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Form of Addendum No. 4 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to Exhibit 4(d) of Post-Effective Amendment No. 163 to Registrant’s Registration Statement filed on April 29, 2011.
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(e)
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Form of Addendum No. 6 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to Exhibit 4(e) of Post-Effective Amendment No. 186 to Registrant’s Registration Statement filed on September 29, 2011.
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(f)
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Form of Addendum No. 7 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
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Exhibit
Number
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Description
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(g
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)
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Form of Addendum No. 8 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
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(h
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)
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Form of Addendum No. 9 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
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(i
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)
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Form of Investment Advisory Agreement between Registrant, on behalf of BlackRock India Fund, BlackRock India Fund (Mauritius) Limited and BlackRock Advisors, LLC is incorporated herein by reference to
Exhibit 4(e) of Post-Effective Amendment No. 164 to Registrant’s Registration Statement filed on April 29, 2011.
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(j
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)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Institutional Management Corporation with respect to the Money Market Portfolios is incorporated herein by reference to Exhibit 4(d) of Post-Effective Amendment No. 100 to Registrant’s Registration Statement filed on October 13, 2006.
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(k
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)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock International, Ltd. with respect to the International Opportunities Portfolio is incorporated herein by reference to Exhibit 4(e) of Post-Effective Amendment No. 100 to Registrant’s Registration Statement filed on October 13, 2006.
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(l
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)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Financial Management, Inc. with respect to the Asset Allocation Portfolio, Global Opportunities Portfolio and BlackRock Global Long/Short Credit Fund is incorporated herein by reference to Exhibit 4(f) of Post-Effective Amendment No. 100 to Registrant’s Registration Statement filed on October 13, 2006.
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(m
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)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock International Limited with respect to BlackRock World Gold Fund, BlackRock Global Long/Short Credit Fund and BlackRock Commodity Strategies Fund is incorporated herein by reference to Exhibit 4(h) of Post-Effective Amendment No. 144 to Registrant’s Registration Statement filed on January 28, 2011.
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(n
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)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Fund Advisors with respect to BlackRock Emerging Markets Long/Short Equity Fund is incorporated herein by reference to Exhibit 4(l) of Post-Effective Amendment No. 188 to Registrant’s Registration Statement filed on October 6, 2011.
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(o
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)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Fund Advisors with respect to BlackRock Global Long/Short Equity Fund is incorporated herein by reference to Exhibit 4(n) of Post-Effective Amendment No. 257 to Registrant’s Registration Statement filed on December 19, 2012.
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(p
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)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Financial Management, Inc. with respect to BlackRock Real Estate Securities Fund, BlackRock Multi-Asset Real Return Fund and BlackRock Strategic Risk Allocation Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
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(q
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)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock International Limited with respect to BlackRock Strategic Risk Allocation Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
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Exhibit
Number
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Description
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(r)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock (Hong Kong) Limited with respect to BlackRock China Fund, BlackRock India Fund and BlackRock Managed Volatility Portfolio is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 269 to Registrant’s Registration Statement filed on January 28, 2013.
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(s)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock (Singapore) Limited with respect to BlackRock Managed Volatility Portfolio is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 269 to Registrant’s Registration Statement filed on January 28, 2013.
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(t)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Fund Advisors with respect to BlackRock Disciplined Small Cap Core Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 282 to Registrant’s Registration Statement filed on March 13, 2013.
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(u)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Fund Advisors with respect to BlackRock Emerging Market Allocation Portfolio is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
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(v)
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Form of Sub-Investment Advisory Agreement between BlackRock Advisors, LLC and BlackRock International Limited with respect to BlackRock Emerging Market Allocation Portfolio is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
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(w)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Asset Management North Asia Limited with respect to BlackRock Emerging Market Allocation Portfolio is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
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(x)
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Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock (Singapore) Limited with respect to BlackRock Emerging Market Allocation Portfolio is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
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(y)
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Form of Sub-Investment Advisory Agreement between BlackRock Advisors, LLC and BlackRock International Limited with respect to BlackRock Emerging Markets Dividend Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 308 to Registrant’s Registration Statement filed on August 16, 2013.
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(z)
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Form
of Addendum No. 10 to Investment Advisory Agreement between
the Registrant and BlackRock Advisors, LLC to be filed by amendment.
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(aa)
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Form
of Sub-Advisory Agreement between BlackRock Advisors, LLC and Subadvisers with respect to the BlackRock Multi-Manager Alternatives
Fund to be filed by amendment.
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(bb)
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Form
of Investment Advisory Agreement between BlackRock Cayman Multi-Manager Alternatives Fund , Ltd. and BlackRock Advisors, LLC
to be filed by amendment.
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(cc)
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Form
of Sub-Advisory Agreement between BlackRock Advisors, LLC and Sub-Advisers with respect
to BlackRock Cayman Multi-Manager Alternatives Fund, Ltd. to be filed by amendment.
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5
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Underwriting Contracts
|
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(a)
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Form of Distribution Agreement between Registrant and BlackRock Investments, LLC (formerly BlackRock Investments, Inc.) is incorporated herein by reference to Exhibit 5(a) to Post-Effective Amendment No. 111 to Registrant’s Registration Statement filed on January 28, 2009.
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(b)
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Exhibit A to Distribution Agreement between Registrant and BlackRock Investments, LLC is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
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(c)
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|
Form of Cooperation Agreement among the Registrant, on behalf of All-Cap Energy & Resources Portfolio, BlackRock Advisors, LLC and UBS AG is incorporated by reference to Exhibit 5(b) of Post-Effective Amendment No. 116 to Registrant’s Registration Statement filed on November 24, 2009.
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6
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Bonus or Profit Sharing Contracts
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(a)
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None
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Exhibit
Number
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Description
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7
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Custodian Agreements
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(a)
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|
Amended and Restated Custodian Agreement dated February 10, 2004 between BlackRock Funds and PFPC Trust Company is incorporated herein by reference to Exhibit 7(a) of Post-Effective Amendment No. 86 to Registrant’s Registration Statement filed on November 3, 2004.
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(b)
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Reserved
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(c)
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|
Reserved
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(d)
|
|
Reserved
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(e)
|
|
Sub-Custodian Agreement dated April 27, 1992 among the Registrant, PNC Bank, National Association and The Chase Manhattan Bank is incorporated herein by reference to Exhibit(8)(e) of Post-Effective Amendment No. 34 to Registrant’s Registration Statement filed on February 13, 1998.
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(f)
|
|
Global Custody Agreement between Barclays Bank PLC and PNC Bank, National Association dated October 28, 1992 is incorporated herein by reference to Exhibit(8)(f) of Post-Effective Amendment No. 33 to Registrant’s Registration Statement filed on January 27, 1998.
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(g)
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|
Form of Custodian Agreement between the Registrant and State Street Bank and Trust Company is incorporated herein by reference to Exhibit 7(a) of Post-Effective Amendment No. 110 to Registrant’s Registration Statement filed on September 24, 2008.
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(h)
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|
Custodian Agreement between State Street Bank and Trust Company and PNC Bank, National Association dated June 13, 1983 is incorporated herein by reference to Exhibit(8)(g) of Post-Effective Amendment No. 34 to Registrant’s Registration Statement filed on February 13, 1998.
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(i)
|
|
Amendment No. 1 to Custodian Agreement between State Street Bank and Trust Company and PNC Bank, National Association dated November 21, 1989 is incorporated herein by reference to Exhibit(8)(h) of Post-Effective Amendment No. 34 to Registrant’s Registration Statement filed on February 13, 1998
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(j)
|
|
Subcustodial Services Agreement dated October 1, 1996 between PNC Bank, National Association and Citibank, N.A. is incorporated herein by reference to Exhibit 8(j) of Post-Effective Amendment No. 27 to Registrant’s Registration Statement filed on January 28, 1997.
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8
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Other Material Contracts
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(a)
|
|
Amended and Restated Administration Agreement dated February 10, 2004 among Registrant, BlackRock Advisors, LLC and PNC Global Investment Servicing (U.S.) Inc. (formerly PFPC Inc.) is incorporated herein by reference to Exhibit 8(a) of Post-Effective Amendment No. 86 to Registrant’s Registration Statement filed on November 3, 2004.
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(b)
|
|
Form of Administration Agreement dated June 1, 2007 among Registrant, BlackRock Advisors, LLC and State Street Bank and Trust Company is incorporated herein by reference to Exhibit 8(j) of Post-Effective Amendment No. 112 to Registrant’s Registration Statement filed on April 30, 2009.
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(c)
|
|
Amended and Restated Transfer Agency Agreement dated February 10, 2004 between Registrant and PNC Global Investment Servicing (U.S.) Inc. (formerly PFPC Inc.) is incorporated herein by reference to
Exhibit 8(c) of Post-Effective Amendment No. 86 to Registrant’s Registration Statement filed on November 3, 2004.
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Exhibit
Number
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|
|
Description
|
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(d)
|
|
Exhibit A to Amended and Restated Transfer Agency Agreement dated February 10, 2004 between Registrant and PNC Global Investment Servicing (U.S.) Inc. (formerly PFPC Inc.) is incorporated herein by reference to Exhibit 8(h) of Post-Effective Amendment No. 86 to Registrant’s Registration Statement filed on November 3, 2004.
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(e)
|
|
Share Acquisition Agreement dated April 29, 1998 by and among Registrant and PNC Bank, National Association and PNC Bank, Delaware, respectively, each as trustee for certain of the common trust funds listed therein is incorporated herein by reference to Exhibit 9(l) of Post-Effective Amendment No. 36 to Registrant’s Registration Statement filed on April 29, 1998.
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(f)
|
|
Form
of Fourth Amended and Restated Expense Limitation Agreement by and between Registrant and BlackRock Advisors, LLC is incorporated
herein by reference to Exhibit 8(h)(3) of Pre-Effective Amendment No. 2 to the Registration Statement of BlackRock CoRI
Funds (File No. 333-190251) filed on January 29, 2014.
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(g)
|
|
Form of Shareholders’ Administrative Services Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to Exhibit 8(p) of Post-Effective Amendment No. 91 to Registrant’s Registration Statement filed on January 31, 2005.
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(h)
|
|
Form of Seventh Amended and Restated Credit Agreement among the Registrant, a syndicate of banks and certain other parties is incorporated herein by reference to Exhibit 8(b)(7) to Post-Effective Amendment No. 18 to the Registration Statement on Form N-1A of BlackRock Fundamental Growth Fund, Inc.
(File No. 33-47875), filed on December 21, 2006.
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(i)
|
|
Form of Termination, Replacement and Restatement Agreement among the Registrant, a syndicate of banks and certain other parties is incorporated herein by reference to Exhibit 8(b) to Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A of BlackRock Global Growth Fund, Inc. (File No. 333-32899), filed on December 17, 2007.
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(j)
|
|
Form of Termination, Replacement and Restatement Agreement between the Registrant and a syndicate of banks dated as of November 19, 2008, relating to the Credit Agreement dated as of November 21, 2007 is incorporated herein by reference to Exhibit 8(c) to Post-Effective Amendment No. 20 to the Registrant Statement on Form N-1A of BlackRock Fundamental Growth Fund, Inc. (File No. 33-47875), filed on December 22, 2008.
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(k)
|
|
Form of Termination, Replacement and Restatement Agreement between the Registrant and a syndicate of banks dated as of November 18, 2009, relating to the Credit Agreement dated as of November 19, 2008, is incorporated herein by reference to Exhibit 8(c) to Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A of BlackRock Fundamental Growth Fund, Inc. (File No. 33-47875) filed on December 23, 2009.
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(l)
|
|
Form of Termination, Replacement and Restatement Agreement between the Registrant and a syndicate of banks dated as of November 17, 2010, relating to the Credit Agreement dated as of November 18, 2009, is incorporated herein by reference to Exhibit 8(k) to Post-Effective Amendment No. 36 to the Registration Statement on Form N-1A of BlackRock Funds II (File No. 333-142592), filed on November 22, 2010.
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(m)
|
|
Form of Termination, Replacement and Restatement Agreement between the Registrant and a syndicate of banks as of November 16, 2011, relating to the Credit Agreement dated as of November 17, 2010 is incorporated by reference to Exhibit 8(e)(6) to Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A of BlackRock Large Cap Series Funds, Inc. (File No. 333-89389), filed on January 27, 2012.
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|
|
Exhibit
Number
|
|
|
Description
|
|
|
|
|
|
|
(n)
|
|
Form of Termination, Replacement and Restatement Agreement between the Registrant, on behalf of Core Plus Fund, and a syndicate of banks dated as of November 14, 2012, relating to the Credit Agreement dated as of November 16, 2011 is incorporated herein by reference to Exhibit 8(e)(7) to Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A of BlackRock Large Cap Series Funds, Inc.
(File No. 333-89389), filed on January 28, 2013.
|
|
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(o)
|
|
Form of Amended and Restated Credit Agreement among the Registrant, a syndicate of banks and certain other parties is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 298 to Registrant’s Registration Statement filed on May 31, 2013.
|
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(p)
|
|
[Form
of Second Amended and Restated Securities Lending Agency Agreement between the Registrant and BlackRock Investment Management,
LLC is incorporated by reference to Exhibit 8(d) to Post-Effective Amendment No. 37 to the Registration Statement on
Form N-1A of BlackRock Global Allocation Fund, Inc. (File No. 33-22462), filed on February 28, 2014.]
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(q)
|
|
Form of Investment Advisory Agreement between BlackRock Cayman Emerging Market Allocation Fund, Ltd. and BlackRock Advisors, LLC with respect to BlackRock Cayman Emerging Market Allocation Fund, Ltd. is incorporated by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
|
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9
|
|
|
Legal Opinion
|
|
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|
|
(a)
|
|
Opinion
of [ ] to be filed by amendment.
|
|
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|
|
|
10
|
|
|
Other Opinions
|
|
|
|
|
|
|
(a)
|
|
None
|
|
|
|
|
|
11
|
|
|
Omitted Financial Statements
|
|
|
|
|
|
|
(a)
|
|
None
|
|
|
|
|
|
12
|
|
|
Initial Capital Agreements
|
|
|
|
|
|
|
(a)
|
|
Form of Purchase Agreement between Registrant and Registrant’s distributor relating to Classes A-1, B-1, C-1, D-2, E-2, F-2, G-2, H-2, I-1, I-2, J-1, J-2, K-2, L-2, M-2, N-2, O-2, P-2, D-1, E-1, F-1, G-1, H-1, K-1, L-1, M-1, N-1, O-1, P-1, A-2, B-2, C-2, I-2, J-2, A-3, B-3, C-3, D-3, E-3, F-3, G-3, H-3, I-3, J-3, K-3, L-3, M-3, N-3, O-3, P-3, Q-1, Q-2, Q-3, R-1, R-2, R-3, S-1, S-2, S-3, T-1, T-2, T-3, U-1, U-2, U-3, A-4, D-4, E-4, F-4, G-4, H-4, K-4, L-4, M-4, N-4, O-4, P-4, R-4, S-4, T-4, U-4, W-4, X-4, Y-4, V-1, V-2, V-3, W-1, W-2, W-3, X-1, X-2, X-3, Y-1, Y-2, Y-3, Z-1, Z-2, Z-3, AA-1, AA-2, AA-3, AA-4, AA-5, BB-1, BB-2, BB-3, BB-4, BB-5, CC-3, A-5, B-4, B-5, C-4, C-5, I-4, I-5, J-4, J-5, Q-4, Q-5, V-4, V-5, Z-4, Z-5, X-1, X-3, D-5, E-5, F-5, G-5, H-5, K-5, L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-5, Y-5, DD-1, DD-2, DD-3, DD-4, DD-5, EE-1, EE-2, EE-3, EE-4, EE-5, R-6, BB-6, FF-3, GG-3, HH-1, HH-2, HH-3, HH-4, HH-5, II-1, II-2, II-3, II-4, II-5, S-6, JJ-1, JJ-2, JJ-3, JJ-4, JJ-5, KK-1, KK-2, KK-3, KK-4, KK-5, LL-1, LL-2, LL-3, LL-4 and LL-5 is incorporated herein by reference to Exhibit (13)(a) of Post-Effective Amendment No. 34 to Registrant’s Registration Statement filed on February 13, 1998
.
|
|
|
|
|
|
|
(b)
|
|
Form of Purchase Agreement between Registrant and Registrant’s distributor relating to Classes MM-1, MM-2, MM-3, MM-4, MM-5 and MM-6 is incorporated herein by reference to Exhibit 13(b) of Post-Effective Amendment No. 37 to Registrant’s Registration Statement filed on August 7, 1998.
|
|
|
|
|
|
|
(c)
|
|
Form of Purchase Agreement between Registrant and Registrant’s distributor relating to Class NN-3 is incorporated herein by reference to Exhibit 12(c) of Post-Effective Amendment No. 42 to Registrant’s Registration Statement filed on June 11, 1999.
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
|
Description
|
|
|
|
|
|
|
(d)
|
|
Form of Purchase Agreement between Registrant and Registrant’s distributor relating to Classes A-7 and C-7 is incorporated herein by reference to Exhibit 12(d) of Post-Effective Amendment No. 43 to Registrant’s Registration Statement filed on August 6, 1999.
|
|
|
|
|
|
|
(e)
|
|
Form of Purchase Agreement between Registrant and Registrant’s distributor relating to Classes OO-1, OO-2, OO-3, OO-4 and OO-5 is incorporated herein by reference to Exhibit 12(e) of Post-Effective Amendment No. 54 to Registrant’s Registration Statement filed on May 10, 2000.
|
|
|
|
|
|
|
(f)
|
|
Form of Purchase Agreement between Registrant and Registrant’s distributor relating to Classes PP-1, PP-2, PP-3, PP-4 and PP-5, QQ-1, QQ-2, QQ-3, QQ-4, QQ-5 and U-6 is incorporated herein by reference to Exhibit 12(f) of Post-Effective Amendment No. 55 to Registrant’s Registration Statement filed on June 6, 2000.
|
|
|
|
|
|
|
(g)
|
|
Form of Purchase Agreement between Registrant and Registrant’s distributor relating to Class RR-3 is incorporated herein by reference to Exhibit 12(g) of Post-Effective Amendment No. 56 to Registrant’s Registration Statement filed on August 16, 2000.
|
|
|
|
|
|
|
(h)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes SS-1, SS-2, SS-3, SS-4 and SS-5 is incorporated herein by reference to Exhibit 12(h) of Post-Effective Amendment No. 58 to Registrant’s Registration Statement filed on November 14, 2000.
|
|
|
|
|
|
|
(i)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes TT-1, TT-2, TT-3, TT-4, TT-5 and TT-6 is incorporated herein by reference to Exhibit 12(i) of Post-Effective Amendment No. 58 to Registrant’s Registration Statement filed on November 14, 2000.
|
|
|
|
|
|
|
(j)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class UU-1, UU-2, UU-3, UU-4 and UU-5 is incorporated herein by reference to Exhibit 12(j) of Post-Effective Amendment No. 60 to Registrant’s Registration Statement filed on November 14, 2001.
|
|
|
|
|
|
|
(k)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class H-6 is incorporated herein by reference to Exhibit 12(k) of Post-Effective Amendment No. 63 to Registrant’s Registration Statement filed on September 26, 2002.
|
|
|
|
|
|
|
(l)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class JJ-6 is incorporated herein by reference to Exhibit 12(l) of Post-Effective Amendment No. 64 to Registrant’s Registration Statement filed on September 30, 2002.
|
|
|
|
|
|
|
(m)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes G-6, O-6 and X-6 is incorporated herein by reference to Exhibit 12(m) of Post-Effective Amendment No. 67 to Registrant’s Registration Statement filed on November 27, 2002.
|
|
|
|
|
|
|
(n)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes VV-1, VV-2, VV-3, VV-6, WW-1, WW-2, WW-3, and WW-6 is incorporated herein by reference to
Exhibit 12(n) of Post-Effective Amendment No. 72 to the Registrant’s Registration Statement filed on February 11, 2004.
|
|
|
|
|
|
|
(o)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class P-6 is incorporated herein by reference to Exhibit 12(o) of Post-Effective Amendment No. 76 to Registrant’s Registration Statement filed on April 8, 2004.
|
|
|
|
|
|
|
(p)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class W-6 is incorporated herein by reference to Exhibit 12(p) of Post-Effective Amendment No. 77 to Registrant’s Registration Statement filed on May 18, 2004.
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
|
Description
|
|
|
|
|
|
(q
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes XX-1, XX-2, XX-3, XX-4, XX-5, XX-6, YY-1, YY-2, YY-3, YY-4, YY-5 and YY-6 is incorporated herein by reference to Exhibit 12(q) of Post-Effective Amendment No. 79 to Registrant’s Registration Statement filed on June 18, 2004.
|
|
|
|
|
|
(r
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes ZZ-1, ZZ-2, ZZ-3, ZZ-4 and ZZ-5 is incorporated herein by reference to Exhibit 12(r) of Post-Effective Amendment No. 82 to Registrant’s Registration Statement filed on August 24, 2004.
|
|
|
|
|
|
(s
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class X-1 is incorporated herein by reference to Exhibit 12(s) of Post-Effective Amendment No. 85 to Registrant’s Registration Statement filed on October 27, 2004.
|
|
|
|
|
|
(t
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes AAA-6, BBB-1, BBB-2, BBB-3, BBB-4, BBB-5, CCC-1, CCC-2, CCC-3, CCC-4, CCC-5, EEE-1, EEE-2, EEE-3, EEE-4, EEE-5, EEE-6, EEE-8, FFF-1, FFF-2, FFF-3, FFF-4, FFF-5, GGG-1, GGG-2, GGG-3, GGG-4 and GGG-5 is incorporated herein by reference to Exhibit 12(t) of Post-Effective Amendment No. 86 to Registrant’s Registration Statement filed on November 3, 2004.
|
|
|
|
|
|
(u
|
)
|
|
Form
of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes HHH-1, HHH-2, HHH-3,
HHH-4, HHH-5 and HHH-6 is incorporated herein by reference to Exhibit 12(u) of Post-Effective Amendment No. 87 to Registrant’s
Registration Statement filed on November 19, 2004.
|
|
|
|
|
|
(v
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes III-1, III-2, III-3, III-4 and III-5 is incorporated herein by reference to Exhibit 12(v) of Post-Effective Amendment No. 94 to Registrant’s Registration Statement filed on January 27, 2006.
|
|
|
|
|
|
(w
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes JJJ-2, JJJ-3, JJJ-6 and JJJ-13 is incorporated herein by reference to Exhibit 12(w) of Post-Effective Amendment No. 100 to Registrant’s Registration Statement filed on October 13, 2006.
|
|
|
|
|
|
(x
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes X-3, R-8, R-9, X-9, MM-9, R-10, R-11, X-11, MM-11, R-12 and R shares of certain Portfolios is incorporated herein by reference to Exhibit 12(x) of Post-Effective Amendment No. 97 to Registrant’s Registration Statement filed on September 19, 2006.
|
|
|
|
|
|
(y
|
)
|
|
Form
of Purchase Agreement between Registrant and BlackRock Investments, LLC (formerly BlackRock Investments, Inc.) relating to
the International Diversification Fund is incorporated herein by reference to Exhibit 12(a) of Post-Effective Amendment No.
110 to Registrant’s Registration Statement filed on September 24, 2008.
|
|
|
|
|
|
(z
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock World Gold Fund is incorporated herein by reference to Exhibit 12(z) of Post-Effective Amendment No. 135 to Registrant’s Registration Statement filed on July 29, 2010.
|
|
|
|
|
|
(aa
|
)
|
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock China Fund incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 163 to Registrant’s Registration Statement filed on April 29, 2011.
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
|
Description
|
|
|
|
|
|
|
(bb)
|
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock India Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 163 to Registrant’s Registration Statement filed on April 29, 2011.
|
|
|
|
|
|
|
(cc)
|
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Global Long/Short Credit Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 186 to Registrant’s Registration Statement filed on September 29, 2011
|
|
|
|
|
|
|
(dd)
|
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Commodity Strategies Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 187 to Registrant’s Registration Statement filed on September 29, 2011.
|
|
|
|
|
|
|
(ee)
|
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Emerging Markets Long/Short Equity Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 188 to Registrant’s Registration Statement filed on October 6, 2011.
|
|
|
|
|
|
|
(ff)
|
|
Form
of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Real Estate Securities Fund
is incorporated by reference to an Exhibit of Post-Effective Amendment No. 298 to Registrant’s Registration Statement
filed on May 31, 2013.
|
|
|
|
|
|
|
(gg)
|
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Short-Term Treasury Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 241 to Registrant’s Registration Statement filed on October 15, 2012.
|
|
|
|
|
|
|
(hh)
|
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Short Obligations Fund and BlackRock Ultra-Short Obligations Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 243 to Registrant’s Registration Statement filed on November 2, 2012.
|
|
|
|
|
|
|
(ii)
|
|
Form of Purchase Agreement between Registrant and BlackRock Holdco 2, Inc. relating to BlackRock Global Long/Short Equity Fund is incorporated by reference to Exhibit 12(ii) of Post-Effective Amendment No. 257 to Registrant’s Registration Statement filed on December 19, 2012.
|
|
|
|
|
|
|
(jj)
|
|
Form of Purchase Agreement between Registrant and BlackRock Holdco 2, Inc. relating to BlackRock Multi-Asset Real Return Fund is incorporated by reference to Exhibit 12(jj) of Post-Effective Amendment No. 258 to Registrant’s Registration Statement filed on December 21, 2012.
|
|
|
|
|
|
|
(kk)
|
|
Form of Purchase Agreement between Registrant and BlackRock Holdco 2, Inc. relating to BlackRock Strategic Risk Allocation Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
|
|
|
|
|
|
|
(ll)
|
|
Form of Purchase Agreement between Registrant and BlackRock Holdco 2, Inc. relating to BlackRock Disciplined Small Cap Core Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 282 to Registrant’s Registration Statement filed on March 13, 2013.
|
|
|
|
|
|
|
(mm)
|
|
Form of Purchase Agreement between Registrant and BlackRock Holdco 2, Inc. relating to BlackRock Emerging Market Allocation Portfolio is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 295 to Registrant’s Registration Statement filed on May 16, 2013.
|
|
|
|
|
|
|
|
|
|
(nn)
|
|
Form
of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Multi-Manager Alternatives Fund
to be filed by amendment.
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Exhibit
Number
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Description
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13
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Rule 12b-1 Plan.
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(a)
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Form of Distribution and Service Plan for Institutional, Service, Investor A, Investor B, Investor C, Hilliard Lyons, R and BlackRock Shares is incorporated herein by reference to Exhibit 13(a) to Post-Effective Amendment 111 to the Registrant’s Registration Statement filed on January 28, 2009
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(b)
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Form of Exhibit A to Distribution and Service Plan is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
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14
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Rule 18f-3 Plan.
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(a)
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Amended and Restated Plan Pursuant to Rule 18f-3 for Operation of a Multi-Class Distribution System is incorporated herein by reference to Exhibit 14(a) of Post-Effective Amendment No. 241 to Registrant’s Registration Statement filed on October 15, 2012.
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15
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Reserved
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16
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Codes of Ethics.
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(a)
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Code of Ethics of BlackRock Funds is incorporated herein by reference to Exhibit 15(a) of Post-Effective Amendment No. 44 to the Registration Statement on Form N-1A of Ready Assets Prime Money Fund (formerly known as Merrill Lynch Ready Assets Trust) (File No. 2-52711), filed on April 29, 2009.
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(b)
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Code of Ethics of BlackRock Investments, LLC (formerly BlackRock Investments, Inc.) is incorporated herein by reference to Exhibit 15(b) to Post-Effective Amendment No. 44 to the Registration Statement on Form N-1A of Ready Assets Prime Money Fund (formerly known as Merrill Lynch Ready Assets Trust)
(File No. 2-52711), filed on April 29, 2009.
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(c)
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Code of Ethics of BlackRock Advisors, LLC is incorporated herein by reference to Exhibit 15(c) to Post-Effective Amendment No. 44 to the Registration Statement on Form N-1A of Ready Assets Prime Money Fund (formerly known as Merrill Lynch Ready Assets Trust) (File No. 2-52711), filed on April 29, 2009.
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99
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Power of Attorney.
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(a)
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Power
of Attorney is incorporated herein by reference to Exhibit (h)(5) to Post-Effective Amendment No. 96 to the Registration Statement
on Form N-1A of BlackRock Liquidity Funds, filed on February 28, 2014.
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(b)
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Power
of Attorney with respect to Frank J. Fabozzi is filed herewith.
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Item 29.
Persons
Controlled by or under Common Control with the Fund.
The Registrant does not control and is not
under common control with any person.
Item 30.
Indemnification.
Indemnification of Registrant’s principal
underwriter against certain losses is provided for in Section 9 of the Distribution Agreement incorporated by reference herein
as Exhibit 5(a). Indemnification of Registrant’s Custodian, Transfer Agent and Administrators is provided for, respectively,
in Section 12 of the Custodian Agreement incorporated by reference herein as Exhibit 7(a), Section 12 of the Transfer Agency Agreement incorporated by reference herein as Exhibit 8(c) and Section 9
of the Administration Agreement incorporated by reference herein as Exhibit 8(k). Registrant intends to obtain from a major insurance
carrier a trustees’ and officers’ liability policy covering certain types of errors and omissions. In addition, Section 9.3
of the Registrant’s Declaration of Trust incorporated by reference herein as Exhibit 1(a) provides as follows:
Indemnification of Trustees, Officers, Representatives
and Employees. The Trust shall indemnify each of its Trustees against all liabilities and expenses (including amounts paid in satisfaction
of judgments, in compromise, as fines and penalties, and as counsel fees) reasonably incurred by him in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be involved or with which he
may be threatened, while as a Trustee or thereafter, by reason of his being or having been such a Trustee except with respect to
any matter as to which he shall have been adjudicated to have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties, provided that as to any matter disposed of by a compromise payment by such person, pursuant to a consent
decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless the Trust shall
have received a written opinion from independent legal counsel approved by the Trustees to the effect that if either the matter
of willful misfeasance, gross negligence or reckless disregard of duty, or the matter of bad faith had been adjudicated, it would
in the opinion of such counsel have been adjudicated in favor of such person. The rights accruing to any person under these provisions
shall not exclude any other right to which he may be lawfully entitled, provided that no person may satisfy any right of indemnity
or reimbursement hereunder except out of the property of the Trust. The Trustees may make advance payments in connection with the
indemnification under this Section 9.3, provided that the indemnified person shall have given a written undertaking to reimburse
the Trust in the event it is subsequently determined that he is not entitled to such indemnification.
The Trustee shall indemnify officers, representatives
and employees of the Trust to the same extent that Trustees are entitled to indemnification pursuant to this Section 9.3.
Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses incurred or paid by a trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Section 9.6 of the Registrant’s Declaration
of Trust, filed herein as Exhibit 1(a), also provides for the indemnification of shareholders of the Registrant. Section 9.6
states as follows:
Indemnification of Shareholders. In case any
Shareholder or former Shareholder shall be held to be personally liable solely by reason of his being or having been a Shareholder
and not because of his acts or omissions or for some other reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives or, in the case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the classes of Shares with the same
alphabetical designation as that of the Shares
owned by such Shareholder to be held harmless from and indemnified against all loss and expense arising from such liability. The
Trust shall, upon request by the Shareholder, assume the defense of any claim made against any Shareholder for any act or obligations
of the Trust and satisfy any judgment thereon from such assets.
Item 31.
Business
and Other Connections of Investment Advisers.
(a) BlackRock Advisors, LLC is an indirect
wholly-owned subsidiary of BlackRock, Inc. BlackRock Advisors, LLC was organized in 1994 for the purpose of providing advisory
services to investment companies. The information required by this Item 31 about officers and directors of BlackRock Advisors,
LLC, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV, filed
by BlackRock Advisors, LLC pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-47710).
(b) BlackRock Financial Management, Inc. (“BFM”).
BFM currently offers investment advisory services to institutional investors such as pension and profit-sharing plans or trusts,
insurance companies and banks. The information required by this Item 31 about officers and directors of BFM, together with
information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV, filed by BFM pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-48433).
(c) BlackRock International Limited (formerly
BlackRock International, Ltd. and prior to that Castle International Asset Management Limited) (“BIL”). The information
required by this Item 31 of officers and directors of BIL, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated
by reference to Schedules A and D of Form ADV, filed by BIL pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-51087).
(d) BlackRock Investment Management, LLC (“BIM”).
The information required by this Item 31 about officers and directors of BIM, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years,
is incorporated by reference to Schedules A and D of Form ADV, filed by BIM pursuant to the Investment Advisers Act of 1940 (SEC
File No. 801-56972).
(e) BlackRock Fund Advisors (“BFA”).
The information required by this Item 31 about officers and directors of BFA, together with information as to any other business
profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years,
is incorporated by reference to Schedule A and D of Form ADV, filed by BFA pursuant to the Investment Advisers Act of 1940 (SEC
File No. 801-22609).
(f) BlackRock Asset Management North Asia
Limited (“BNA”) is a wholly-owned subsidiary of BlackRock, Inc. BNA currently offers investment advisory services
to pooled investment vehicles, corporations or other businesses and government agencies or quasi-government agencies. The information
required by this Item 31 about officers and directors of BNA, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated
by reference to Schedules A and D of Form ADV, filed by BNA pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-77343).
(g) BlackRock (Singapore) Limited (“BRS”)
is a wholly-owned subsidiary of BlackRock, Inc. BRS currently offers investment advisory services to pooled investment vehicles,
state or municipal government entities and insurance companies. The information required by this Item 31 about officers and
directors of BRS, together with information as to any other business, profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form
ADV, filed by BRS pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-76926).
(h) Benefit Street Partners, LLC (“Benefit Street Partners”).
The information required by this Item 31 of officers and directors of Benefit Street Partners, together with information
as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of Form ADV, filed by Benefit Street Partners pursuant
to the Investment Advisers Act of 1940 (SEC File No. 801-72843).
(i) Carl M. Loeb Advisory Partners L.P. (“Loeb”).
The information required by this Item 31 of officers and directors of Loeb, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years,
is incorporated by reference to Schedules A and D of Form ADV, filed by Loeb pursuant to the Investment Advisers Act of 1940 (SEC
File No. 801-78423).
(j) Independence Capital Asset Partners, LLC (“ICAP”).
The information required by this Item 31 of officers and directors of ICAP, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years,
is incorporated by reference to Schedules A and D of Form ADV, filed by ICAP pursuant to the Investment Advisers Act of 1940 (SEC
File No. 801-63551).
(k) LibreMax Capital, LLC (“LibreMax”). The information
required by this Item 31 of officers and directors of LibreMax, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated
by reference to Schedules A and D of Form ADV, filed by LibreMax pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-
72148).
(l) MeehanCombs LP (“MeehanCombs”). The information
required by this Item 31 of officers and directors of MeehanCombs, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated
by reference to Schedules A and D of Form ADV, filed by MeehanCombs pursuant to the Investment Advisers Act of 1940 (SEC File
No. 801-77404).
(m) Peak6 Advisors LLC (“Peak6”). The information
required by this Item 31 of officers and directors of Peak6, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated
by reference to Schedules A and D of Form ADV, filed by Peak6 pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-
66095).
(n) QMS Capital Management LP (“QMS”). The
information required by this Item 31 of officers and directors of QMS, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the
past two years, is incorporated by reference to Schedules A and D of Form ADV, filed by QMS pursuant to the Investment
Advisers Act of 1940 (SEC File No. [ ]).
(o) Saiers Capital, LLC (“Saiers”). The information
required by this Item 31 of officers and directors of Saiers, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated
by reference to Schedules A and D of Form ADV, filed by Saiers pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-
70249).
Item 32.
Principal
Underwriters.
(a) BlackRock Investments, LLC (“BRIL”)
acts as the principal underwriter or placement agent, as applicable, for each of the following open-end registered investment companies
including the Registrant:
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BBIF Government Securities Fund
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BlackRock Multi-State Municipal Series Trust
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BBIF Money Fund
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BlackRock Municipal Bond Fund, Inc.
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BBIF Tax-Exempt Fund
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BlackRock Municipal Series Trust
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BBIF Treasury Fund
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BlackRock Natural Resources Trust
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BIF Government Securities Fund
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BlackRock Pacific Fund, Inc.
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BIF Money Fund
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BlackRock Series Fund, Inc.
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BIF Multi-State Municipal Series Trust
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BlackRock Series, Inc.
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BIF Tax-Exempt Fund
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BlackRock Value Opportunities Fund, Inc.
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BIF Treasury Fund
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BlackRock Variable Series Funds, Inc.
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BlackRock Allocation Target Shares
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BlackRock World Income Fund, Inc.
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BlackRock Balanced Capital Fund, Inc.
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FDP Series, Inc.
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BlackRock Basic Value Fund, Inc.
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Funds for Institutions Series
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BlackRock Bond Fund, Inc.
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iShares, Inc.
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BlackRock California Municipal Series Trust
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iShares MSCI Russia Capped Index Fund, Inc.
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BlackRock Capital Appreciation Fund, Inc.
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iShares Trust
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BlackRock CoRI Funds
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iShares U.S. ETF Trust
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BlackRock Emerging Markets Fund, Inc.
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Managed Account Series
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BlackRock Equity Dividend Fund
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Master Basic Value LLC
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BlackRock EuroFund
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Master Bond LLC
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BlackRock Financial Institutions Series Trust
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Master Focus Growth LLC
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BlackRock Focus Growth Fund, Inc.
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Master Government Securities LLC
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BlackRock Funds
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Master Institutional Money Market LLC
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BlackRock Funds II
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Master Investment Portfolio
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BlackRock Funds III
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Master Large Cap Series LLC
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BlackRock Global Allocation Fund, Inc.
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Master Money LLC
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BlackRock Global SmallCap Fund, Inc.
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Master Tax-Exempt LLC
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BlackRock Index Funds, Inc.
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Master Treasury LLC
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BlackRock Large Cap Series Funds, Inc.
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Master Value Opportunities LLC
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BlackRock Latin America Fund, Inc.
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Quantitative Master Series LLC
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BlackRock Liquidity Funds
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Ready Assets Prime Money Fund
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BlackRock Long-Horizon Equity Fund
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Ready Assets U.S. Treasury Money Fund
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BlackRock Master LLC
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Ready Assets U.S.A. Government Money Fund
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BlackRock Mid Cap Value Opportunities Series, Inc.
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Retirement Series Trust
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BRIL also acts as the principal underwriter or
placement agent, as applicable, for the following closed-end registered investment companies:
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BlackRock Fixed Income Value Opportunities
BlackRock Preferred Partners LLC
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BRIL provides numerous financial services
to BlackRock-advised funds and is the distributor of BlackRock’s open-end funds. These services include coordinating and
executing Authorized Participation Agreements, preparing, reviewing and providing advice with respect to all sales literature
and responding to Financial Industry Regulatory Authority comments on marketing materials.
(b) Set forth
below is information concerning each director and officer of BRIL. The principal business address for each such person is 40 East
52
nd
Street, New York, New York 10022.
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Name
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Position(s) and Office(s) with BRIL
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Position(s) and
Office(s)
with Registrant
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Robert Fairbairn
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Chairman, Chief Executive Officer and Senior Managing Director
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None
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Anne Ackerley
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Managing Director
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None
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Matthew Mallow
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General Counsel and Senior Managing Director
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None
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Russell McGranahan
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Secretary and Managing Director
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None
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Ned Montenecourt
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Chief Compliance Officer and Director
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None
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Saurabh Pathak
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Chief Financial Officer and Director
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None
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Francis Porcelli
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Managing Director and Member, Board of Managers
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None
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Brenda Sklar
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Managing Director
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None
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Lisa Hill
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Managing Director
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None
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Joseph Craven
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Managing Director
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None
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Terri Slane
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Director and Assistant Secretary
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Melissa Walker
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Vice President and Assistant Secretary
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None
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Chris Nugent
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Director
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None
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Richard Prager
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Member, Board of Managers
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None
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Christopher Vogel
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Member, Board of Managers
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None
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(c) Not Applicable.
Item 33.
Location
of Accounts and Records.
All accounts, books and other documents required
to be maintained by Section 31(a) of the Investment Company Act and the rules thereunder are maintained at the offices of:
(a) Registrant, 100 Bellevue Parkway,
Wilmington, Delaware 19809.
(b)
BlackRock Investments, LLC, 40 East 52
nd
Street,
New York, New York 10022 (records relating to its functions as distributor and placement agent, as applicable).
(c) BlackRock Advisors, LLC, 100
Bellevue Parkway, Wilmington, Delaware 19809 (records relating to its functions as investment adviser and co-administrator).
(d)
BlackRock Financial Management, Inc., 55 East 52
nd
Street,
New York, New York 10055 (records relating to its functions as investment adviser and sub-adviser).
(e) BlackRock
International Limited, Exchange Place One, 1 Semple Street, Edinburgh, EH3 8BL United Kingdom (records relating to its
functions as sub-adviser).
(f) BlackRock Investment Management,
LLC, 1 University Square Drive, Princeton, NJ 08540-6455 (records relating to its functions as sub-adviser).
(g) BlackRock Fund Advisors, 400
Howard Street, San Francisco, California 94105 (records relating to its function as sub-adviser).
(h) BlackRock Asset Management
North Asia Limited, 16/F Cheung Kong Center, 2 Queen’s Road Central, Hong Kong, China (records relating to its functions
as sub-adviser).
(i) BlackRock (Singapore) Limited,
20 Anson Road, #18-01, Twenty Anson Singapore, 079912 Singapore (records relating to its functions as sub-adviser).
(j) BNY Mellon Investment Servicing
(US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809 (records relating to its functions as co-administrator, transfer agent,
dividend disbursing agent and accounting services provider).
(k) State Street Bank and Trust
Company, 100 Summer Street, Boston, Massachusetts 02110 (records relating to its functions as co-administrator, accounting services
provider and custodian).
(l) The Bank of New York Mellon,
One Wall Street, New York, New York 10286 (records relating to its functions as custodian).
(m) The Chase Manhattan Bank,
N.A., 1285 Avenue of the Americas, New York, New York 10019 (records relating to its functions as sub-custodian).
(n)
Citibank, N.A., 111 Wall Street, 23
rd
Floor,
Zone 6, New York, NY 10043 (records relating to its functions as sub-custodian).
(o) BlackRock Advisors, LLC,
100 Bellevue Parkway, Wilmington, Delaware 19809 (Registrant’s declaration of trust, code of regulations and minute books).
(p) Benefit Street Partners,
LLC, 9 West 57
th
Street, Suite 4700, New York, NY 10019 (records relating to its function as sub-adviser).
(q) Carl M. Loeb Advisory Partners
L.P., 125 Broad Street, 14
th
Floor, New York, NY 10004 (records relating to its function as sub-adviser).
(r) Independence Capital Asset
Partners, LLC, 1400 16
th
Street, Suite 520, Denver, CO 80202 (records relating to its function as sub-adviser).
(s) LibreMax Capital, LLC,
600 Lexington Avenue, 19
th
Floor, New York, NY 10022 (records relating to its function as sub-adviser).
(t) MeehanCombs LP, 660 Steamboat
Road, Greenwich, CT 06830 (records relating to its function as sub-adviser).
(u) Peak6 Advisors LLC, 141
W. Jackson Blvd., Suite 700, Chicago, IL 60604 (records relating to its function as sub-adviser).
(v) QMS Capital Management
LP, 240 Leigh Farm Rd., Suite 230, Durham, NC 27707 (records relating to its function as sub-adviser).
(w) Saiers Capital, LLC, 2
Rector Street 3
rd
Floor, New York, NY 10006 (records relating to its function as sub-adviser).
Item 34.
Management
Services.
None.
Item 35.
Undertakings.
None.
SIGNATURES
Pursuant to the requirements of
the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and
the State of New York, on April 2, 2014.
|
|
B
LACK
R
OCK
F
UNDS
SM
ON
BEHALF
OF
ITS
SERIES
, B
LACK
R
OCK
M
ulti
-M
anager
A
lternatives
F
UND
(R
EGISTRANT
)
|
|
|
|
|
|
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By:
|
/
S
/ J
OHN
M. P
ERLOWSKI
|
|
|
|
John M. Perlowski,
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities
Act of 1933, this Post-Effective Amendment to its Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/
S
/ J
OHN
M. P
ERLOWSKI
(John M. Perlowski)
|
|
President and Chief Executive Officer (Principal Executive Officer)
|
|
April 2,
2014
|
|
|
|
|
|
/
S
/ N
EAL
J. A
NDREWS
(Neal J. Andrews)
|
|
Chief Financial Officer (Principal Financial and Accounting Officer)
|
|
April 2,
2014
|
|
|
|
|
|
D
AVID
O. B
EIM
*
(David O. Beim)
|
|
Trustee
|
|
|
|
|
|
|
|
F
RANK
J. F
ABOZZI
*
(Frank
J. Fabozzi)
|
|
Trustee
|
|
|
|
|
|
|
|
R
ONALD
W. F
ORBES
*
(Ronald W. Forbes)
|
|
Trustee
|
|
|
|
|
|
|
|
D
R
.
M
ATINA
S. H
ORNER
*
(Dr. Matina S.
Horner)
|
|
Trustee
|
|
|
|
|
|
|
|
R
ODNEY
D. J
OHNSON
*
(Rodney D. Johnson)
|
|
Trustee
|
|
|
|
|
|
|
|
H
ERBERT
I. L
ONDON
*
(Herbert I. London)
|
|
Trustee
|
|
|
|
|
|
|
|
I
AN
A. M
AC
K
INNON
*
(Ian A. MacKinnon)
|
|
Trustee
|
|
|
|
|
|
|
|
C
YNTHIA
A. M
ONTGOMERY
*
(Cynthia A. Montgomery)
|
|
Trustee
|
|
|
|
|
|
|
|
J
OSEPH
P. P
LATT
*
(Joseph P. Platt)
|
|
Trustee
|
|
|
|
|
|
|
|
R
OBERT
C. R
OBB
, J
R
.*
(Robert C. Robb,
Jr.)
|
|
Trustee
|
|
|
|
|
|
|
|
T
OBY
R
OSENBLATT
*
(Toby Rosenblatt)
|
|
Trustee
|
|
|
|
|
|
|
|
K
ENNETH
L. U
RISH
*
(Kenneth L. Urish)
|
|
Trustee
|
|
|
|
|
|
|
|
F
REDERICK
W. W
INTER
*
(Frederick W.
Winter)
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Trustee
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P
AUL
A
UDET
*
(Paul Audet)
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Trustee
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H
ENRY
G
ABBAY
*
(Henry Gabbay)
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Trustee
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*By:
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/
S
/ B
ENJAMIN
ARCHIBALD
|
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April 2,
2014
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|
(Benjamin Archibald, Attorney-In-Fact)
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SIGNATURES
BlackRock
Cayman Multi-Manager Alternatives Fund, Ltd. has duly caused this Registration Statement of BlackRock Funds
SM
,
on behalf of BlackRock Multi-Manager Alternatives Fund, with respect only to information that specifically relates to BlackRock
Cayman Multi-Manager Alternatives Fund, Ltd., to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, and State of New York, on April 2, 2014.
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B
LACK
R
OCK
C
AYMAN
M
ULTI-
M
ANAGER
A
LTERNATIVES
F
UND
,
L
TD
.
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By:
|
/
S
/ P
AUL
L. A
UDET
|
|
|
|
(Paul L. Audet, Director)
|
This Registration
Statement of BlackRock Funds
SM
, on
behalf of BlackRock Multi-Manager Alternatives Fund, with respect only to information that specifically relates to BlackRock Cayman
Multi-Manager Alternatives Fund, Ltd., has been signed below by the following persons in the capacities on the dates indicated:
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Signature
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Title
|
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Date
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/
S
/ P
AUL
L. A
UDET
(Paul L. Audet)
|
|
Director, BlackRock Cayman Multi-Manager Alternatives Fund, Ltd.
|
|
April 2, 2014
|
|
|
|
|
|
/
S
/ H
ENRY
G
ABBAY
(Henry Gabbay)
|
|
Director, BlackRock Cayman Multi-Manager Alternatives Fund, Ltd.
|
|
April 2, 2014
|
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