Beneficial Ownership of Securities.
The Fund is a newly-organized investment company. Accordingly, as of the date of this Memorandum, the portfolio manager did not beneficially own any securities issued by the Fund.
PRIOR PERFORMANCE OF RELATED ACCOUNTS
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Average Annual Net Returns |
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8.38 |
% |
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6.52 |
% |
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7.34 |
% |
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8.39 |
% |
ICE BofA US High Yield Index (reflects no deduction for fees or expenses) |
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13.46 |
% |
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5.21 |
% |
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4.51 |
% |
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6.10 |
% |
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The performance information shown here is the historical performance of funds managed by the Adviser that have strategies, policies and objectives that are substantially similar to those of the Fund (the “Composite”). The Composite consists of all funds and accounts under discretionary management by the Adviser that have investment objectives, policies and strategies substantially similar to those of the Fund.
The performance information relates only to the Composite. It does not reflect the performance record of the Fund and should not be considered a substitute for the Fund’s own performance. Past returns are not indicative of future performance. The Fund’s actual performance may differ significantly from the past performance of the Composite.
The Composite Net Return represents the annualized net returns of the funds in the Composite, calculated in aggregate. The calculation differs from the SEC’s method for calculating returns for a closed-end registered investment company, in that it uses the total net asset values and the actual fees and expenses applied across the accounts of all investors in the included funds, rather than using a hypothetical invested amount and applying a sales load and fees to that investment over time. The Composite Net Returns have been calculated by aggregating each month’s net profit and loss from all of the included funds in existence that month, dividing that amount by the aggregate net asset value of the included funds at the start of that month, and combining the results to produce an annualized return. The funds in the Composite have varying structures, terms, fees and expenses, which differ from the structure, terms, fees and expenses of the Fund. The Composite Net Returns have not been adjusted to reflect the fees and expenses applicable to the Fund. Certain accounts included in the Composite pay incentive fees that may increase such accounts’ expenses based on the performance of such accounts. Other accounts included in the Composite pay management fees that are lower than the management fees applicable to the Fund, which could create expenses for those accounts that are lower than the expenses of the Fund. For these reasons, the expenses of the accounts included in the Composite may be greater or less than the expenses of the Fund at any given point in time. To the extent that such expenses were higher or lower than the expenses of the Fund, the related performance would have been lower or higher, respectively, than the performance of the Fund.
None of the funds in the Composite has at any time been registered under the 1940 Act or been subject to Subchapter M of the Internal Revenue Code. As such, they were not subject to certain investment limitations, diversification requirements and other restrictions imposed by the 1940 Act or the Internal Revenue Code, which, if applied, may have adversely affected the funds’ performance.
While the funds and accounts in the Composite experience inflows and outflows of cash from clients, there can be no assurance that the continuous offering of the Fund’s shares and the Fund’s repurchases will not adversely affect the Fund’s performance.
AB CarVal Investors, L.P. serves as the administrator to the Fund (in such capacity, the “Administrator”) pursuant to an administration agreement between the Fund and the Administrator (the “Administration Agreement”). The Administrator provides, or arranges for the provision of, the administrative services necessary for the Fund to operate. In accordance with the Administration Agreement, the Fund has agreed to reimburse the Administrator for the expenses it incurs on the Fund’s behalf in connection with providing such administrative services, including the Fund’s allocable portion of the salaries of any administrative personnel retained by the Administrator that provide services to the Fund, as well as the allocable portion of overhead, including rent, attributable to such administrative personnel.
The Administrator may provide such administrative services directly or engage one or more third-party administrators to provide such administrative services to the Fund on its behalf.
The Administrator has entered into agreements with State Street Bank and Trust Company and The Northern Trust Company (in such capacities, the “Sub-Administrators”) to assist in the provision of administrative and accounting services. The Sub-Administrators receive compensation for their provision of administrative and accounting services under the sub-administration agreements. The compensation is paid directly or indirectly by the Fund.
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TRANSFER AGENT AND CUSTODIAN
The Fund has entered into a transfer agency agreement with AllianceBernstein Investor Services, Inc., (the “Transfer Agent”), under which the Transfer Agent provides the Fund with transfer agency services. The Transfer Agent’s principal place of business is located at P.O. Box 786003, San Antonio, Texas 78278-6003. For providing transfer agency, dividend disbursing agency, repurchase offer agency and shareholder servicing support to the Fund, the Fund pays the Transfer Agent a transfer agency fee payable monthly based on the number of accounts administered, the types of accounts administered and the amount of assets held in such accounts. The Fund has also entered into a custody agreement with The Northern Trust Company (the “Custodian”) under which the Custodian provides the Fund with custodian services. The Custodian’s principal place of business is located at 50 South LaSalle Street, Chicago, Illinois 60603.
The Fund, the Distributor and the Transfer Agent may enter into arrangements with one or more financial intermediaries to provide sub-transfer agency and other services associated with Shareholders whose Shares are held of record in omnibus accounts, including platforms that facilitate trading and recordkeeping by financial intermediaries. In return for these services, the Fund, the Distributor or the Transfer Agent pays sub-transfer agency fees to such financial intermediaries. If paid by the Fund, these expenses will be included in “Other Expenses” under “Fees and Expenses of the Fund—Annual Fund Operating Expenses” in the Summary Information at the beginning of this Memorandum.
The Fund has entered into a distribution agreement with AllianceBernstein Investments, Inc., an affiliate of the Adviser (the “Distributor”), which serves as the Fund’s principal underwriter and acts as distributor and placement agent of the Fund’s Shares on a best efforts basis, subject to various conditions.
Pursuant to the Advisory Agreement, the investment team of the Adviser, together with its staff, when and to the extent engaged in providing investment advisory and management services, and the compensation and related expenses and routine overhead expenses of such personnel allocable to such services, will be provided for and paid for by the Adviser. Other than such expenses that are expressly borne by the Adviser pursuant to the Advisory Agreement or the Administrator pursuant to the Administration Agreement, the Fund will bear all other costs and expenses of its operations and transactions, including, without limitation: (i) the cost of the Fund’s organization and any offerings; (ii) the cost of calculating the Fund’s NAV, including the cost of any third-party valuation services; (iii) the cost of effecting sales and repurchases of the Shares and other securities, including, without limitation, as provided for under the Share Repurchase Program; (iv) interest payable on debt, if any, to finance the Fund’s investments; (v) Management Fees payable pursuant to the Advisory Agreement; (vi) fees payable to third parties relating to, or associated with, making investments, including legal fees and expenses and fees and expenses associated with performing due diligence reviews of prospective investments and advisory fees as well as expenses associated with such activities (including travel-related expenses (including in connection with potential investment and trading activity and which may include first-class travel)), provided that such fees shall not include fees paid to any sub-adviser; (vii) broken deal expenses; (viii) expenses of consultants, paying agents, registrars, servicers, financial advisors, investment bankers; (ix) fees and expenses relating to data and pricing services (e.g., Bloomberg); (x) trading order management systems (e.g., Everest and Efront) whose primary purpose is to support the Fund’s trading activities and related record keeping as well as the expenses of any subsidiary or special purpose vehicle in which the Fund invests; (xi) the costs associated with protecting the Fund’s interests in its investments, including legal fees; (xii) transfer agent and custodial fees; (xiii) fees and expenses associated with marketing and investor relations efforts (including attendance at investment conferences and similar events); (xiv) federal and state registration fees; (xv) any exchange listing fees; (xvi) U.S. federal, state, and local and non-U.S. taxes; (xvii) Independent Trustees’ fees and expenses (including travel and other costs associated with the performance of Independent Trustees’ responsibilities); (xviii) brokerage commissions; (xix) costs of proxy statements, stockholders’ reports and notices; (xx) costs of preparing government filings, including periodic and current reports with the SEC; (xxi) fidelity bond, liability insurance and other insurance premiums; (xxii) direct costs and expenses of administration, including printing, mailing, long distance telephone and staff; (xxiii) fees and expenses associated with independent audits and outside legal costs; (xxiv) costs associated with the Fund’s reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws and any fees (including licensing fees) and expenses relating to the Fund’s adherence with rules of any self-regulatory organization or applicable law in connection with the Fund’s activities; (xxv) all other fees and expenses payable to third parties retained by the Adviser to provide administrative services to the Fund on its behalf pursuant to the Administration Agreement, including, but not limited to, any sub-administrators or compliance providers; (xxvi) document storage and obligation tracking systems; and (xxvii) all other expenses incurred by the either the Fund or the Adviser and the Administrator in connection with operating the Fund’s business, including an allocation of the salaries and benefits of the Adviser’s and Administrator’s employees, contractors or agents and
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other compensation, including an allocation of information technology expenses related to such individuals, to the extent such individuals provide services related to or otherwise benefiting the organization and operations of the Fund and its investments and trading activities (the “Internal Fund Operating Expenses”) (excluding compensation for investment advisory services). Examples of Internal Fund Operating Expenses charged to the Fund shall include, without limitation, accounting personnel, legal personnel who assist with the Fund’s investment or trading activity, tax personnel, preparation and distribution of annual reports (including Form N-CSR), notices, statements and other communications to investors, internal audit services and oversight, monitoring of third-party service providers, cash management services that are administrative in nature, fund accounting and computer hardware and software.
Expense Limitation Arrangement
The Adviser has contractually agreed to reimburse expenses (exclusive of Management Fees, distribution and/or servicing fees, investment-related expenses, borrowing costs, borrowing-related costs, taxes, brokerage expenses, litigation, acquired fund fees and expenses, and extraordinary expenses) (and inclusive of organizational and initial offering costs) to the extent necessary to limit “Other Expenses” to 0.48% of the Fund’s average daily net assets. This contractual arrangement will remain in effect at least until February 23, 2025 unless the Fund’s Board approves its earlier termination. The Adviser may recoup from the Fund any waived amount or reimbursed expenses with respect to the Fund pursuant to the Expense Limitation Agreement if such recoupment does not cause the Fund to exceed the current expense limit or the expense limit in place at the time of the waiver or reimbursement (whichever is lower) and the recoupment is made within three years from the date the amount was initially waived or reimbursed.
Organizational and Offering Costs
Organizational costs include, among other things, the cost of organizing as a Delaware statutory trust, including the cost of legal services and other fees pertaining to the Fund’s organization.
The Fund’s initial offering costs include, among other things, legal, accounting, printing and other expenses pertaining to this offering.
The Adviser will bear the Fund’s organizational costs and the initial offering costs associated with the Fund’s continuous offering of Shares pursuant to the Expense Limitation Agreement between the Fund and the Adviser. The Adviser may recoup from the Fund any waived amount or reimbursed expenses with respect to the Fund pursuant to the Expense Limitation Agreement if such recoupment does not cause the Fund to exceed the current expense limit or the expense limit in place at the time of the waiver or reimbursement (whichever is lower) and the recoupment is made within three years from the date the amount was initially waived or reimbursed.
Each prospective investor in the Fund will be required to certify to the Fund that the Shares are being acquired for the account of an “accredited investor” as defined in Regulation D under the 1933 Act (or another category of investor to which offers and sales of securities may be made pursuant to an exemption from the registration provision of the 1933 Act). As stated previously in this Memorandum, investors who are “accredited investors” as defined in Regulation D (or are included in such other category of investor) are referred to in this Memorandum as “Eligible Investors.” Existing Shareholders who purchase additional Shares will be required to qualify as Eligible Investors at the time of each additional purchase. Qualifications that must be met in becoming a Shareholder are set out in the subscription agreement that must be completed by each prospective investor.
No Shareholder will have the right to require the Fund to repurchase such Shareholder’s Shares or any portion thereof. Shareholders may not exchange their shares of the Fund for shares of any other registered investment company. Because no public market exists for the Shares, and none is expected to develop in the foreseeable future, Shareholders will not be able to liquidate their investment, other than through the Fund’s share repurchase program, or, in limited circumstances, as a result of transfers of Shares to other investors. Please see “Share Repurchase Program” below.
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TRANSFERABILITY OF SHARES
Shares may be transferred only: (i) by operation of law as a result of the death, bankruptcy, insolvency, adjudicated incompetence or dissolution of the Shareholder; or (ii) under certain limited circumstances, with the written consent of the Fund, which may be withheld in its sole discretion. The Fund generally will not consent to a transfer of Shares by a Shareholder unless the transfer is to a transferee who represents that the transferee is eligible to invest in the Fund and completes a subscription agreement.
The Fund does not currently intend to list its Shares on any securities exchange and does not expect any secondary market for them to develop in the foreseeable future. Therefore, Shareholders should expect that they will be unable to sell their Shares for an indefinite time or at a desired price. No Shareholder will have the right to require the Fund to repurchase such Shareholder’s Shares or any portion thereof. Shareholders may not exchange their shares of the Fund for shares of any other registered investment company. Because no public market exists for the Shares, and none is expected to develop in the foreseeable future, Shareholders will not be able to liquidate their investment, other than through the Fund’s share repurchase program, or, in limited circumstances, as a result of transfers of Shares to other investors. Thus, the Shares are appropriate only as a long-term investment. In addition, the Fund’s repurchase offers may subject the Fund and Shareholders to special risks.
To provide Shareholders with limited liquidity, the Fund is structured as an “interval fund” and intends to conduct quarterly offers to repurchase between 5% and 25% of its outstanding Shares at NAV, pursuant to Rule 23c-3 under the 1940 Act, unless such offer is suspended or postponed in accordance with regulatory requirements (as discussed below). In connection with any given repurchase offer, it is expected that the Fund will offer to repurchase only the minimum amount of 5% of its outstanding Shares. The offer to purchase Shares on a quarterly basis is a fundamental policy that may not be changed without the vote of the holders of a majority of the Fund’s outstanding voting securities (as defined in the 1940 Act). The Repurchase Offer Notice is sent to Shareholders at least 21 calendar days and no more than 42 calendar days before the Repurchase Request Deadline. The Fund expects to determine the NAV applicable to repurchases on the Repurchase Request Deadline. However, the NAV will be calculated no later than the Repurchase Pricing Date, although the NAV is expected to be determined on the Repurchase Request Deadline. The Fund will distribute payment to Shareholders no later than seven calendar days after the Repurchase Pricing Date. The quarterly repurchases will commence in the months of January, April, July and October, with payment being distributed to Shareholders within the time period discussed above.
The Fund also has the right to repurchase all of a shareholder’s Shares at any time if the aggregate value of such shareholder’s Shares is, at the time of such compulsory repurchase, less than the minimum initial investment applicable for the Fund.
If during any consecutive 24-month period, the Fund does not engage in a repurchase offer in which the Fund accepts 100% of properly tendered shares (i.e., a repurchase offer that is undersubscribed) (a “Qualifying Tender”), the Fund will not make any new investments (excluding (i) short-term cash management investments under 30 days in duration and (ii) follow-on investments, future fundings or similar investments in issuers of which the Fund already holds investments), and the Fund will reserve all available investable assets to satisfy future tender requests until a Qualifying Tender occurs.
Determination of Repurchase Offer Amount
The Board, or a committee thereof, in its sole discretion, will determine the number of Shares that the Fund will offer to repurchase (the “Repurchase Offer Amount”) for a given Repurchase Request Deadline. The Repurchase Offer Amount, however, will be no less than 5% and no more than 25% of the total number of Shares outstanding on the Repurchase Request Deadline.
If Shareholders tender for repurchase more than the Repurchase Offer Amount for a given repurchase offer, the Fund will repurchase the Shares on a pro rata basis. However, the Fund may accept all Shares tendered for repurchase by Shareholders who own less than one hundred Shares and who tender all of their Shares, before prorating other amounts tendered.
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No less than 21 days and more than 42 days before each Repurchase Request Deadline, the Fund shall send to Shareholders or financial intermediaries a notification of its offer to repurchase Shares (“Shareholder Notification”). Financial intermediaries, in turn, are responsible for providing the Shareholder Notification to their respective customers who are shareholders of the Fund. The Shareholder Notification will contain information Shareholders should consider in deciding whether to tender their Shares for repurchase. The notice also will include detailed instructions on how to tender Shares for repurchase, state the Repurchase Offer Amount and identify the dates of the Repurchase Request Deadline, the scheduled Repurchase Pricing Date, and the date the repurchase proceeds are scheduled for payment (the “Repurchase Payment Deadline”). The notice also will set forth the NAV that has been computed no more than seven days before the date of notification, and how Shareholders may ascertain the NAV after the notification date.
The repurchase price of the Shares will be the NAV of the share class as of the close of regular trading on the NYSE on the Repurchase Pricing Date. You may call (800) 221-5672 to learn the NAV. The notice of the repurchase offer also will provide information concerning the NAV, such as the NAV as of a recent date or a sampling of recent NAVs, and a toll-free number for information regarding the repurchase offer.
Repurchase Amounts and Payment of Proceeds
Shares tendered for repurchase by shareholders prior to any Repurchase Request Deadline will be repurchased subject to the aggregate Repurchase Offer Amount established for that Repurchase Request Deadline. Payment pursuant to the repurchase offer will be made by check to the Shareholder’s address of record, or credited directly to a predetermined bank account on the Purchase Payment Date, which will be no more than seven days after the Repurchase Pricing Date. The Board may establish other policies for repurchases of shares that are consistent with the 1940 Act, regulations thereunder and other pertinent laws.
If Shareholders tender for repurchase more than the Repurchase Offer Amount for a given repurchase offer, the Fund may, but is not required to, repurchase an additional number of Shares not to exceed 2.00% of the outstanding Shares of the Fund on the Repurchase Request Deadline. If the Fund determines not to repurchase more than the Repurchase Offer Amount, or if Shareholders tender shares in an amount exceeding the Repurchase Offer Amount plus 2.00% of the outstanding Shares on the Repurchase Request Deadline, the Fund will repurchase the Shares on a pro rata basis. However, the Fund may accept all Shares tendered for repurchase by Shareholders who own less than one hundred Shares and who tender all of their Shares, before prorating other amounts tendered.
With respect to any required minimum distributions from an IRA or other qualified retirement plan in which Shares are held, it is the obligation of the shareholder to determine the amount of any such required minimum distribution and to otherwise satisfy the required minimum. In the event that shareholders tender for repurchase more than the Repurchase Offer Amount for a given repurchase offer, the Fund will repurchase the shares on a pro rata basis, which may result in the Fund not repurchasing the full amount of a required minimum distribution requested by a shareholder.
PROXY VOTING POLICIES AND PROCEDURES
The Board has delegated to the Adviser authority to vote all proxies relating to the Fund’s portfolio securities pursuant to the Statement of Policies and Procedures for Proxy Voting summarized in Appendix A to this Memorandum. Information on how the Fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 will be available without charge by calling (800) 227-4618, or on the SEC’s website at http://www.sec.gov. This reference to the website does not incorporate the contents of the website into this Memorandum.
The Fund’s Board has adopted a code of ethics pursuant to Rule 17j-1 under 1940 Act. The Board has approved the respective Codes of Business Conduct and Ethics adopted by the Adviser and the Distributor
The codes of ethics establish policies and procedures for personal investing by employees and restrict certain transactions. Employees subject to the codes of ethics may invest in securities for their personal investment accounts, including securities that may be purchased or held, directly or indirectly, by the Fund.
The codes of ethics are available on the Edgar Database on the SEC’s website,
http://www.sec.gov
, or may be obtained, after paying a duplicating fee, by electronic request to publicinfo@sec.gov.
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Subject to policies established by the Board, the Adviser is primarily responsible for the execution of the Fund’s portfolio transactions and the allocation of any brokerage.
Portfolio transactions for the Fund will be allocated to brokers and dealers on the basis of numerous factors and not necessarily lowest pricing. Brokers and dealers may provide other services that are beneficial to the Adviser and/or certain Accounts, but not beneficial to all Accounts. Subject to best execution, in selecting brokers and dealers (including prime brokers) to execute transactions, provide financing and securities on loan, hold cash and short balances and provide other services, the Adviser may consider, among other factors that are deemed appropriate to consider under the circumstances, the following: price; likelihood of execution; likelihood of execution within a desired timeframe; market conditions; ability of a counterparty to execute in desired volume; ability of a counterparty to act on a confidential basis; ability of a counterparty to act with minimum market effect; creditworthiness of a counterparty in relation to risk created by the transaction; willingness and ability of a counterparty to make a market in particular securities; operational coordination by a counterparty with the asset management firm and custodians of the firm’s clients, including ability to communicate to settle trades reliably and to quickly and effectively resolve differences; counterparty’s reputation for ethical and trustworthy behavior; willingness of a counterparty to commit capital to a particular transaction; the market knowledge of a counterparty and as applicable the value of research provided; ability of a counterparty to source and/or execute difficult transaction in unique and/or complex securities; and identifying the key components of favorable and efficient executions.
Many of the investments that the Adviser manages involve specialized services or unique sourcing considerations, resulting in higher commissions or their equivalents than would be the case with transactions requiring more routine services. Accordingly, the commission rates (or dealer markups and markdowns arising in connection with riskless principal transactions) charged to the Fund by brokers or dealers in the foregoing circumstances may be higher than those charged by other brokers or dealers that may not offer such services. A significant portion of the trading done for the Fund is done on a net basis, so in many circumstances it may not be possible to determine the amount of commission being paid to a broker or dealer. The Adviser need not solicit competitive bids and does not have an obligation to seek the lowest available commission cost or spread.
From time to time, the Fund may pay a broker-dealer commissions for effecting Fund transactions in excess of that which another broker-dealer might have charged for effecting the transaction in recognition of the value of the brokerage and research services provided by the broker-dealer. The Adviser may cause the Fund to effect such transactions, and receive such brokerage and research services, only to the extent that they fall within the safe harbor provided by Section 28(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and subject to prevailing guidance provided by the SEC regarding Section 28(e). The investment information provided to the Adviser is designed to augment the Adviser’s own internal research and investment strategy capabilities. Research services furnished by brokers through which the Fund effects securities transactions are used by the Adviser in carrying out its investment responsibilities with respect to all its client accounts.
If the Adviser decides, based on the factors set forth above, to execute over-the-counter transactions on an agency basis through Electronic Communications Networks (“ECNs”), it will also consider the following factors when choosing to use one ECN over another: the ease of use; the flexibility of the ECN compared to other ECNs; and the level of care and attention that will be given to smaller orders.
As of the date of this Memorandum, there were no brokerage commissions because the Fund had not yet commenced investment operations.
The Fund’s portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the particular fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the particular fiscal year. For purposes of determining this rate, all securities whose maturities at the time of acquisition are one year or less are excluded. A high portfolio turnover rate may result in greater transaction costs, which are borne directly by the Fund. In addition, high portfolio turnover may result in the realization of net short-term capital gains by the Fund which, when distributed to the Fund’s shareholders, will be taxable as ordinary income.
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NAV per Share will be determined daily on each day the NYSE is open for trading or at such other times as the Board may determine. NAV per Share is determined by dividing the total value of the Fund’s net assets by the total number of Shares outstanding. The Fund’s net assets are determined by subtracting any liabilities (including borrowings for investment purposes) from the total value of its portfolio investments and other assets. The Fund’s net assets are available to holders of preferred shares (if any) and Shares. If any preferred shares are outstanding, net assets available for the shareholders is determined by deducting from net assets the liquidation preference and any accrued dividends on the preferred shares.
The Fund values its investments at market value determined on the basis of market quotations or, if market quotations are not readily available or are unreliable, at “fair value” as determined in accordance with procedures approved by the Fund’s Board. Pursuant to these procedures, the Adviser, as the Fund’s “valuation designee” pursuant to Rule 2a-5 under the 1940 Act, is responsible for making all fair value determinations relating to the Fund’s portfolio investments, subject to oversight of the Fund’s Board.
The Adviser conducts the valuation of the Fund’s investments, upon which the Fund’s NAV is based, at all times consistent with GAAP and the 1940 Act. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to portfolio investments for which market quotations are not readily available, the Adviser is responsible for determining in good faith the fair value in accordance with the valuation policy approved by the Board. The Adviser values the Fund’s investments in accordance with FASB Accounting Standards Codification Topic 820, Fair Value Measurement (“ASC 820”), which defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the applicable measurement date. ASC 820 prioritizes the use of observable market prices or values derived from such prices over entity-specific inputs. Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material.
Consistent with ASC 820, each investment will be categorized into a valuation level based upon the method and corresponding inputs used to derive fair value. The valuation process prioritizes the use of market observable inputs over unobservable/internal inputs, where relevant. The hierarchy of valuation levels is defined below.
| |
i. |
Level 1: Fair value is determined by quoted prices in active markets for identical investments. Examples of this include exchange-traded investments. |
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ii. |
Level 2: Fair value is determined by other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, default rates, credit risk, etc.). Examples of this include traded positions with a higher liquidity profile, positions where multiple broker prices can be observed and certain derivative instruments (including foreign currency contracts). |
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iii. |
Level 3: Fair value is determined by significant unobservable inputs. The assets within this level are typically valued using a discounted cash-flow analysis, broker quotes not qualifying as Level 2, or through other comparable internal analysis that requires management’s involvement to arrive at fair value. |
The Fund’s investments will generally be valued at their current market values as determined in the following manner:
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1. |
Loan portfolio investments will generally be valued utilizing the methodologies included in Level 3. |
The fair value of loan portfolio investments, which are not quoted securities, whether performing or non-performing, will generally be based on a risk-adjusted discounted cash flow analysis. The projected cash flows may include contractual payments of interest and principal, proceeds from a sale of collateral on or after foreclosure, proceeds from a negotiated discounted pay-off, operating cash flows, and associated costs including servicing, legal and other fees. A risk-adjusted discount rate is then applied to these cash flow projections to determine current valuation.
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| |
2. |
Corporate securities investments may fall into any of the valuation levels. |
Corporate securities that fall into Level 1 will be valued at the market settlement price, which generally represents last executed market price. If a bid-ask spread is quoted in absence of a discrete settlement price active positions will be valued at the bid (long) or ask (short).
Corporate securities that fall into Level 2 are generally those positions for which quotes are available from more than one source. These positions will generally be valued at the bid (if held long), the ask (if held short) or as otherwise supplied by pricing vendors, with certain permitted exceptions.
Corporate securities that fall into Level 3 will be valued using external or internal models, including models developed by third-party pricing services and models developed by the Adviser that incorporate risk adjusted cash flow projections and risk-adjusted discount rates.
| |
3. |
Structured credit investments will generally be valued using quotes, through independent pricing services, or through an internal discounted cash flow model that considers the performance of the underlying collateral, benchmark rates, current spreads, and other market information. If the quotes or model are based upon significantly observable inputs they will be included in Level 2, otherwise they will be included in Level 3. |
| |
4. |
Hard assets such as aircraft, vessels and equipment will typically be Level 3 and valued using a discounted cash-flow analysis. The analysis will consider factors such as streams of rental income on current and future leases, costs relating to refurbishments, spares, broker fees, maintenance reserves, disposition strategy (sale or part-out) and exit timing. |
Inputs to valuations are monitored on an ongoing basis to ensure they remain reasonable and consistent with market. This monitoring includes, but is not limited to, cash flow projections, the risk premium component of the discount rate, solicited quotes, and reference market data. Valuation methodologies utilized for new investment strategies or asset classes are also fully assessed.
Prices provided by a pricing service are not, and broker-dealer quotes may not be, actual bids or offers for the relevant securities.
If market values for any of these investments are not readily available or are unreliable, they will be valued at fair value under the Fund’s procedures as discussed above.
The Fund is subject to a number of actual and potential conflicts of interest involving the Adviser and its affiliates (collectively, the “AB CarVal Group”), and the AB CarVal Group is subject to a range of conflicts of interest in its management of the Fund and Other Accounts. While the potential for conflicts of interest is inherent to the relationships among the AB CarVal Group and the entities (including the Fund) that it manages, merely because an actual or potential conflict of interest exists does not mean that it will be acted upon to the detriment of the Fund.
In addition to the conflicts of interest that may arise from the trading activities of the Portfolio Managers and other Adviser personnel servicing the Fund (as described under “Investment Advisory and Management Arrangements — The Portfolio Managers — Conflicts of Interest”), the Adviser and its affiliates included in the AB CarVal Group may be subject to additional conflicts of interest in their management of the Fund and Other Accounts. A summary of certain of these conflicts is provided below.
Conflicts of Interest Involving the AB CarVal Group
AB CarVal Group Advisory Accounts.
The AB CarVal Group manages a number of different accounts, including other investment funds, with investment objectives and strategies similar to those of the Fund.
Transactions in securities by multiple accounts may have the effect of diluting or otherwise negatively affecting the values, prices, liquidity or investment strategies associated with investments held by the Fund, particularly, but not limited to, in small capitalization, emerging market or less liquid strategies. When members of the AB CarVal Group implement a portfolio investment decision or strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for the 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.
The Adviser may determine that the Fund should invest on a side-by-side basis with one or more other accounts managed by the Adviser or other member(s) of the AB CarVal Group. In certain circumstances, co-investments may be made only in accordance with the terms of the Exemptive Order subject to certain conditions that limit or restrict the Fund’s ability to participate in such investments. In such cases, the Fund may participate in an investment to a lesser extent or, under certain circumstances, may not participate in the investment.
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In the event investment opportunities are allocated among the Fund and Other Accounts, the Fund may not be able to structure its investment portfolio in the manner desired. Although the Adviser endeavors to allocate investment opportunities in a fair and equitable manner over time, the Fund is not generally permitted to co-invest in any portfolio company in which a fund managed by the Adviser or any of its downstream affiliates (other than the Fund and its downstream affiliates) currently has an investment. However, the Fund may co-invest with funds managed by the Adviser or any of its downstream affiliates, subject to compliance with existing regulatory guidance, applicable regulations and its allocation procedures. Additionally, the Fund and Other Accounts may invest in different levels of an issuer’s capital structure. Consequently, the Adviser may determine that the sale of such investments may not be appropriate for a number of reasons, including if such sale could be detrimental to Other Accounts. The Adviser will not be required to act only in the best interests of the Fund, except to the extent required under Section 36 of the 1940 Act, and such determinations by the Adviser could reduce the liquidity of the Fund and could potentially affect the Fund’s ability to fund its quarterly repurchase offers.
The Adviser and other members of the AB CarVal Group may, in certain cases, elect to implement internal policies and procedures designed to limit such consequences, which may cause the 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. The Adviser and other members of the AB CarVal Group have proprietary interests in accounts or funds that have investment objectives similar to those of the Fund and/or that engage in transactions in the same types of securities, currencies and instruments as the Fund. One or more members of the AB CarVal Group may also be 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 members of the AB CarVal Group are or may be actively engaged in transactions in the same securities, currencies, and instruments in which the Fund invests. Such activities could affect the prices and availability of the securities, currencies, and instruments in which the Fund invests, which could have an adverse impact on the Fund’s performance. These transactions, particularly in respect of most proprietary accounts or customer accounts, may be executed independently of the Fund’s transactions and thus at prices or rates that may be more or less favorable than those obtained by the Fund.
The Fund will enter into certain transactions with the Adviser and/or AB Affiliates, including, but not limited to, transactions for the provision of services to the Fund by such parties, subject to the limitations on affiliated transactions under the 1940 Act. To the extent the Fund is permitted to engage in such transactions, it is expected that a number of such transactions may give rise to potential conflicts of interest. Although no exact statement of the full range of such transactions can be made, it is expected that any such transaction will be entered into by the relevant parties on an arm’s-length basis. The Fund may be prohibited under the 1940 Act from knowingly participating in certain transactions with its affiliates without the prior approval of the SEC.
The Adviser will devote to the Fund as much time as is necessary or appropriate, in its judgment, to manage the Fund’s investment activities. The Adviser and its affiliates, including members of the AB CarVal Group, are not restricted from forming investment funds (including investment funds that follow similar investment programs), from entering into other investment advisory or subadvisory relationships, or from engaging in other business activities. As noted above, the Adviser currently manages accounts other than the Fund that consist of a substantial amount of assets. These activities could be viewed as creating a conflict of interest in that the time and effort of the Adviser will not be devoted exclusively to the business of the Fund, but will be allocated between the business of the Fund and its other business activities.
Conflicts may also arise because portfolio decisions regarding the Fund may benefit other accounts managed by the Adviser and the AB CarVal Group. For example, the sale of a long position or establishment of a short position by the 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 the Fund may increase the price of the same security held by (and therefore benefit) one or more affiliates or their Other Accounts.
The Adviser and the AB CarVal Group and their clients may pursue or enforce rights with respect to an issuer in which the 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 the Adviser and the AB CarVal Group 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.
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The Adviser will have access to information that shareholders do not have and will be entitled to receive information regarding the Fund and its activities. Under certain circumstances, however, allowing AB CarVal Group personnel to act upon such information might conflict with the AB CarVal Group’s duties to investors in the Fund or otherwise conflict with legal or regulatory obligations applicable to the AB CarVal Group’s business. In such event, the Adviser might not be permitted to utilize such information in connection with its management of the Fund or might be restricted from taking actions on behalf of the Fund with respect to its investments.
In connection with its management of the Fund, the Adviser may have access to certain fundamental analysis and proprietary technical models developed by itself or one or more members of the AB CarVal Group. The Adviser will not be under any obligation, however, to effect transactions on behalf of the Fund in accordance with these analyses and models. In addition, neither the Adviser nor members of the AB CarVal Group 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 the Fund. The proprietary activities or portfolio strategies of members of the AB CarVal Group or the activities or strategies used for accounts managed by them or other customer accounts could conflict with the transactions and strategies employed by the Adviser in managing the Fund.
The Adviser has adopted compliance policies and procedures reasonably designed to ensure that all of the activities of the Fund are in compliance with applicable law and regulations. Such policies and procedures seek to ensure that neither the Adviser nor its employees and affiliates will use information regarding investment transactions of the Fund for any personal or other advantage to the detriment of the Fund.
Other AB CarVal Group Relationships and Activities.
The Adviser may enter into transactions and invest in securities, instruments and currencies on behalf of the Fund with respect to which customers of members of the AB Carval Group, to the extent permitted by applicable law, serve as the counterparty, principal or issuer. In these cases, the party’s interests in the transaction will be adverse to the interests of the Fund, and due to the customer relationship, the Adviser 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 investments by the Fund may enhance the profitability of members of the AB CarVal Group.
The Fund will be required to establish business relationships with its counterparties based on the Fund’s own credit standing. Neither the Adviser nor the members of the AB CarVal Group will have any obligation to allow their credit to be used in connection with the Fund’s establishment of its business relationships, nor is it expected that the Fund’s counterparties will rely on the credit of the Adviser or members of the AB CarVal Group in evaluating the Fund’s creditworthiness.
The Adviser, AB CarVal Group, AB Affiliates, their personnel and other financial service providers have interests in promoting sales of the Fund. The remuneration and profitability relating to services to and sales of the Fund 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. Members of the AB CarVal Group and AB Affiliates and their sales personnel may directly or indirectly receive a portion of the fees charged to the Fund or its shareholders.
Members of the AB CarVal Group, AB Affiliates and their 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 members of the AB CarVal Group or AB Affiliates resulting from transactions on behalf of or management of the Fund may be greater than the remuneration and profitability resulting from other services or products. The Fund is expected to be sold to, among others, investment advisory clients of the Adviser and/or its affiliates. Because the Adviser receives fees based on the amount of assets invested in the Fund, the Adviser has an interest in having its clients invest, and stay invested, in the Fund. Additionally, Fund Shares are not redeemable by investors but will be subject to quarterly repurchases by the Fund. The size of any such repurchases will be determined by the Board, in part, on the recommendation of the Adviser. The Adviser has a conflict of interest with respect to its recommendation on the size of any such repurchases.
The Fund engages the Distributor to solicit investments in the Fund. As of the date of this Memorandum, the Distributor serves in that capacity on a best efforts basis, subject to various conditions. The Distributor may engage one or more financial intermediaries. Under the terms of the distribution services agreement by and between the Fund and the Distributor, the Distributor has been engaged to distribute shares of the Fund. The Distributor also is authorized to retain and compensate financial intermediaries to provide ongoing distribution and sales support services as well as investor and shareholder services. In addition, to the extent permitted by applicable law, the Adviser, the AB CarVal Group and the AB Affiliates may make payments to authorized dealers and other financial intermediaries periodically to promote the Fund and/or other products. Such payments would be made out of the Adviser’s, an AB CarVal Group member’s or an AB Affiliate’s assets, or amounts payable to the Adviser, rather than as a separately identified charge to the Fund (such as a distribution and shareholder servicing fee).
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These payments may compensate intermediaries for, among other things: marketing the Fund and other products; access to the intermediaries’ registered representatives or salespersons, including at conferences and other meetings; assistance in training and education of personnel; marketing support; and/or other specified services intended to assist in the distribution and marketing of the Fund and other products. The payments may also, to the extent permitted by applicable regulations, contribute to various non-cash and cash incentive arrangements to promote certain products, as well as sponsor various educational programs, sales contests and/or promotions. The additional payments by the Adviser, the AB CarVal Group or the AB Affiliates may also compensate intermediaries for sub-accounting, administrative and/or shareholder processing services that are in addition to the fees paid for these services by such products.
The payments made by the Adviser, the AB Affiliates, or the AB CarVal Group may be different for different intermediaries. The presence of these payments and the basis on which an intermediary compensates its registered representatives or salespersons may create an incentive for a particular intermediary, registered representative or salesperson to highlight, feature or recommend certain products based, at least in part, on the level of compensation paid.
To the extent permitted by applicable law, the Fund may invest all or some of its short-term cash investments in any money market fund advised or managed by the Adviser or affiliate of the Adviser. In connection with any such investments, the Fund would pay its share of expenses of a money market fund in which it invests, which may result in the Fund bearing some additional expenses.
Present and future activities of the AB Affiliates and members of the AB CarVal Group, including the Adviser, may give rise to other conflicts of interest, in addition to those described in this section.
While the Adviser will attempt to identify and address conflicts of interest in its investment assessments, there can be no assurance that all such conflicts will be identified or addressed or that such conflicts will not negatively impact the Fund.
The Adviser and AllianceBernstein
. As the businesses of the Adviser and its parent company, AllianceBernstein, L.P. (“AB”), operate independently, investors should not, when making an investment decision, rely on the availability of the AB infrastructure, resources or expertise, although the Fund may benefit directly or indirectly from services offered by affiliates of AB that are not part of the AB CarVal Group. Also, AB may want to limit its potential liabilities to third parties and to ensure that the Adviser’s operations are not damaging to the AB organization as a whole.
AB and its clients may make investments that are beyond the scope of the Fund’s investment mandate, but they also may make investments that would be within the scope of the investment mandate of the Fund. AB and its affiliates are not obligated to share any investment opportunity, idea or strategy with the Fund or the Adviser.
AB and its affiliates will periodically come into possession of confidential or material, non-public information. Disclosure of such information within AB is limited to members of working groups with a need for such information. Therefore, the Fund will not have access to material, non-public information in the possession of AB or its affiliates that might be relevant to an investment decision to be made by the Fund, and the Fund may initiate a transaction or sell an investment which, if such information had been known to it, may not have been undertaken. In the event any material, non-public information is disclosed to any of the Adviser’s officers or employees (including in their capacity as a member of a company’s board of directors), any member of the Adviser’s portfolio investment committee or any other person responsible for the affairs of the Fund, the Fund may be prohibited by applicable securities laws and the Adviser’s internal policies from acting upon any such information. Due to these restrictions, the Fund may not be able to make an investment that it otherwise might have made or sell an investment that it otherwise might have sold.
The following is a non-exclusive list of certain transactions or types of transactions in which such conflicts may exist:
Provision of Services
. The Adviser and/or the AB CarVal Group may enter into certain other advisory relationships with or otherwise receive services from AB which may provide brokerage services, research products, and other products and services to the Fund or an entity in which the Fund invests. For instance, Sanford C. Bernstein & Co LLC (a registered broker affiliated with AB) may provide research, brokerage or other services to the Adviser and/or individuals associated with the Adviser may be private clients of Bernstein Global Wealth Management. The Adviser could potentially be incentivized to engage its affiliates to provide such services in order to benefit its affiliates, AB, and the fees and other expenses incurred by the Adviser in connection with any such relationships or services (e.g., brokerage fees) may ultimately be borne by the Fund.
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Employee Compensation
. Certain employees from the Adviser’s legal, compliance and other departments will provide legal and related support or corporate secretarial services to the Adviser in connection with the operational and investment activities of the Fund. The salaries, fees and other expenses paid by the Adviser with respect to such services will be reimbursed by the Fund subject to the limits described herein. Additionally, separate divisions within the AB group may refer certain business and investment opportunities to each other, or otherwise enter into arrangements with each other that could result in fee sharing or other forms of compensation.
Facilitation of Expenses.
The Adviser may advance funds for or otherwise facilitate the payment of the Fund’s expenses for the benefit of the Fund, including, but not limited to, operating and other Fund-related expenses. The Adviser will be entitled to seek and receive reimbursement for any such paid amounts.
The relationships among the Fund, the Other Accounts, the Adviser, the AB CarVal Group and AB are complex and dynamic and as the Adviser’s and the Fund’s businesses change over time, the Adviser and its affiliates may be subject, and the Fund may be exposed, to new or additional conflicts of interest. There can be no assurance that this discussion addresses or anticipates every possible current or future conflict of interest that may arise or that is or may be detrimental to the Fund or the Shareholders. You should consult with your own advisers regarding the possible implications on your investment in the Fund of the conflicts of interest described herein.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain material U.S. federal income tax considerations regarding the Fund and the purchase, ownership and disposition of Shares. This summary does not address all of the potential U.S. federal income tax consequences that may be applicable to the Fund or to all categories of investors, some of which may be subject to special tax rules, and does not address any state, local, non-U.S. or other tax consequences. Unless otherwise noted, the following discussion applies only to a shareholder that holds Shares as a capital asset and is a U.S. Shareholder. A “U.S. Shareholder” generally is a beneficial owner of Shares who is for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States; |
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a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
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an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
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a trust if it (a) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds Shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective shareholder that is a partner in a partnership holding Shares should consult the shareholder’s personal advisors with respect to the purchase, ownership and disposition of Shares.
The discussion set forth herein does not constitute tax advice. Current and prospective shareholders are urged to consult their own tax advisor with respect to the specific federal, state, local and foreign tax consequences of investing in the Fund. The summary is based on the laws in effect on the date of this Memorandum and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect.
The Fund intends to qualify to be treated as a RIC under the Code each taxable year. To so qualify, the Fund must, among other things: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock or securities or 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 and net income derived from interests in “qualified publicly traded partnerships”; and (b) meet the Code’s asset diversification test, which requires that, at the end of each quarter of the Fund’s taxable year, (i) at least 50% of the market value of the Fund’s assets is represented by cash, securities of other RICs, 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
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assets is invested in the securities (other than U.S. government securities or securities of other RICs) 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. A “qualified publicly traded partnership” is a partnership (i) whose interests are traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof); (ii) that derives less than 90% of its annual income from dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies; and (iii) that has met the gross income requirements under Code Section 7704(c)(2) such that it will be treated for tax purposes as a partnership.
For purposes of the 90% gross income test, income that the Fund earns from equity interests in certain entities that are not treated as corporations or as qualified publicly traded partnerships for U.S. federal income tax purposes (
, partnerships or trusts) will generally have the same character for the Fund as in the hands of such an entity; consequently, the Fund may be required to limit its equity investments in any such entities that earn fee income, rental income, or other nonqualifying income. In addition, future Treasury regulations could provide that qualifying income under the 90% gross income test will not include gains from foreign currency transactions that are not directly related to the Fund’s principal business of investing in stock or securities or options and futures with respect to stock or securities.
Fund investments in partnerships, including in qualified publicly traded partnerships, may result in the Fund’s being subject to state, local or foreign income, franchise or withholding tax liabilities.
As a RIC, the Fund will not be subject to U.S. federal income tax on the portion of its taxable investment income and capital gains that it distributes to its shareholders, provided that it satisfies a minimum distribution requirement. To satisfy the minimum distribution requirement, the Fund must distribute to its shareholders at least the sum of (i) 90% of its “investment company taxable income” (
, income other than its net realized long-term capital gain over its net realized short-term capital loss), plus or minus certain adjustments, and (ii) 90% of its net tax-exempt income for the taxable year. The Fund will be subject to income tax at regular corporate rates on any taxable income or gains that it does not distribute to its shareholders.
The Code imposes a 4% nondeductible excise tax on the Fund to the extent it does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income for that year and (ii) 98.2% of its capital gain net income (both long-term and short-term) for the one-year period ending, as a general rule, on October 31 of that year. For this purpose, however, any ordinary income or capital gain net income retained by the Fund that is subject to corporate income tax will be considered to have been distributed by year-end. In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any underdistribution or overdistribution, as the case may be, from previous years.
The Fund may be able to cure a failure to derive 90% of its income from the sources specified above or a failure to diversify its holdings in the manner described above by paying a tax, by disposing of certain assets, or by doing both of these things. If, in any taxable year, the Fund fails one of these tests and does not timely cure the failure, the Fund will be taxed in the same manner as an ordinary corporation and distributions to its shareholders will not be deductible by the fund in computing its taxable income.
If, in any taxable year, the Fund fails to qualify as a RIC under the Code or fails to meet the distribution requirement, it will be taxed in the same manner as an ordinary corporation and distributions to its shareholders will not be deductible by the Fund in computing its taxable income. In addition, in the event of a failure to qualify, the Fund’s distributions, to the extent derived from the Fund’s current or accumulated earnings and profits, including any distributions of net long-term capital gains, will be taxable to shareholders as dividend income. However, such dividends generally would be eligible (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders, in each case, subject to certain holing period and other requirements. Distributions in excess of the Fund’s current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of a shareholder’s basis in his Shares, and as a capital gain thereafter (if the shareholder holds his Shares as capital assets). A return of capital reduces the basis in the Shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition of the Shares. Moreover, if the Fund fails to qualify as a RIC in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a RIC. If the Fund fails to qualify as a RIC for a period greater than two taxable years, the Fund may be required to recognize any net built-in gains with respect to certain of its assets (
, the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Fund had been liquidated) if it qualifies as a RIC in a subsequent year.
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The Fund’s transactions in zero coupon securities, foreign currencies, forward contracts, options and futures contracts (including options and futures contracts on foreign currencies), to the extent permitted, will be subject to special provisions of the Code (including provisions relating to “hedging transactions” and “straddles”) that, among other things, may affect the character of gains and losses realized by the Fund (
, may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund and defer Fund losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of the positions in its portfolio (
, treat them as if they were closed out at the end of each year) and (b) may cause the Fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. The Fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any foreign currency, forward contract, futures contract or hedged investment in order to mitigate the effect of these rules.
The Fund’s investments in so-called “section 1256 contracts,” such as regulated futures contracts, most foreign currency forward contracts traded in the interbank market and options on most stock indices, are subject to special tax rules. All section 1256 contracts held by the Fund at the end of its taxable year are required to be marked to their market value, and any unrealized gain or loss on those positions will be included in the Fund’s income as if each position had been sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain or loss realized by the Fund from positions in section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not part of a “hedging transaction” or part of a “straddle,” 60% of the resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss, regardless of the period of time the positions were actually held by the Fund.
As a result of entering into swap contracts, the Fund may make or receive periodic net payments. The Fund may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Swap payments will generally constitute ordinary income or deductions, while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if the Fund has been a party to the swap for more than one year). With respect to certain types of swaps, the Fund may be required to currently recognize income or loss with respect to future payments on such swaps or may elect under certain circumstances to mark such swaps to market annually for tax purposes as ordinary income or loss.
In general, gain or loss on a short sale is recognized when the Fund closes the sale by delivering the borrowed property to the lender, not when the borrowed property is sold. Gain or loss from a short sale is generally considered as capital gain or loss to the extent that the property used to close the short sale constitutes a capital asset in the Fund’s hands. Except with respect to certain situations where the property used by the Fund to close a short sale has a long-term holding period on the date of the short sale, special rules would generally treat the gains on short sales as short-term capital gains. These rules may also terminate the running of the holding period of “substantially identical property” held by the Fund. Moreover, a loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, “substantially identical property” has been held by the Fund for more than one year. In general, the Fund will not be permitted to deduct payments made to reimburse the lender of securities for dividends paid on borrowed stock if the short sale is closed on or before the 45th day after the short sale is entered into.
Dividends or other income (including, in some cases, capital gains) received by the Fund from investments in foreign securities may be subject to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes in some cases. The Fund does not expect to be eligible to elect to treat any foreign taxes it pays as paid by its shareholders, who therefore will not be entitled to credits or deductions for such taxes on their own tax returns. Foreign taxes paid by the Fund will reduce the return from the Fund’s investments.
