This Statement of Additional Information (SAI) supplements the information contained in
the current statutory prospectus of the Elfun Funds (each a Fund, collectively the Funds) dated [April 30], 2014, as it may be revised from time to time (the Prospectus) and should be read in conjunction with the
Prospectus. This SAI, although not a prospectus, is incorporated in its entirety by reference into the Prospectus. Copies of the Prospectus describing each Fund may be obtained without charge by calling the Funds at the toll-free telephone number
listed above.
The Funds financial statements for the fiscal year ended December 31, 2013 and the Independent Registered Public
Accounting firms Report thereon are incorporated by reference to the Funds Annual Report dated December 31, 2013, which may be obtained without charge by calling the Funds at the toll-free telephone number listed above. Information
regarding the status of unit-holder accounts may be obtained by calling the Funds at the toll-free telephone number listed above or by writing to the Funds at 1600 Summer Street, Stamford, CT 06905 or at P.O. Box 7900, Stamford, CT 06904-7900. Terms
that are defined in the Prospectus shall have the same meanings in this SAI
.
Investment Objectives and Principal Strategies and Risks
Elfun Trusts
.
The investment objectives of the Elfun Trusts are long-term growth of capital and future income rather than
current income. The Fund seeks to achieve its investment objectives by investing in equity securities of U.S. companies, such as common and preferred stocks. A U.S. company is a company that generates at least 50% of its revenue or profits from
business activities in the U.S., has at least 50% of its assets situated in the U.S., or has the principal trading market for its securities in the U.S.
-3-
International Fund
.
The investment objectives of the International Fund are
long-term growth of capital and future income by investing principally in foreign securities consistent with prudent investment management and the preservation of capital. The Fund seeks to achieve its objectives by investing at least 80% (measured
at the time of investment) of its net assets plus borrowings for investment purposes, under normal circumstances, in equity securities, such as common and preferred stocks. The Fund invests primarily (meaning at least 65%) in companies located in
both developed and emerging market countries outside the U.S. An issuer is considered to be located outside the U.S. if at least 50% of its revenues or profits are from business activities located outside the U.S., at least 50% of its assets are
located outside the U.S., or the principal trading market for its securities is located outside the U.S. Under normal circumstances, at least 65% of the Funds assets are invested in securities of foreign (non-U.S.) companies representing no
fewer than three different countries.
Income Fund
.
The investment objective of the Income Fund is a high level of income
consistent with prudent investment management and the preservation of capital. The Fund seeks to achieve its objective, by investing at least 80% (measured at the time of investment) of its net assets plus borrowings for investment purposes, under
normal circumstances, in debt securities. The Fund invests primarily in a variety of investment-grade debt securities, such as mortgage-backed securities, corporate bonds, U.S. Government securities and money market instruments. The Fund normally
has a weighted average maturity of approximately five to ten years, but is subject to no limitation with respect to the maturities of the instruments in which it may invest.
Tax-Exempt Fund
.
The investment objective of the Tax-Exempt Fund is as high a level of current interest income exempt from
federal income taxation as is available from a concentration of investments in municipal bonds consistent with prudent investment management and the preservation of capital. The Fund seeks to achieve its objective by investing primarily in
investment-grade municipal obligations. Under normal circumstances, the portfolio manager of the Fund will invest its assets so that, during any fiscal year, at least 80% of the income generated by the Fund is exempt from regular federal income
taxes and the federal alternative minimum tax. The Fund may also hold a portion of its total assets in cash or money market instruments, including taxable money market instruments.
Diversified Fund
.
The investment objective of the Diversified Fund is the highest total return consistent with prudent
investment management and the preservation of capital (total return includes both income and capital appreciation). The Fund seeks to achieve its objective by investing primarily in a combination of U.S. and foreign (non-U.S.) equity and debt
securities and cash. The Funds asset allocation process utilizes information from GE Asset Management Incorporateds (GEAM) Asset Allocation Committee to diversify holdings across these asset classes. The Fund adjusts its
weightings based on market and economic conditions to meet its objectives. The Fund invests in equity securities, such as common and preferred stocks, principally for their capital appreciation potential and investment-grade debt securities
principally for their income potential. The Fund invests in cash principally for the preservation of capital, income potential or maintenance of liquidity. Within each asset class, the portfolio managers primarily use active security selection to
choose securities based on the perceived merits of individual issuers, although portfolio managers of different asset classes or strategies may place different emphasis on the various characteristics of a company during the selection process.
-4-
GEAM has broad latitude in selecting the classes of investments to which the Diversified
Funds assets are committed. Although the Fund has the authority to invest solely in equity securities, solely in debt securities, solely in money market instruments or in any combination of these classes of investments, GEAM anticipates that
at most times the Fund will be invested in a combination of equity and debt instruments.
Money Market Fund
.
The
investment objective of the Money Market Fund is a high level of current income consistent with prudent investment management and the preservation of capital. The Fund seeks to achieve its objective by investing at least 80% of its assets in
short-term government securities. The Fund may invest to a lesser extent in short-term, U.S. dollar-denominated money market instruments, repurchase agreements, commercial paper, certificates of deposit, variable rate securities, asset-backed
securities, foreign debt securities, Eurodollar deposits and domestic and foreign bank deposits. The Fund invests consistent with regulatory and industry standards governing security quality, maturity, liquidity and portfolio diversification.
***********
Supplemental
information concerning certain of the securities and other instruments in which the Funds may invest, the investment policies and strategies that the Funds may utilize and certain risks attendant to those investments, policies and strategies are
discussed below. Some or all of the Funds may invest in the types of instruments and engage in the types of investment strategies and techniques described in detail below. The Funds are not obligated to pursue the following strategies or techniques
and do not represent that these strategies or techniques are available now or will be available at any time in the future. A Fund will not purchase all of the following types of securities or employ all of the following strategies unless doing so is
consistent with its investment objective(s).
-5-
The following table summarizes the investment techniques that may be employed by the Funds.
Certain techniques and limitations may be changed at the discretion of GEAM and in some cases may be subject to the approval by the Board. Percentage figures refer to the percentage of a Funds total assets (including any borrowings) that may
be invested in accordance with the indicated techniques.
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Elfun
Trusts
|
|
International
Fund
|
|
Income Fund
|
|
Tax-Exempt
Fund
|
|
Diversified
Fund
|
|
Money
Market
Fund
|
Borrowing Limit
|
|
33
1
⁄
3
%
|
|
33
1
⁄
3
%
|
|
33
1
⁄
3
%
|
|
33
1
⁄
3
%*
|
|
33
1
⁄
3
%
|
|
33
1
⁄
3
%
|
Repurchase Agreements
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
Reverse Repurchase Agreements
|
|
No
|
|
No
|
|
No
|
|
No
|
|
Yes
|
|
Yes
|
Restricted and Illiquid Investments
|
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Yes
|
|
Yes
|
|
Yes
|
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Yes
|
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Yes
|
|
Yes
|
Structured and Indexed Securities
|
|
No
|
|
No
|
|
Yes
|
|
No
|
|
Yes
|
|
No
|
Purchasing and Writing Securities Options
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
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No
|
Purchasing and Writing Securities Index Options
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
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No
|
Futures Contracts and Options on Futures Contracts
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
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No
|
Forward Currency Transactions
|
|
No
|
|
Yes
|
|
Yes
|
|
No
|
|
Yes
|
|
No
|
Options on Foreign Currencies
|
|
No
|
|
Yes
|
|
Yes
|
|
No
|
|
Yes
|
|
No
|
Maximum Investment in Debt Securities
|
|
35%
|
|
20%
|
|
100%
(maximum
of 25%
BBB by
S&P or
Baa by
Moodys
or
equivalent
|
|
100%
(maximum
of 25%
BBB by
S&P or
Baa by
Moodys
or
equivalent
|
|
100%
(maximum
of 25%
BBB by
S&P or
Baa by
Moodys
or
equivalent
|
|
100%
|
Maximum Investment in High Yield Securities
|
|
5%
|
|
None
|
|
20% BB
or B by
S&P or Ba
or B by
Moodys
or below
or of
similar
quality
|
|
10% BB
or B by
S&P or Ba
or B by
Moodys
or below
or of
similar
quality
|
|
20% BB
or B by
S&P or Ba
or B by
Moodys
or below
or of
similar
quality
|
|
None
|
Maximum Investment in Foreign Securities
|
|
35%**
|
|
100%
|
|
35%**
|
|
None
|
|
70%**
|
|
25%**
|
When-Issued and Delayed Delivery Securities
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
Lending Portfolio Securities
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
Rule 144A Securities
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
Debt Obligations of Supranational Agencies
|
|
No
|
|
No
|
|
Yes
|
|
No
|
|
Yes
|
|
Yes
|
Depositary Receipts
|
|
Yes
|
|
Yes
|
|
No
|
|
No
|
|
Yes
|
|
No
|
Securities of Other Investment Funds
|
|
Yes
|
|
Yes
|
|
Yes
|
|
No
|
|
Yes
|
|
Yes
|
Municipal Leases
|
|
No
|
|
No
|
|
Yes
|
|
Yes
|
|
Yes
|
|
No
|
-6-
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Elfun
Trusts
|
|
International
Fund
|
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Income Fund
|
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Tax-Exempt
Fund
|
|
Diversified
Fund
|
|
Money
Market
Fund
|
Floating and Variable Rate Instruments
|
|
No***
|
|
No***
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
Participation Interests in Municipal Obligations
|
|
No
|
|
No
|
|
Yes
|
|
Yes
|
|
Yes
|
|
No
|
Zero Coupon Obligations
|
|
No
|
|
No
|
|
Yes
|
|
Yes
|
|
Yes
|
|
No
|
Municipal Obligations Components
|
|
No
|
|
No
|
|
Yes
|
|
Yes
|
|
Yes
|
|
No
|
Custodial Receipts on Municipal Obligations
|
|
No
|
|
No
|
|
Yes
|
|
Yes
|
|
Yes
|
|
No
|
Mortgage Related Securities, including CMOs
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
Government Stripped Mortgage Related Securities
|
|
No
|
|
No
|
|
Yes
|
|
No
|
|
Yes
|
|
No
|
Asset Backed Securities and Receivable-Backed Securities
|
|
No
|
|
No
|
|
Yes
|
|
No
|
|
Yes
|
|
Yes
|
Mortgage Dollar Rolls
|
|
No
|
|
No
|
|
Yes
|
|
No
|
|
Yes
|
|
No
|
Short Sales Against the Box
|
|
No
|
|
No
|
|
No
|
|
No
|
|
Yes
|
|
Yes
|
*
|
The Elfun Tax-Exempt Fund also may borrow from banks for long-term or leveraging purposes in an amount not to exceed 10% of total assets.
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**
|
This limitation excludes: American Depository Receipts (ADRs); securities of a foreign issuer with a class of securities registered with the Securities and Exchange Commission (SEC) and listed on
a U.S. national securities exchange; and dollar-denominated securities publicly offered in the U.S. by a foreign issuer.
|
***
|
Excludes commercial paper and notes with variable and floating rates of interest.
|
-7-
Money Market Fund Investments
.
The Money Market Fund limits its portfolio
investments to securities that the Board determines present minimal credit risk and that are Eligible Securities at the time of acquisition by the Money Market Fund. Eligible Securities means securities rated by the requisite
nationally recognized statistical rating organizations (NRSROs) in one of the two highest short-term rating categories, consisting of issuers that have received these ratings with respect to other short-term debt securities and
comparable unrated securities. Requisite NRSROs means (1) any two NRSROs that have issued ratings with respect to a security or class of debt obligations of an issuer or (2) one NRSRO, if only one NRSRO has issued such a rating
at the time that the Money Market Fund acquires the security. Currently, four organizations are NRSROs: S&P, Moodys Investors Service, Inc. (Moodys), Fitch Investors Service, Inc. and Dominion Bank Ratings Service
Limited. A discussion of the ratings categories is contained in the appendix to this SAI. By limiting its investments to Eligible Securities, the Money Market Fund may not achieve as high a level of current income as a fund investing in lower-rated
securities.
All investments purchased by the Money Market Fund will mature or will be deemed to mature within 397 days or less from the
date of acquisition and the average maturity of the Money Market Fund portfolio (on a dollar-weighted basis) will be 60 days or less. The maturities of variable rate demand instruments held in the Money Market Funds portfolio will be deemed to
be the longer of the period required before the Money Market Fund is entitled to receive payment of the principal amount of the instrument through demand, or the period remaining until the next interest rate readjustment, although the stated
maturities may be in excess of 397 days. The weighted average life of the Money Market Funds portfolio will be 120 days or less.
Under Rule 2a-7 under the Investment Company Act of 1940, as amended (the 1940 Act), Daily Liquid Assets means
(i) cash, (ii) direct obligations of the U.S. Government; or (iii) securities that will mature or any subject to a demand feature that is exercisable and payable within one business day. The Money Market Fund will not acquire any
security other than a Daily Liquid Asset if, immediately after the acquisition, the Money Market Fund would have invested less than 10% of its total assets in Daily Liquid Assets. Under Rule 2a-7 under the 1940 Act, Weekly Liquid Assets
means (i) cash, (ii) direct obligations of the U.S. Government, (iii) Government securities that are issued by a person controlled or supervised by and acting as an instrumentality of the U.S. Government pursuant to authority granted
by the U.S. Congress that (A) are issued at a discount to the principal amount to be repaid at maturity; and (B) have a remaining maturity date of 60 days or less; or (v) securities that will mature or any subject to a demand feature
that is exercisable and payable within five business days. The Money Market Fund will not acquire any security other than a Weekly Liquid Asset if, immediately after the acquisition, the Money Market Fund would have invested less than 30% of its
total assets in Weekly Liquid Assets. The Money Market Fund may maintain a higher percentage of its total assets in Daily Liquid Assets or Weekly Liquid Assets if determined to be appropriate by the Board.
The Money Market Fund may not invest more than 5% of its total assets in the securities of any one issuer, except for Government Securities
and except to the extent permitted under rules adopted by the SEC under the 1940 Act. In addition, the Money Market Fund may not invest more than 3% of its total assets in Eligible Securities that have not received the highest short-term rating for
debt obligations and comparable unrated securities (collectively, Second Tier Securities), and may not invest more than 0.5% of its total assets in the Second Tier Securities of any one issuer. The Money Market Fund is also prohibited
from purchasing any Second Tier Securities with a remaining maturity in excess of 45 days. The Money Market Fund
-8-
may invest more than 5% (but not more than 25%) of the then-current value of the Money Market Funds total assets in the securities of a single issuer for a period of up to three business
days, so long as (1) the securities either are rated by the Requisite NRSROs in the highest short-term rating category or are securities of issuers that have received such ratings with respect to other short-term debt securities or are
comparable unrated securities and (2) the Money Market Fund does not make more than one such investment at any one time. Determinations of comparable quality for purchases of unrated securities are made by GEAM in accordance with procedures
established by the Board. The Money Market Fund invests only in instruments that have (or, pursuant to regulations adopted by the SEC, are deemed to have) remaining maturities of 13 months or less at the date of purchase (except securities subject
to repurchase agreements), determined in accordance with a rule promulgated by the SEC. Up to 20% of the Money Market Funds total assets may be invested in foreign debt securities, excluding, for purposes of this limitation, ADRs, securities
of a foreign issuer with a class of securities registered with the SEC and listed on a U.S. national securities exchange, and dollar-denominated securities publicly offered in the U.S. by a foreign issuer. The Funds do not regard as a foreign
security an Eligible Security issued by an issuer organized in the United States, even if affiliated with a foreign entity or otherwise serving as a nominal or co-issuer, or if issuing a security guaranteed by a foreign entity. Nor does the Money
Market Fund regard as a foreign security, a dollar denominated Eligible Security issued by a foreign bank, with a branch in the United States. The Money Market Fund will maintain a dollar-weighted average portfolio maturity of 60 days or less. The
assets of the Money Market Fund are valued on the basis of amortized cost, as described below under Net Asset Value. The Money Market Fund also may hold restricted securities that are eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended (the 1933 Act) (Rule 144A Securities), and that are liquid (see Restricted Securities and Other Illiquid Investments).
Money Market Instruments
.
The types of money market instruments in which each Fund may invest either directly or indirectly are
as follows: (i) Government Securities, (ii) debt obligations of banks, savings and loan institutions, insurance companies and mortgage bankers, (iii) commercial paper and notes, including those with variable and floating rates of
interest, (iv) debt obligations of foreign branches of U.S. banks, U.S. branches of foreign banks and foreign branches of foreign banks, (v) debt obligations issued or guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of supranational entities, (vi) debt securities issued by foreign issuers and (vii) repurchase agreements.
[Each Fund, other than the Money Market Fund and the Tax-Exempt Fund, may also invest indirectly in money market instruments through
investment in the GE Institutional Money Market Fund, which is generally used to invest a Funds cash balance, as well as the cash balances of other non-money market investment companies managed by GEAM. The Income Fund and the Diversified Fund
are authorized to invest up to 25% of their assets in the GE Institutional Money Market Fund, Elfun Trusts and the International Fund may invest up to 5% of their assets in the GE Institutional Money Market Fund. The investment objective of the GE
Institutional Money Market Fund is to seek a high level of current income consistent with the preservation of capital and the maintenance of liquidity. The GE Institutional Money Market Fund seeks to achieve this objective by investing primarily in
short-term, U.S. dollar denominated money market instruments. In order to ensure that the Funds do not incur duplicative advisory fees on the cash balances invested in the GE Institutional Money Market Fund, GEAM will waive a portion of its
management fee for each Fund in an amount equal to the management fee payable to GEAM by the GE Institutional Money Market Fund with respect to each Funds cash holdings invested in the GE Institutional Money Market Fund, if any.]
-9-
Each of the Funds may invest in the following types of Government Securities; debt
obligations of varying maturities issued by the U.S. Treasury or issued or guaranteed by an entity controlled by or supervised by, and acting as an instrumentality of, the Government of the United States pursuant to authority granted by the United
States Congress, such as the following: the Federal Housing Administration, Farmers Home Administration,
Export-Import
Bank of the United States, Small Business Administration, Government National Mortgage
Association (Ginnie Mae), General Services Administration, Central Bank for Cooperatives, Federal Farm Credit Banks Funding Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal
Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage Association (Fannie Mae), Federal Deposit Insurance Corporation (FDIC), Maritime Administration, Tennessee Valley Authority, District of Columbia Armory
Board, Student Loan Marketing Association and Resolution Trust Corporation. Direct obligations of the U.S. Treasury include a variety of securities that differ in their interest rates, maturities and dates of issuance. Certain of the Government
Securities that may be held by the Funds are instruments that are backed by the full faith and credit of the United States (
i.e.,
U.S. Treasury bills and notes and obligations of Ginnie Mae). Other U.S. Government securities are neither
issued nor guaranteed by the full faith and credit of the U.S. Government, including those issued by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac have been operating under a conservatorship since 2008, with the Federal Housing Finance
Agency (FHFA) acting as their conservator, and receive certain financing support from and have access to certain borrowing arrangements with the U.S. Treasury. The status of these entities and the value of their securities and the
securities which they guarantee could be affected to the extent the entities no longer receive such support. Other securities issued by a Government agency or related entity also may be considered Government Securities even though they are
considered derivatives or use complex structures, such as stripped mortgage-backed securities, or interest-only or principal-only securities. Because the U.S. Government is not obligated by law to provide support to an instrumentality that it
sponsors, a Fund will invest in obligations issued by an instrumentality of the U.S. Government, only if the portfolio manager determines that the instrumentalitys credit risk does not make its securities unsuitable for investment by the Fund.
For purposes of a repurchase agreement entered into by a Fund, however, Government Securities serving as collateral for that repurchase agreement means only those type of Government Securities that permit the Fund to look-through the repurchase
agreement to that collateral for the purposes permitted by the 1940 Act, to the extent it is necessary or appropriate for the Fund to look through to that collateral.
Lending Portfolio Securities
.
Each Fund is authorized to lend its portfolio securities to well-known and recognized U.S. and
foreign brokers, dealers and banks in accordance with its fundamental investment restrictions on making loans. The Funds loans of securities will be collateralized by cash, letters of credit or Government Securities. Each Fund will retain the
right to all interest and dividends payable with respect to the loaned securities. If a Fund lends its portfolio securities, it may charge the borrower a negotiated fee and retain the ability to terminate the loan at any time. Cash or instruments
collateralizing a Funds loans of securities are segregated and maintained at all times with the Funds custodian, or with a designated sub-custodian, in an amount at least equal to the current market value of the loaned securities. In
lending securities, a Fund will be subject to risks, including the potential inability to recall the loaned securities should the borrower fail financially, and the possible loss in market value of the collateral. Income derived by the Tax-Exempt
Fund on any loan of its portfolio securities will not be exempt from Federal income taxation.
-10-
If a Fund loans its portfolio securities, it will adhere to the following conditions whenever its
portfolio securities are loaned: (1) the Fund must receive at least 100% cash collateral or equivalent securities from the borrower; (2) the borrower must increase the collateral whenever the market value of the securities loaned rises
above the level of the collateral; (3) the Fund must be able to terminate the loan at any time; (4) the Fund must receive a reasonable fee on the loan, as well as any dividends, interest or other distributions on the loaned securities, and
any increase in market value of the loaned securities; and (5) the Fund may pay only reasonable custodian fees in connection with the loan. When securities are loaned, voting rights typically are passed to the borrower. However, if a member of
the proxy committee determines that a proxy vote is materially important to the unitholders of the Funds and where it is feasible to recall the securities on a timely basis, GEAM may use its reasonable efforts to recall the loaned securities. GEAM
disclaims any responsibility for its inability to vote on proposals where, despite its reasonable efforts, it could not successfully recall the loaned securities before the record date and/or the deadline for voting, as applicable. From time to
time, a Fund may pay a part of the interest earned from the investment of collateral received for securities loaned to the borrower and/or a third party that is unaffiliated with the Fund and is acting as a finder.
Cash and Temporary Defensive Positions
.
During periods when the portfolio manager believes there are adverse market, economic,
political or currency conditions domestically or abroad, the portfolio manager may assume, on behalf of a Fund, a temporary defensive posture and (i) without limitation hold cash, or (ii) restrict the securities markets in which the
Funds assets are invested by investing those assets in securities markets deemed by the portfolio manager to be conservative in light of the Funds investment objective and policies. Under normal circumstances, each Fund may invest a
portion of its total assets in cash: (i) pending investment; (ii) for investment purposes; (iii) for cash management purposes, such as to meet redemptions, or pay operating expenses, and (iv) during a Fund restructuring. A Fund
may also hold cash under circumstances where the liquidation of a Fund has been approved by each Funds Board and therefore, investments in accordance with the Funds investment objective and policies would no longer be appropriate. To the
extent that a Fund, other than the Money Market Fund holds cash, it may not achieve its investment objective(s).
Cash includes bank
deposits, and highly rated, liquid short-term instruments, such as money market instruments. Certain of these instruments may be referred to as cash equivalents.
Bank Obligations
.
Domestic commercial banks organized under federal law are supervised and examined by the U.S. Comptroller of
the Currency and are required to be members of the Federal Reserve System and to be insured by the FDIC. Foreign branches of U.S. banks and foreign banks are not regulated by U.S. banking authorities and generally are not bound by mandatory reserve
requirements, loan limitations, accounting, auditing and financial reporting standards comparable to U.S. banks. Obligations of foreign branches of U.S. banks and foreign banks are subject to the risks associated with investing in foreign securities
generally. These obligations entail risks that are different from those of investments in obligations in domestic banks, including foreign economic and political developments outside the United States, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding or other taxes on income.
-11-
A U.S. branch of a foreign bank may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, branches licensed by the Comptroller of the Currency and branches licensed by certain states (State Branches) may
or may not be required to: (i) pledge to the regulator by depositing assets with a designated bank within the state, an amount of its assets equal to 5% of its total liabilities; and (ii) maintain assets within the state in an amount equal
to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of State Branches may not necessarily be insured by the FDIC. In addition, less
information may be available to the public about a U.S. branch of a foreign bank than about a U.S. bank.
Debt Instruments
.
A debt instrument held by a Fund will be affected by general changes in interest rates that will in turn result in increases or decreases in the market value of those obligations. The market value of debt instruments in a Funds portfolio can
be expected to vary inversely to changes in prevailing interest rates. In periods of declining interest rates, the yield of a Fund holding a significant amount of debt instruments will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates, the Funds yield will tend to be somewhat lower. In addition, when interest rates are falling, money received by such a Fund from the continuous sale of its shares will likely be invested in portfolio
instruments producing lower yields than the balance of its portfolio, thereby reducing the Funds current yield. In periods of rising interest rates, the opposite result can be expected to occur.
Ratings as Investment Criteria
.
The ratings of NRSROs such as S&P or Moodys represent the opinions of those
organizations as to the quality of securities that they rate. Although these ratings, which are relative and subjective and are not absolute standards of quality, are used by the portfolio manager as initial criteria for the selection of portfolio
securities on behalf of the Funds, the portfolio manager also relies upon its own analysis to evaluate potential investments.
Subsequent
to its purchase by a Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Although neither event will require the sale of the securities by a Fund, other than the Money
Market Fund, the portfolio manager will consider the event in its determination of whether the Fund should continue to hold the securities. In the event the rating of a security held by the Money Market Fund falls below the minimum acceptable rating
or the issuer of the security defaults, the Money Market Fund will dispose of the security as soon as practicable, consistent with achieving an orderly disposition of the security, unless the Board determines that disposal of the security would not
be in the best interests of the Money Market Fund. To the extent that a NRSROs ratings change as a result of a change in the NRSRO or its rating system, the Funds will attempt to use comparable ratings as standards for their investments in
accordance with their investment objectives and policies.
Certain Investment-Grade Debt Obligations
. Although obligations
rated BBB by S&P or Baa by Moodys are considered investment grade, they may be viewed as being subject to greater risks than other investment grade obligations. Obligations rated BBB by S&P are regarded as having only an adequate
capacity to pay principal and interest and those rated Baa by Moodys are considered medium-grade obligations that lack outstanding investment characteristics and have speculative characteristics as well.
Rule 144A Securities
.
Each of the Funds may purchase Rule 144A Securities. Certain Rule 144A Securities may be considered
illiquid and therefore subject to a Funds limitation on the purchase of illiquid investments, unless the Board determines on an ongoing basis that an adequate trading market exists for the Rule 144A Securities. A Funds purchase of
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Rule 144A Securities could have the effect of increasing the level of illiquidity in the Fund to the extent that qualified institutional buyers become uninterested for a time in purchasing Rule
144A Securities held by the Fund. The Board has established standards and procedures for determining the liquidity of a Rule 144A Security and monitors GEAMs implementation of the standards and procedures.
When-Issued
and
Delayed-Delivery
Securities
.
To
secure prices or yields deemed advantageous at a particular time, a Fund may purchase securities on a when-issued or delayed-delivery basis (e.g. to be announced (TBA) mortgage-backed securities), in which case, delivery of
the securities occurs beyond the normal settlement period; no payment for or delivery of the securities is made by, and no income accrues to, the Fund, however, prior to the actual delivery or payment by the other party to the transaction. Each Fund
will enter into when-issued or delayed-delivery transactions for the purpose of acquiring securities and not for the purpose of leverage. When-issued securities purchased by a Fund may include securities purchased on a when, as and if
issued basis under which the issuance of the securities depends on the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. Cash or other liquid assets in an amount equal to the amount
of each Funds when-issued or delayed-delivery purchase commitments will be segregated with the Funds custodian, or with a designated subcustodian, in order to avoid or limit any leveraging effect that may arise in the purchase of a
security pursuant to such a commitment.
Securities purchased on a when-issued or delayed-delivery basis may expose a Fund to risk
because the securities may experience fluctuations in value prior to their delivery. Purchasing securities on a when-issued or delayed-delivery basis can involve the additional risk that the return available in the market when the delivery takes
place may be higher than that applicable at the time of the purchase. This characteristic of when-issued and delayed-delivery securities could result in exaggerated movements in a Funds net asset value.
When a Fund engages in
when-issued
or
delayed-delivery
securities transactions, it relies on the selling party to consummate the trade. Failure of the seller to do so may result in the Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
Below Investment-Grade Debt Securities
.
Certain Funds are authorized to invest in securities rated lower than investment-grade
(sometimes referred to as junk bonds). Below investment-grade and comparable unrated securities (collectively referred to as below investment-grade securities) likely have quality and protective characteristics that, in the
judgment of a rating organization, are outweighed by large uncertainties or major risk exposures to adverse conditions, and are predominantly speculative with respect to the issuers capacity to pay interest and repay principal in accordance
with the terms of the obligation. Securities in the lowest rating categories may be in default or may present substantial risks of default.
The market values of certain below-investment grade securities tend to be more sensitive to individual corporate developments and changes in
economic conditions than higher-rated securities. In addition, below-investment grade securities generally present a higher degree of credit risk. Issuers of below-investment grade securities are often highly leveraged and may not have more
traditional methods of financing available to them, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. The risk of loss due to default by these
issuers is significantly greater because below-investment grade securities generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. A Fund may incur additional expenses
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to the extent that it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. The existence of limited markets for below-investment grade
securities may diminish the Funds ability to obtain accurate market quotations for purposes of valuing the securities held by a Fund and calculating the Funds net asset value.
Repurchase and Reverse Repurchase Agreements
.
Each Fund may engage in repurchase agreement transactions with respect to
instruments that are consistent with its investment objectives. The Funds may engage in repurchase agreement transactions with certain member banks of the Federal Reserve System and with certain dealers listed on the Federal Reserve Bank of New
Yorks list of reporting dealers. Under the terms of a typical repurchase agreement, which is deemed a loan for purposes of the 1940 Act, a Fund would acquire an underlying obligation for a relatively short period (usually from one to seven
days) subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during the Funds holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Funds holding period. The value of the securities underlying a repurchase agreement of a Fund are monitored on an ongoing basis by GEAM to ensure that the value is at least equal at
all times to the total amount of the repurchase obligation, including interest. GEAM also monitors, on an ongoing basis to evaluate potential risks, the creditworthiness of those banks and dealers with which a Fund enters into repurchase agreements.
Income derived by the Tax-Exempt Fund when engaging in a repurchase agreement is not exempt from Federal income taxation.
A Fund entering
into a repurchase agreement will bear a risk of loss in the event that the other party to the transaction defaults on its obligations and the Fund is delayed or prevented from exercising its rights to dispose of the underlying securities. The Fund
will be, in particular, subject to the risk of a possible decline in the value of the underlying securities during the period in which the Fund seeks to assert its right to them, the risk of incurring expenses associated with asserting those rights
and the risk of losing all or a part of the income from the agreement.
Certain Funds may engage in reverse repurchase agreements, subject
to its investment restrictions. A reverse repurchase agreement, which is considered a borrowing by the Fund, involves a sale by the Fund of securities that it holds concurrently with an agreement by the Fund to repurchase the same securities at an
agreed upon price and date. The Fund uses the proceeds of reverse repurchase agreements to provide liquidity to meet redemption requests and to make cash payments of dividends and distributions when the sale of the Funds securities is
considered to be disadvantageous. Cash, Government Securities or other liquid assets equal in value to the Funds obligations with respect to reverse repurchase agreements are segregated and maintained with the Funds custodian or a
designated sub-custodian.
A reverse repurchase agreement involves the risk that the market value of the securities retained by a Fund may
decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, a Funds use of
the proceeds of the agreement may be restricted pending a determination by the party, or its trustee or receiver, whether to enforce the Funds obligation to repurchase the securities.
Restricted Securities and Other Illiquid Investments
.
GEAM is responsible for determining the value and liquidity of investments
held by each Fund. Investments may be illiquid because of the absence of a trading market, making it difficult to value them or dispose of them promptly at an acceptable price. The Tax-Exempt Fund and the Money Market Fund
-14-
may each invest up to 5% of its assets in non-publicly traded securities. Elfun Trusts, the International Fund and the Income Fund may each invest up to 10% of its assets in such securities. The
Diversified Fund is permitted to invest in restricted securities, subject to its permissible investment limits in illiquid investments. In addition, each Fund, may invest up to 10% (5% in the case of the Tax-Exempt Fund and 15% in the case of the
Diversified Fund) of its assets in illiquid investments. In no event, however, will any Funds investments in illiquid and non-publicly traded securities, in the aggregate, exceed 10% of its assets (5% in the case of the Tax-Exempt
Fund and 15% in the case of the Diversified Fund). An investment is considered not readily marketable or illiquid if it cannot be disposed of by a Fund within seven days in the ordinary course of business at approximately the amount at which the
Fund has valued the investment. Illiquid investments include most repurchase agreements maturing in more than seven days, currency swaps, time deposits with a notice or demand period of more than seven days, certain over-the-counter
(OTC) option contracts (and segregated assets used to cover such options), participation interests in loans, and restricted securities. In addition, securities which, if sold, might position the Income Fund or the Tax-Exempt Fund as an
underwriter under the Securities Act of 1933, as amended, will be deemed to be illiquid.
A restricted security is one that has a
contractual restriction on resale or cannot be resold publicly until it is registered under the 1933 Act. Restricted securities are not, however, considered illiquid if they are Rule 144A Securities that are determined to be liquid by the Board or
by GEAM under board-approved procedures. The guidelines established by the Board or GEAM would take into account trading activity for such securities and the availability of reliable pricing information, among other factors. To the extent that
qualified institutional buyers become for a time uninterested in purchasing these restricted securities, a Funds holdings of those securities may become illiquid. Purchases by these Funds of securities of foreign issuers offered and sold
outside the United States in reliance upon the exemption from registration provided by Regulation S under the 1933 Act also may be liquid even though they are restricted.
Restricted securities may be less liquid than publicly traded securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those originally paid by a Fund. In addition, companies whose securities are not publicly traded are not subject to the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded. A Funds investments in illiquid investments are subject to the risk that should the Fund desire to sell any of these securities when a ready buyer is not available at a price that
GEAM deems representative of their value, the value of the Funds net assets could be adversely affected.
Foreign
Investments.
Investments in foreign securities may offer potential benefits not available from investments solely in securities of domestic issuers or dollar denominated securities. Such benefits may include the opportunity to invest in
foreign issuers that appear to offer better opportunity for long-term capital appreciation or current earnings than investments in domestic issuers, the opportunity to invest in foreign countries with economic policies or business cycles different
from those of the United States and the opportunity to reduce fluctuations in fund value by taking advantage of foreign securities markets that do not necessarily move in a manner parallel to U.S. markets.
Investing in foreign securities (including those dominated in foreign currencies) involves significant risks that are not typically associated
with investing in U.S. dollar-denominated securities or in securities of domestic issuers. Such investments may be affected by changes in currency rates, changes in foreign or U.S. laws or restrictions applicable to such investments and in exchange
control regulations. For example, a decline in the currency
-15-
exchange rate would reduce the dollar value of certain portfolio investments. In addition, if the exchange rate for the currency in which a Fund receives interest payments declines against the
U.S. dollar before such interest is paid as dividends to shareholders, the Fund may have to sell fund securities to obtain sufficient cash to pay such dividends. As discussed below, such techniques also entail certain risks.
Since foreign issuers are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable
to those applicable to U.S. issuers, there may be less publicly available information about a foreign issuer than about a domestic issuer. Some foreign stock markets (and other securities markets) may have substantially less volume than, for
example, the New York Stock Exchange (or other domestic markets) and securities of some foreign issuers may be less liquid than securities of comparable domestic issuers. Fixed commissions on foreign securities exchanges are generally higher than
negotiated commissions on U.S. exchanges, although a Fund may endeavor to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of securities exchanges, brokers, dealers
and listed and unlisted issuers than in the United States. Mail service between the United States and foreign countries may be slower or less reliable than within the United States, thus increasing the risk of delayed settlements or portfolio
transactions or loss of certificates for portfolio securities.
In addition, clearance and settlement procedures may be different in
foreign countries and, in certain markets, on certain occasions, such procedures have been unable to keep pace with the volume of securities transactions, thus making it difficult to conduct such transactions. For example, delays in settlement could
result in temporary periods when a portion of the assets of a Fund are uninvested and no return is earned thereon. The inability of a Fund to make intended investments due to settlement problems could cause it to miss attractive investment
opportunities. Inability to dispose of portfolio securities or other investments due to settlement problems could result either in losses to a Fund due to subsequent declines in value of the portfolio investment or, if the Fund has entered into a
contract to sell the investment, could result in possible liability to the purchaser. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect a Funds investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of payment position.
Foreign Government
Securities.
Some of the Funds may invest in debt obligations of foreign governments or their agencies or instrumentalities, including those with emerging economies or securities markets. Investing in sovereign debt obligations involves risks
not present when investing in the debt obligations of foreign corporate issuers. The issuer of the debt or the government authority that controls the repayment of the debt may be unable or unwilling to repay principal or interest when due, and the
Funds may have limited recourse in the event of such a default. Periods of economic uncertainty may result in the volatility of market prices of sovereign debt to a greater extent than the volatility inherent in debt obligations of U.S. issuers. A
sovereign debtors willingness or ability to repay principal or pay interest in a timely manner may be affected by, among other factors, its cash flow circumstances, the extent of its foreign currency 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, its policy towards principal international lenders and the political constraints to which a sovereign debtor may be subject.
-16-
Depositary Receipts
.
Certain Funds may invest in securities of foreign issuers in
the form of ADRs and European Depositary Receipts (EDRs), which are sometimes referred to as Continental Depositary Receipts (CDRs). ADRs are publicly traded on exchanges or OTC in the United States and are issued through
sponsored or unsponsored arrangements. In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some or all of the depositarys transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligations and the depositarys transaction fees are paid directly by the ADR holders. In addition, less information is available in the United States about an unsponsored ADR than about a sponsored ADR. Each of these
Funds may invest in ADRs through both sponsored and unsponsored arrangements. EDRs and CDRs are generally issued by foreign banks and evidence ownership of either foreign or domestic securities.
Currency Exchange Rates
.
A Funds unit value may change significantly when the currencies, other than the U.S. dollar, in
which the Funds portfolio investments are denominated, strengthen or weaken against the U.S. dollar. Currency exchange rates generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of
investments in different countries as seen from an international perspective. Currency exchange rates can also be affected unpredictably by intervention by U.S. or foreign governments or central banks or by currency controls or political
developments in the United States or abroad.
Foreign Currency Transactions
.
Because investment in foreign issuers will
usually involve currencies of foreign countries, and because each Fund, other than the Tax-Exempt Fund and the Money Market Fund, may have currency exposure independent of their securities positions, the value of the assets of these Funds as
measured in U.S. dollars may be affected by changes in foreign currency exchange rates. To the extent that a Funds assets consist of investments quoted or denominated in a particular currency, the Funds exposure to adverse developments
affecting the value of such currency will increase. The International Fund often has substantial currency exposure both from investments quoted or denominated in foreign currencies and from their currency positions.
Currency exchange rates may fluctuate significantly over short periods of time causing, along with other factors, a Funds net asset
value to fluctuate. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also are affected unpredictably by intervention by U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad. To the extent that a substantial portion of a Funds total assets, adjusted to reflect the Funds net position after giving effect to currency transactions, is denominated or quoted in the currencies of
foreign countries, the Fund is more susceptible to the risk of adverse economic and political developments within those countries.
In
addition to investing in securities denominated or quoted in a foreign currency, certain Funds, may engage in some or all of the foreign currency management practices described below. Such Funds also may hold foreign currency received in connection
with investments in foreign securities when, in the judgment of the portfolio manager, it would be beneficial to convert such currency into U.S. dollars at a later date, based on anticipated changes in the relevant exchange rate. These Funds will
incur costs in connection with conversions between various currencies.
-17-
Certain Funds may utilize forward currency transactions such as engaging in a forward foreign
currency exchange contract. For example, a Fund may hold currencies to meet settlement requirements for foreign securities and may engage in currency exchange transactions to help protect against uncertainty in the level of future exchange rates
between a particular foreign currency and the U.S. dollar or between foreign currencies in which the Funds securities are or may be denominated. The use of forward foreign currency exchange contracts does not eliminate fluctuations in the
underlying prices of securities, but it does establish a rate of exchange that can be achieved in the future.
A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are generally charged at any
stage for trades. Deposits or commissions may be involved, however. The cost to a Fund of engaging in currency transactions varies with factors such as the currency involved, the length of the contract period and the market conditions then
prevailing. At the maturity of a forward contract, a Fund may either accept or make delivery of the currency specified in the contract or, at or prior to maturity, enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract.
Certain Funds may enter into forward foreign currency exchange contracts in several circumstances. First, when they enter into a contract for
the purchase or sale of a security denominated or quoted in a foreign currency, or when they anticipate the receipt in a foreign currency of dividend or interest payments on such a security which either holds, the Funds may desire to lock
in the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars, of the amount of
foreign currency involved in the underlying transactions, the Funds will attempt to protect themselves against an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received.
Additionally, when the portfolio manager believes that the currency of a particular foreign country may suffer a substantial decline against
the U.S. dollar, it may enter into a forward contract to sell, for a fixed amount of dollars, the amount of foreign currency approximating the value of some or all of a Funds portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the contract is entered into and the date it matures. Using forward contracts to protect the value of these Funds portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which the Fund can achieve at some future point in time. The precise projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of only a portion of a Funds foreign assets. Contracts to sell foreign currency could limit any potential gain that might be realized by a Fund if the value of the hedged currency
increases.
-18-
Certain Funds may enter into contracts to purchase foreign currencies to protect against an
anticipated rise in the U.S. dollar price of securities those Funds intend to purchase. These Funds may also engage in cross-hedging by using forward contracts in one currency to hedge against fluctuations in the value of securities quoted or
denominated in a different currency if the portfolio manager determines that there is a pattern of correlation between the two currencies. The International Fund and Diversified Fund also may purchase and sell forward contracts to seek to increase
total return when the portfolio manager anticipates that the foreign currency will appreciate or depreciate in value, but securities denominated or quoted in that currency do not present attractive investment opportunities and are not held by the
Funds.
Certain Funds may utilize foreign forward currency exchange contracts to settle non-dollar securities transactions.
The Funds custodian will segregate cash or other liquid assets in an amount equal to the value of a Funds total assets committed
to the consummation of forward foreign currency exchange contracts requiring the Fund to purchase foreign currencies or forward contracts entered into to seek to increase total return. If the value of the securities so segregated declines,
additional cash or liquid assets are segregated on a daily basis so that the value of the account equals the amount of the Funds commitments with respect to such contracts. These segregated securities are marked-to-market on a daily basis.
While certain Funds will enter into forward contracts to reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Therefore, while these Funds may benefit from such transactions, unanticipated changes in currency prices may result in a poorer overall performance for the Funds than if they had not engaged in any such transactions. Moreover,
there may be imperfect correlation between a Funds portfolio holdings of securities quoted or denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may cause the Fund to sustain losses
which will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss. Likewise, to the extent that the International Fund and Diversified Fund enter into forward foreign currency exchange contracts to seek
to increase total return, the risk of losses on such contracts due to unanticipated changes in currency prices is greater than it is when such contracts are used to reduce currency exchange rate risk.
As with other kinds of option transactions, however, the writing of an option contract on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. These Funds could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an
effective hedge against exchange rate fluctuations; however, in the event of exchange rate movements adverse to the Funds position, the Fund may forfeit the entire amount of the premium plus related transaction costs. In addition, the
International Fund and Diversified Fund may purchase call or put options on currency to seek to increase total return when the portfolio manager anticipates that the currency will appreciate or depreciate in value, but the securities quoted or
denominated in that currency do not present attractive investment opportunities and are not being held in the Fund. When purchased or sold to increase total return, options on currencies are considered speculative.
Emerging Markets
. Each Fund other than the Tax-Exempt Fund may invest in securities issued by companies located in developing
countries or emerging markets countries. These countries are located primarily in the Asia-Pacific region, Eastern Europe, Central and South America and Africa. Political and economic structures in many of these countries may be undergoing
significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Certain of these countries 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 of foreign
-19-
investment generally, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the values of
the Funds investments in those countries and the availability to a Fund of additional investments in those countries.
The small
size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in those countries may also make investments in such countries illiquid and more volatile than investments in Japan or most
Western European countries. As a result, the Fund may be required to establish special custody or other arrangements before making certain investments in those countries. There may be little financial or accounting information available with respect
to issuers located in certain of such countries, and it may be difficult as a result to assess the value or prospects of an investment in such issuers. The laws of some foreign countries may limit the ability of the Fund to invest in securities of
certain issuers located in those countries.
Natural Disasters
. The Funds may invest in securities of a region that may be
more susceptible to natural disasters (including earthquakes and tsunamis) or adverse changes in climate or weather. The risks of such phenomena and the resulting social, political, economic and environmental damage (including nuclear pollution)
cannot be quantified. Economies in which agriculture occupies a prominent position, and countries with limited natural resources (such as oil and natural gas), may be especially vulnerable to natural disasters and climatic changes.
Securities of Other Investment Companies
.
Each Fund, other than the Money Market Fund and the Tax-Exempt Fund, may invest in
other investment companies that invest principally in securities in which the Fund is authorized to invest, and as permitted by the Investment Company Act of 1940, as amended (the 1940 Act) and the rules thereunder. To the extent a Fund
invests in other investment companies, the Funds unitholders will incur certain duplicative fees and expenses, including investment advisory fees; provided however, that GEAM will waive a portion of its management fee charged to the Fund in an
amount equal to the management fee payable to GEAM by the GE Institutional Money Market Fund with respect to the Funds cash holdings invested in the GE Institutional Money Market Fund, if any.
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Derivatives
.
Derivative instruments derive their value, at least
in part, from the price of another security or asset, or the level of an index, such as the S&P 500 Index, or a rate, such as the London Interbank Offered Rate (LIBOR), including structured notes, bonds or other instruments with
interest rates that are determined by reference to changes in the value of other interest rates, indices or financial indicators (References) or the relative change in two or more References. Some forms of derivatives, such as
exchange-traded futures and certain options are traded on regulated exchanges. These types of derivatives are standardized contracts for which market quotations are published daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. Certain types of derivative securities in which a Fund may invest are described more fully below, including swaps, options, futures contracts and options on futures contracts.
A Fund may make an investment in derivative securities to gain exposure to certain types of securities as an alternative to investing directly
in such securities and to hedge against fluctuations in the market value of the other securities in a Funds portfolio due to currency exchange rate fluctuations or other factors in the securities markets. While derivative
securities are useful for investment and hedging, they also carry additional risks.
A Funds use of various investment techniques
may involve derivative instruments. There is no guarantee that these techniques will work. A Fund may, but is not required to, use derivatives as a substitute for taking a long or short position in an underlying asset, to increase returns, or as
part of a hedging strategy. Some derivatives have the effect of leverage on a Fund, meaning that a small investment in derivatives could have a potentially large impact on a Funds performance and its rate of income distributions for a
particular period of time. The use of derivatives involves risks different from, and/or possibly greater than, the risks associated with investing directly in the underlying assets. Potential losses from certain derivatives are unlimited.
Derivatives can be highly volatile, illiquid, subject to counterparty risk and difficult to value. There is also the risk that changes in the value of a derivative held by a Fund may not correlate with the Funds other investments which could
impact Fund performance. A Fund may choose not to invest in derivative instruments because of their cost, limited availability or any number of other reasons deemed relevant by GEAM and the portfolio manager(s) responsible for managing the Fund.
Purchasing Put and Call Options on Securities
. Each Fund, other than the Money Market Fund, may purchase put and call
options that are traded on a U.S. or foreign securities exchange or in the over-the-counter market. A Fund may purchase put options on portfolio securities at or about the same time that it purchases the underlying security or at a later time. By
buying a put, a Fund will seek to limit its risk of loss from a decline in the market value of the security until the put expires. Any appreciation in the value of the underlying security, however, will be partially offset by the amount of the
premium paid for the put option and any related transaction costs. Call options may be purchased by a Fund in order to acquire the underlying securities for a price that avoids any additional cost that would result from a substantial increase in the
market value of a security. A Fund may also purchase call options to increase its return at a time when the call is expected to increase in value due to anticipated appreciation of the underlying security. Prior to their expirations, put and call
options may be sold by a Fund in closing sale transactions, which are sales by the Fund, prior to the exercise of options that it has purchased, of options of the same series. Profit or loss from the sale will depend on whether the amount received
is more or less than the premium paid for the option plus the related transaction costs. Options are also subject to the risks generally associated with investments in derivatives, which are described under Derivatives above.
-21-
Covered Option Writing
.
Each Fund, other than the Money Market Fund, may write
covered put and call options on securities. A Fund will realize fees (referred to as premiums) for granting the rights evidenced by the options. A put option embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price at any time during the option period. In contrast, a call option embodies the right of its purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price at any time during the option period.
The Funds with option-writing authority will write only
options that are covered. A call option written by a Fund will be deemed covered (i) if the Fund owns the securities underlying the call or has an absolute and immediate right to acquire those securities without additional cash consideration
upon conversion or exchange of other securities held in its portfolio, (ii) if the Fund holds a call at the same exercise price for the same exercise period and on the same securities as the call written, (iii) in the case of a call option
on a stock index, if the Fund owns a portfolio of securities substantially replicating the movement of the index underlying the call option, or (iv) if, at the time the call is written, an amount of cash, Government Securities or other liquid
assets equal to the fluctuating market value of the optioned securities, is segregated with the Funds custodian or a designated sub-custodian. A put option will be deemed covered (i) if, at the time the put is written, an amount of cash,
Government Securities or other liquid assets having a value at least equal to the exercise price of the underlying securities is segregated with the Funds custodian or a designated sub-custodian, or (ii) if the Fund continues to own an
equivalent number of puts of the same series (that is, puts on the same underlying securities having the same exercise prices and expiration dates as those written by the Fund), or an equivalent number of puts of the same
class (that is, puts on the same underlying securities) with exercise prices greater than those that it has written (or, if the exercise prices of the puts it holds are less than the exercise prices of those it has written, the
difference is segregated with the Funds custodian or with a designated sub-custodian).
The principal reason for writing covered
call options on a securities portfolio is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. In return for a premium, the writer of a covered call option forfeits the right to any
appreciation in the value of the underlying security above the strike price for the life of the option (or until a closing purchase transaction can be effected). Nevertheless, the call writer retains the risk of a decline in the price of the
underlying security. Similarly, the principal reason for writing covered put options is to realize income in the form of premiums. The writer of a covered put option accepts the risk of a decline in the price of the underlying security. The size of
the premiums that a Fund may receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their
option-writing
activities.
Options written by a Fund will normally have expiration dates between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying securities at the times the options are written. In the case of call options, these exercise prices are referred to as in-the-money, at-the-money and
out-of-the-money, respectively.
So long as the obligation of a Fund as the writer of an option continues, the Fund may be
assigned an exercise notice by the
broker-dealer
through which the option was sold, requiring the Fund to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the option expires or the Fund effects a closing purchase transaction. A Fund can no longer effect a
-22-
closing purchase transaction with respect to an option once it has been assigned an exercise notice. To secure its obligation to deliver the underlying security when it writes a call option, or
to pay for the underlying security when it writes a put option, a Fund will be required to deposit in escrow the underlying security or other assets in accordance with the rules of the Options Clearing Corporation (the Clearing
Corporation) and of the securities exchange on which the option is written.
A Fund may engage in a closing purchase transaction to
realize a profit, to prevent an underlying security from being called or put or, in the case of a call option, to unfreeze an underlying security (thereby permitting its sale or the writing of a new option on the security prior to the outstanding
options expiration). To effect a closing purchase transaction, a Fund would purchase, prior to the holders exercise of an option that the Fund has written, an option of the same series as that on which the Fund desires to terminate its
obligation. The obligation of a Fund under an option that it has written would be terminated by a closing purchase transaction, but the Fund would not be deemed to own an option as the result of the transaction. An option position may be closed out
only if a secondary market exists for an option of the same series on a recognized securities exchange or in the OTC market. In light of the need for a secondary market in which to close an option position, the Funds are expected to purchase only
call or put options issued by the Clearing Corporation. GEAM expects that the Funds will write options, other than those on Government Securities, only on national securities exchanges. Options on Government Securities may be written by the Funds in
the OTC market.
A Fund may realize a profit or loss upon entering into closing transactions. When a Fund has written an option, for
example, it will realize a profit if the cost of the closing purchase transaction is less than the premium received upon writing the original option; the Fund will incur a loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. When a Fund has purchased an option and engages in a closing sale transaction, whether the Fund realizes a profit or loss will depend upon whether the amount received in the closing sale transaction is more
or less than the premium the Fund initially paid for the original option plus the related transaction costs.
No assurance can be given
that a Fund will be able to affect closing purchase transactions at a desired time. The ability of a Fund to engage in closing purchase transactions with respect to options depends on the existence of a liquid secondary market. Although a Fund will
generally purchase or write securities options only if a liquid secondary market appears to exist for the option purchased or sold, no such secondary market may exist or the market may cease to exist.
Option writing for a Fund may be limited by position and exercise limits established by U.S. securities exchanges and the Financial Industry
Regulatory Authority, Inc. and by requirements of the Internal Revenue Code of 1986, as amended (the Code) for qualification as a regulated investment company. In addition to writing covered put and call options to generate current
income, a Fund may enter into options transactions as hedges to reduce investment risk, generally by making an investment expected to move in the opposite direction of a portfolio position. A hedge is designed to offset a loss on a portfolio
position with a gain on the hedge position; at the same time, however, a properly correlated hedge will result in a gain on the portfolios position being offset by a loss on the hedge position.
A Fund will engage in hedging transactions only when deemed advisable by the portfolio manager. Successful use by a Fund of options will
depend on the portfolio managers ability to predict correctly movements in the direction of the securities underlying the option used as a hedge. Losses incurred in hedging transactions and the costs of these transactions will affect a
Funds performance. Options are also subject to the risks generally associated with investments in derivatives, which are described under Derivatives above.
-23-
Securities Index Options
. Each Fund, other than the Money Market Fund, may purchase
and write put and call options on securities indices listed on U.S. or foreign securities exchanges or traded in the OTC market, which indices include securities held in the Funds portfolio. The Funds with such option-writing authority may
write only covered options. A Fund may also use securities index options as a means of participating in a securities market without making direct purchases of securities.
A securities index option written by a Fund will be deemed covered in any manner permitted under the 1940 Act or the rules and regulations
thereunder or any other method determined by the SEC to be permissible.
A securities index measures the movement of a certain group of
securities by assigning relative values to the securities included in the index. Options on securities indices are generally similar to options on specific securities. Unlike options on securities, however, options on securities indices do not
involve the delivery of an underlying security; the option in the case of an option on a securities index represents the holders right to obtain from the writer in cash a fixed multiple of the amount by which the exercise price exceeds (in the
case of a call) or is less than (in the case of a put) the closing value of the underlying securities index on the exercise date. A Fund may purchase and write put and call options on securities indices or securities index futures contracts that are
traded on a U.S. exchange or board of trade or a foreign exchange as a hedge against changes in market conditions and interest rates, and for duration management, and may enter into closing transactions with respect to those options to terminate
existing positions. A securities index fluctuates with changes in the market values of the securities included in the index. Securities index options may be based on a broad or narrow market index or on an industry or market segment.
The delivery requirements of options on securities indices differ from the options on securities. Unlike a securities option, which
contemplates the right to take or make delivery of securities at a specified price, an option on a securities index gives the holder the right to receive a cash exercise settlement amount equal to (1) the amount, if any, by which
the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the securities index on the date of exercise, multiplied by (2) a fixed index multiplier. Receipt of
this cash amount will depend upon the closing level of the securities index upon which the option is based being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of cash received
will be equal to the difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery
of this amount. The writer may offset its position in securities index options prior to expiration by entering into a closing transaction on an exchange, which is accomplished by purchasing an option of the same series as the option previously
written, or it may allow the option to expire unexercised.
The effectiveness of purchasing or writing securities index options as a
hedging technique will depend upon the extent to which price movements in the portion of a securities portfolio being hedged correlate with price movements of the securities index selected. Because the value of an index option depends upon movements
in the level of the index rather than the price of a particular security, whether a Fund realizes a gain or loss from the purchase or writing
-24-
of options on an index depends upon movements in the level of prices in the market generally or, in the case of certain indices, in an industry or market segment, rather than movements in the
price of a particular security. As a result, successful use by a Fund of options on securities indices is subject to the portfolio managers ability to predict correctly movements in the direction of the market generally or of a particular
industry. This ability contemplates different skills and techniques from those used in predicting changes in the price of individual securities.
Securities index options are subject to position and exercise limits and other regulations imposed by the exchange on which they are traded.
The ability of a Fund to engage in closing purchase transactions with respect to securities index options depends on the existence of a liquid secondary market. Although a Fund will generally purchase or write securities index options only if a
liquid secondary market for the options purchased or sold appears to exist, no such secondary market may exist, or the market may cease to exist at some future date, for some options. No assurance can be given that a closing purchase transaction can
be effected when the portfolio manager desires that a Fund engage in such a transaction. Options are also subject to the risks generally associated with investments in derivatives, which are described under Derivatives above.
OTC Options
. Certain Funds may purchase OTC or dealer options or sell covered OTC options. Unlike exchange-listed options where
an intermediary or clearing corporation, such as the Clearing Corporation, assures that all transactions in such options are properly executed, the responsibility for performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for example, is obligated to deliver the underlying stock to the clearing organization if the option is exercised, and the clearing organization is then obligated to pay the writer
the exercise price of the option. If a Fund were to purchase a dealer option, however, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. If the dealer fails to honor the exercise of the option by
the Fund, the Fund would lose the premium it paid for the option and the expected benefit of the transaction.
Listed options generally
have a continuous liquid market while dealer options have none. Consequently, a Fund will generally be able to realize the value of a dealer option it has purchased only by exercising it or reselling it to the dealer that issued it. Similarly, when
a Fund writes a dealer option, it generally will be able to close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Fund originally wrote the option. Although the Funds will seek
to enter into dealer options only with dealers that will agree to and that are expected to be capable of entering into closing transactions with the Funds, there can be no assurance that a Fund will be able to liquidate a dealer option at a
favorable price at any time prior to expiration. The inability to enter into a closing transaction may result in material losses to a Fund. Until a Fund, as a covered OTC call option writer, is able to effect a closing purchase transaction, it will
not be able to liquidate securities (or other assets) used to cover the written option until the option expires or is exercised. This requirement may impair a Funds ability to sell portfolio securities or, with respect to currency options,
currencies at a time when such sale might be advantageous. In the event of insolvency of the other party, the Fund may be unable to liquidate a dealer option. Options are also subject to the risks generally associated with investments in
derivatives, which are described under Derivatives above.
Futures Contracts and Options on Futures Contracts
.
Each Fund, other than the Money Market Fund, may enter into interest rate, financial and stock or bond index futures contracts and options on financial futures contracts, securities (limited to debt securities in the case of the Tax-Exempt Fund)
and, in the case of the Diversified Fund, interest rate futures
-25-
contracts and options on interest rate futures contracts that are traded on a U.S. or foreign exchange or board of trade approved by the CFTC or in the OTC market. If entered into, these
transactions can be made for a variety of portfolio management purposes such as hedging against the effects of changes in the value of portfolio securities due to anticipated changes in interest rates and/or market conditions, to gain market
exposure for accumulating and residual cash positions, for duration management, or when the transactions are economically appropriate to the reduction of risks inherent in the management of the Fund involved. Futures contracts may reflect the
economic or investment equivalent of a long or short position in the underlying financial or securities reference depending on the terms of the futures contract. However, a futures contract that represents the equivalent of a short position is not
considered to be a short sale transaction.
An interest rate futures contract provides for the future sale by one party and the purchase
by the other party of a specified amount of a particular financial instrument (debt security) at a specified price, date, time and place. Financial futures contracts are contracts that obligate the holder to deliver (in the case of a futures
contract that is sold) or receive (in the case of a futures contract that is purchased) at a future date a specified quantity of a financial instrument, specified securities, or the cash value of a securities index. A municipal bond index futures
contract is based on an index of long-term, tax-exempt municipal bonds and a corporate bond index futures contract is based on an index of corporate bonds. Stock index futures contracts are based on indices that reflect the market value of common
stock of the companies included in the indices. An index futures contract is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was originally written. The clearing house of the exchange on which a futures contract is entered into becomes the counterparty to each purchaser and seller of the futures
contract. An option on an interest rate or index futures contract generally gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time prior to the expiration
date of the option.
Each Fund will use futures contracts and options on futures contracts in accordance with the rules of the CFTC
pursuant to which the Funds avoid being deemed a commodity pool operator. Because of these investments, the Funds have claimed the applicable exemption under CFTC rules and are not registered or regulated as a commodity pool operator. In
early 2012, the CFTC amended its rules to limit the ability of registered investment companies, such as the Funds, to use futures, options on futures and certain swaps and continue to rely on that CFTC exemption. Under the amended CFTC exemption,
each Fund may invest in futures contracts, options on futures contracts and certain swap agreements only (i) for bona fide hedging purposes within the meaning of CFTC regulations, or (ii) for other than bona fide hedging purposes if
(1) the aggregate initial margin and premiums required to establish such positions will not exceed 5% of the liquidation value of the Funds portfolio (after taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded from such 5%; or (2) the aggregate notional value of all non-hedge futures contracts including such contract
(taken at market value at the time of entering that contract) does not exceed the liquidation value of the Funds portfolio (after taking into account unrealized profits and unrealized losses on any such positions). If a Fund could not satisfy
these requirements, the investment strategy, disclosure and operations of the Fund would need to comply with all applicable regulations governing commodity pools and GEAM would be required to register that Fund as a commodity pool and operate it as
required for regulated commodity pools.
-26-
No consideration is paid or received by a Fund upon trading a futures contract. Upon entering
into a futures contract, cash or other securities acceptable to the broker equal to approximately 1% to 10% of the contract amount will be segregated with the Funds custodian or a designated
sub-custodian.
This amount, which is subject to change by the exchange on which the contract is traded, is known as initial margin and is in the nature of a performance bond or good faith deposit
on the contract that is returned to the Fund upon termination of the futures contract, so long as all contractual obligations have been satisfied; the broker will have access to amounts in the margin account if the Fund fails to meet its contractual
obligations. Subsequent payments, known as variation margin, to and from the broker, will be made daily as the price of the securities underlying the futures contract fluctuates, making the long and short positions in the contract more
or less valuable, a process known as
marking-to-market.
At any time prior to the expiration of a futures contract, a Fund may elect to close a position by
taking an opposite position, which will operate to terminate the Funds existing position in the contract.
If a Fund has hedged
against the possibility of an increase in interest rates adversely affecting the value of securities held in its portfolio and rates decrease instead, the Fund will lose part or all of the benefit of the increased value of securities that it has
hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund had insufficient cash, it may have to sell securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. These sales of securities may, but will not necessarily, be at increased prices that reflect the decline in interest rates.
An option on a futures contract, unlike a direct investment in such a contract, gives the purchaser the right, in return for the premium paid,
to assume a position in the futures contract at a specified exercise price at any time prior to the expiration date of the option. Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the
option will be accompanied by delivery of the accumulated balance in the writers futures margin account, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case
of a put, the exercise price of the option on the futures contract. The potential loss related to the purchase of an option on futures contracts is limited to the premium paid for the option (plus transaction costs). Because the price of the option
to the purchaser is fixed at the point of sale, no daily cash payments are made to reflect changes in the value of the underlying contract. The value of the option, however, does change daily and that change would be reflected in the net asset value
of the Fund holding the options.
The use of futures contracts and options on futures contracts as a hedging device involves several
risks. No assurance can be given that a correlation will exist between price movements in the underlying securities or index and price movements in the securities that are the subject of the hedge. Positions in futures contracts and options on
futures contracts may be closed out only on the exchange or board of trade on which they were entered. Furthermore, because any income earned from transactions in futures contracts and related options will be taxable, GEAM anticipates that the
Tax-Exempt Fund will invest in these instruments only in unusual circumstances, such as when the GEAM anticipates a significant change in interest rates or market conditions. Losses incurred in hedging transactions and the costs of these
transactions will affect a Funds performance.
Although the Funds intend to enter into futures contracts only if an active market
exists for the contracts, no assurance can be given that an active market will exist for the contracts at any particular time. Most U.S. futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices
during a single trading day. Once the
-27-
daily limit has been reached in a particular contract, no trades may be made on that day at a price beyond that limit. Futures contract prices may move to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. In such a case, and in the event of adverse price movements, a Fund would be required to
make daily cash payments of variation margin. In such circumstances, an increase in the value of the portion of the portfolio being hedged, if any, may partially or completely offset losses on the futures contract. Futures contracts are also subject
to the risks generally associated with investments in derivatives, which are described under Derivatives above.
Forward
Currency Transactions
.
The Income Fund, the International Fund and the Diversified Fund may each hold currencies for various portfolio management purposes such as meeting settlement requirements for foreign securities. Certain Funds may also
engage in currency exchange transactions to protect against uncertainty in the level of future exchange rates between a particular foreign currency and the U.S. dollar or between foreign currencies in which the Funds securities are or may be
denominated. The use of forward currency contracts does not eliminate fluctuations in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. A Fund will not enter into a currency
transaction if, as a result, it will fail to qualify as a regulated investment company under the Code for a given year.
Forward currency
contracts are agreements to exchange one currency for another at a future date. The date (which may be any agreed-upon fixed number of days in the future), the amount of currency to be exchanged and the price at which the exchange will take place
will be negotiated and fixed for the term of the contract at the time that a Fund enters into the contract. Forward currency contracts (1) are traded in a market conducted directly between currency traders (typically, commercial banks or other
financial institutions) and their customers, (2) generally have no deposit requirements and (3) are typically consummated without payment of any commissions. A Fund, however, may enter into certain types of forward currency contracts
subject to centralized clearing requiring deposits of collateral or involving the payment of commissions. The cost to a Fund of engaging in currency transactions varies with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. To assure that a Funds forward currency contracts are not used to achieve investment leverage, cash or other liquid assets will be segregated with the Funds custodian or a designated
sub-custodian in an amount at all times equal to or exceeding the Funds commitment with respect to the contracts.
Upon maturity of
a forward currency contract, a Fund may (1) pay for and receive the underlying currency, (2) negotiate with the dealer to roll over the contract into a new forward currency contract with a new future settlement date or (3) negotiate
with the dealer to terminate the forward contract into an offset with the currency trader providing for the Funds paying or receiving the difference between the exchange rate fixed in the contract and the then current exchange rate. The Fund
may also be able to negotiate such an offset on behalf of a Fund prior to maturity of the original forward contract. No assurance can be given that new forward contracts or offsets will always be available to a Fund.
In hedging a specific portfolio position, a Fund may enter into a forward contract with respect to either the currency in which the position
is denominated or another currency deemed appropriate by GEAM.
-28-
The cost to a Fund of engaging in currency transactions varies with factors such as the currency
involved, the length of the contract period and the market conditions then prevailing. Because transactions in currency exchange are usually conducted on a principal basis, no fees or commissions are involved. The use of forward currency contracts
does not eliminate fluctuations in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. In addition, although forward currency contracts limit the risk of loss due to a decline in the
value of the hedged currency, at the same time, they limit any potential gain that might result should the value of the currency increase. If a devaluation is generally anticipated, a Fund may not be able to sell currency at a price above the
anticipated devaluation level. A Fund will not enter into a currency transaction if, as a result, it will fail to qualify as a regulated investment company under the Code, for a given year.
In entering into forward currency contracts, a Fund will be subject to a number of risks and special considerations. The market for forward
currency contracts, for example, may be limited with respect to certain currencies. The existence of a limited market may in turn restrict the Funds ability to hedge against the risk of devaluation of currencies in which the Fund holds a
substantial quantity of securities. The successful use of forward currency contracts as a hedging technique draws upon the portfolio managers special skills and experience with respect to those instruments and will usually depend upon the
portfolio managers ability to forecast interest rate and currency exchange rate movements correctly. Should interest or exchange rates move in an unexpected manner, a Fund may not achieve the anticipated benefits of forward currency contracts
or may realize losses and thus be in a less advantageous position than if those strategies had not been used. Many forward currency contracts are subject to no daily price fluctuation limits so that adverse market movements could continue with
respect to those contracts to an unlimited extent over a period of time. If a devaluation is generally anticipated, a Fund may not be able to sell currency at a price above the anticipated devaluation level. In addition, the correlation between
movements in the prices of those contracts and movements in the prices of the currencies hedged or used for cover will not be perfect. Although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currency,
at the same time, they limit any potential gain that might result should the value of the currency increase.
The ability to dispose of a
Funds positions in forward currency contracts depends on the availability of active markets in those instruments, and the portfolio manager cannot predict the amount of trading interest that may exist in the future in forward currency
contracts. Forward currency contracts may be closed out only by the parties entering into an offsetting contract. As a result, no assurance can be given that a Fund will be able to utilize these contracts effectively for the intended purposes.
Forward currency transactions are also subject to the risks generally associated with investments in derivatives, which are described under Derivatives above.
Options on Foreign Currencies
.
The Income Fund, the International Fund and the Diversified Fund may each purchase and write put
and call options on foreign currencies for the purpose of hedging against declines in the U.S. dollar value of foreign currency denominated securities and against increases in the U.S. dollar cost of securities to be acquired by the Fund. The Funds
with such option writing authority write only covered options. No Fund will enter into a transaction involving options on foreign currencies for speculative purposes. Options on foreign currencies to be written or purchased by a Fund are traded on
U.S. and foreign exchanges or in the OTC market.
-29-
Certain transactions involving options on foreign currencies are undertaken on contract markets
that are not regulated by the CFTC. Options on foreign currencies traded on national securities exchanges are within the jurisdiction of the SEC, as are other securities traded on those exchanges. As a result, many of the protections provided to
traders on organized exchanges will be available with respect to those transactions. In particular, all foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Clearing Corporation, thereby
reducing the risk of counterparty default. In addition, a liquid secondary market in options traded on a national securities exchange may exist, potentially permitting a Fund to liquidate open positions at a profit prior to exercise or expiration,
or to limit losses in the event of adverse market movements.
The purchase and sale of
exchange-traded
foreign currency options are subject to the risks of the availability of a liquid secondary market as described above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exercise and settlement of
exchange-traded
foreign currency options must be made exclusively through the Clearing Corporation, which has established banking relationships in applicable foreign countries for this purpose. As a result,
the Clearing Corporation may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on the Clearing Corporation or its clearing
members, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise.
Like the writing of other kinds of options, the writing of an option on a foreign currency constitutes only a partial hedge, up to the amount
of the premium received; a Fund could also be required, with respect to any option it has written, to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuation in exchange rates, although in the event of rate movements adverse to a Funds position, the Fund could forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies may be traded on foreign exchanges that are not regulated by either the SEC or CFTC. These transactions are
subject to the risk of governmental actions affecting trading in or the prices of foreign currencies or securities. The value of these positions could also be adversely affected by (1) other complex foreign political and economic factors,
(2) lesser availability of data on which to make trading decisions than in the United States, (3) delays in a Funds ability to act upon economic events occurring in foreign markets during
non-business
hours in the United States, (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (5) lesser trading volume.
Options are also subject to the risks generally associated with investments in derivatives, which are described under Derivatives above.
Interest Rate Swaps, Currency Swaps and Index Swaps
. Interest rate swaps involve the exchange by a Fund with another party of
their respective commitments to pay or receive interest, such as an exchange of fixed rate payments for floating rate payments. Currency swaps involve the exchange by a Fund with another party of their respective rights to make or receive payments
in specified currencies. Index swaps involve the exchange by a Fund with another party of their respective rights to the return on or increase in value of a basket of securities. Since currency swaps are individually negotiated, a Fund expects to
achieve an acceptable degree of correlation between its portfolio investments and its swap positions. The use of swaps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the portfolio manager is incorrect in its forecasts of market values, interest rates and currency exchange rates, the investment performance of a Fund would be less favorable than it would have been if swaps
were not used. Swaps are also subject to the risks generally associated with investments in derivatives, which are described under Derivatives above.
-30-
Credit Default Swaps
. The buyer in a credit default contract is
obligated to pay the seller a periodic stream of payments over the term of the contract provided no event of default has occurred. In the event of default, the seller must pay the buyer the par value (full notional value) of
the reference obligation in exchange for the reference obligation. A Fund may be either the buyer or seller in the transaction. If a Fund is a buyer and no event of default occurs, the Fund loses its investment and recovers nothing. However, if an
event of default occurs, the buyer receives full notional value for a reference obligation that may have little or no value. As a seller, a Fund receives a fixed rate of income throughout the term of the contract, provided there is no default event.
If an event of default occurs, the seller is normally obligated to pay the notional value of the reference obligation. The value of the reference obligation received by the seller, coupled with the 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. Credit default swaps involve greater risks than if a Fund had invested in the reference obligation directly. In addition to general market risks, credit
default swaps are subject to illiquidity risk, counterparty risk and credit risks. If a Fund writes a credit default swap it would normally be required to segregate liquid assets equal in value to the notional value of the contract. Swaps are also
subject to the risks generally associated with investments in derivatives, which are described under Derivatives above.
Warrants
. Because a warrant, which is a security permitting, but not obligating, its holder to subscribe for another security,
does not carry with it the right to dividends or voting rights with respect to the securities that the warrant holder is entitled to purchase, and because a warrant does not represent any rights to the assets of the issuer, a warrant may be
considered more speculative than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying security and a warrant ceases to have value if it is not exercised prior to its
expiration date. The investment by a Fund in warrants valued at the lower of cost or market, may not exceed 5% of the value of that Funds net assets. Included in that amount, but not to exceed 2% of the value of the Funds net assets, may
be warrants that are not listed on the New York Stock Exchange, Inc. (NYSE) or the American Stock Exchange. Warrants acquired by a Fund in units or attached to securities may be deemed to be without value.
Smaller Capitalization Companies
.
Investing in securities of small- and medium-capitalization companies may involve greater
risks than investing in larger, more established issuers. Such smaller capitalization companies may have limited product lines, markets or financial resources and their securities may trade less frequently and in more limited volume than the
securities of larger or more established companies. In addition, these companies are typically subject to a greater degree of changes in earnings and business prospects than are larger, more established issuers. As a result, the prices of securities
of smaller capitalization companies may fluctuate to a greater degree than the prices of securities of other issuers. Although investing in securities of smaller capitalization companies offers potential for above-average returns, the risk exists
that the companies will not succeed and the prices of the companies shares could significantly decline in value.
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Supranational Agencies
.
Certain Funds may invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for Reconstruction and Development (commonly known as the World Bank), which was chartered to finance development projects in developing member countries; the European Union,
which is a twelve-nation organization engaged in cooperative economic activities and the Asian Development Bank, which is an international development bank established to lend funds, promote investment and provide technical assistance to member
nations in the Asian and Pacific regions. Debt obligations of supranational agencies are not considered Government Securities and are not supported, directly or indirectly, by the U.S. Government.
Municipal Obligations
. The term Municipal Obligations as used in the Prospectus and this SAI means debt 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 or multistate agencies or authorities, the interest from which is, in
the opinion of bond counsel to the issuer, excluded from gross income for Federal income tax purposes. Municipal Obligations generally are understood to 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, payment of general operating expenses and extensions of loans to public institutions and facilities. Private activity bonds that are issued by or on behalf of
public authorities to finance privately operated facilities are considered to be Municipal Obligations if the interest paid on them qualifies as excluded from gross income (but not necessarily from alternative minimum taxable income) for regular
federal income tax purposes in the opinion of bond counsel to the issuer.
Opinions relating to the validity of Municipal Obligations and
to the exemption of interest on them from Federal income taxes are rendered by bond counsel to the respective issuers at the time of issuance. The portfolio manager will not review the proceedings relating to the issuance of Municipal Obligations or
the basis for opinions of counsel.
Municipal Obligations may be issued to finance life care facilities, which are an alternative form of
long-term housing for the elderly that offer residents the independence of a condominium life-style and, if needed, the comprehensive care of nursing home services. Bonds to finance these facilities have been issued by various state industrial
development authorities. Because the bonds are secured only by the revenues of each facility and not by state or local government tax payments, they are subject to a wide variety of risks, including a drop in occupancy levels, the difficulty of
maintaining adequate financial reserves to secure estimated actuarial liabilities, the possibility of regulatory cost restrictions applied to health care delivery and competition from alternative health care or conventional housing facilities.
Even though Municipal Obligations are interest-bearing investments that promise a stable flow of income, their prices are inversely affected
by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. The values of Municipal Obligations with longer remaining maturities typically fluctuate more than those of similarly rated Municipal Obligations with
shorter remaining maturities. The values of Municipal Obligations also may be affected by changes in the credit rating or financial condition of the issuing entities.
Tax legislation may affect the supply of, and the demand for, Municipal Obligations, as well as the
tax-exempt
nature of interest paid on those obligations. Neither the Funds nor the portfolio manager can predict with certainty the effect of tax law changes upon the Municipal Obligation market, including the
availability of instruments for investment by a Fund.
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In addition, neither the Funds nor the portfolio manager can predict whether additional legislation adversely affecting the Municipal Obligation market will be enacted in the future. The Funds
monitor legislative developments and consider whether changes in the objective or policies of a Fund need to be made in response to those developments. If any such laws are enacted that would reduce the availability of Municipal Obligation for
investment by the Tax-Exempt Fund so as to affect the Funds unit-holders adversely, the Fund will reevaluate its investment objective and policies and might submit possible changes in its structure to its unit-holders for their consideration.
If legislation were enacted that would treat a type of Municipal Obligation as taxable for federal income tax purposes, the Funds would treat the security as a permissible taxable money market instrument for the Fund within the applicable limits set
forth in the Prospectus.
The Diversified Fund, Income Fund and Tax-Exempt Fund intend to invest in Municipal Obligations of a broad range
of issuers, consistent with prudent regional diversification. Investors in certain states may be subject to state taxation on all or a portion of the income and capital gains produced by such securities.
Municipal Leases.
Included among Municipal Obligations in which certain Funds may invest are participations in lease obligations
or installment purchase contracts issued by state or local governmental authorities (Municipal Leases) to obtain funds to acquire a wide variety of equipment and facilities.
Although Municipal Leases do not normally constitute general obligations of the municipality, they are ordinarily backed by the
municipalitys agreement to make the payments due under the obligation. These obligations have evolved to make it possible for state and local government authorities to acquire property and equipment without meeting constitutional and statutory
requirements for the issuance of debt. Thus, Municipal Leases have additional risks not normally associated with other Municipal Obligations. Municipal Leases may contain
non-appropriation
clauses
that provide that the governmental issuer of the obligation has no obligation to make future payments under the lease or contract unless money is appropriated for those purposes by the legislative body on a yearly or other periodic basis. There have
been challenges to the legality of lease financing in some states and, from time to time, certain municipalities have considered not appropriating funds for lease payments. Moreover, although some Municipal Leases will be secured by the leased
equipment and facilities, the disposition of the equipment or facilities in the event of foreclosure might prove to be difficult.
Municipal Leases that a Fund may acquire will be both rated and unrated. Rated Municipal Leases that may be held by a Fund include those rated
investment grade at the time of investment or those issued by issuers whose senior debt is rated investment grade at the time of investment. A Fund may acquire unrated issues that the portfolio manager deems to be comparable in quality to rated
issues in which a Fund is authorized to invest. A determination that an unrated lease obligation is comparable in quality to a rated lease obligation and that there is a reasonable likelihood that the lease will not be canceled will be subject to
oversight and approval by the Board.
An unrated Municipal Lease with a non-appropriation risk that is backed by an irrevocable bank
letter of credit or an insurance policy issued by a bank or insurer deemed by the portfolio manager to be of high quality and minimal credit risk will not be deemed to be illiquid solely because the underlying municipal lease is unrated, if the
portfolio manager determines that the lease is readily marketable because it is backed by the letter of credit or insurance policy.
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Municipal Leases held by a Fund may be considered illiquid and therefore subject to a Funds
limitation on the purchase of illiquid investments, unless the Board determines on an ongoing basis that an adequate trading market exists for the Municipal Lease. In determining the liquidity of a Municipal Lease, in accordance with methods adopted
by the Board, the following factors relating to the security are considered, among others: (i) the frequency of trades and quotes; (ii) the number of dealers willing to purchase or sell the security; (iii) the willingness of dealers
to undertake to make a market; (iv) the nature of the marketplace trades; and (v) the likelihood that the obligation will continue to be marketable based on the credit quality of the municipality or relevant obligor.
The Tax-Exempt Fund intends to invest in Municipal Leases of a broad range of issuers, consistent with prudent regional diversification.
Interest payments on qualifying Municipal Leases are exempt from federal income taxes. Investors in most states will generally be subject to state taxation on all or a portion of the income and capital gains produced by such securities.
Municipal Obligation Components
.
Certain Funds may invest in Municipal Obligations, the interest rate on which has been divided
by the issuer into two different and variable components, which together result in a fixed interest rate. Typically, the first of the components (the Auction Component) pays an interest rate that is reset periodically through an auction
process, whereas the second of the components (the Residual Component) pays a residual interest rate based on the difference between the total interest paid by the issuer on the Municipal Obligation and the auction rate paid on the
Auction Component. A Fund may purchase both Auction and Residual Components. Because the interest rate paid to holders of Residual Components is generally determined by subtracting the interest rate paid to the holders of Auction Components from a
fixed amount, the interest rate paid to Residual Component holders will decrease as the Auction Components rate increases and decrease as the Auction Components rate increases. Moreover, the extent of the increases and decreases in
market value of Residual Components may be larger than comparable changes in the market value of an equal principal amount of a fixed rate Municipal Obligation having similar credit quality, redemption provisions and maturity.
Custodial Receipts
.
Certain Funds may acquire custodial receipts or certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments, or both, on certain Municipal Obligations. The underwriter of these certificates or receipts typically purchases Municipal Obligations and deposits the obligations in an
irrevocable trust or custodial account with a custodian bank, which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the obligations. Custodial receipts
evidencing specific coupon or principal payments have the same general attributes as zero coupon obligations described below. Although under the terms of a custodial receipt a Fund would be typically authorized to assert its rights directly against
the issuer of the underlying obligation, the Fund could be required to assert through the custodian bank those rights as may exist against the underlying issuers. Thus, in the event the underlying issuer fails to pay principal and/or interest when
due, a Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of the issuer. In addition, in the event that the trust or custodial account in which
the underlying security has been deposited is determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying security would be reduced in recognition of any taxes paid.
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Floating and Variable Rate Instruments
.
Certain Funds may invest in floating
and variable rate instruments. Income securities may provide for floating or variable rate interest or dividend payments. The floating or variable rate may be determined by reference to a known lending rate, such as a banks prime rate, a
certificate of deposit rate or the LIBOR. Alternatively, the rate may be determined through an auction or remarketing process. The rate also may be indexed to changes in the values of interest rate or securities indexes, currency exchange rate or
other commodities. Variable and floating rate securities tend to be less sensitive than fixed rate securities to interest rate changes and tend to have higher yields when interest rates increase. However, during periods of rising interest rates,
changes in the interest rate of an adjustable rate security may lag changes in market rates.
The amount by which the rates paid on
an income security may increase or decrease may be subject to periodic or lifetime caps. Fluctuations in interest rates above these caps could cause adjustable rate securities to behave more like fixed rate securities in response to extreme
movements in interest rates.
Floating and variable rate income securities include securities whose rates vary inversely with changes in
market rates of interest. Such securities may also pay a rate of interest determined by applying a multiple to the variable rate. The extent of increases and decreases in the value of securities whose rates vary inversely with changes in market
rates of interest generally will be larger than comparable changes in the value of an equal principal amount of a fixed rate security having similar credit quality, redemption provisions and maturity.
Certain Funds may purchase floating and variable rate demand bonds and notes, which are debt securities ordinarily having stated maturities in
excess of one year but which permit their holder to demand payment of principal at any time or at specified intervals. Variable rate demand notes include master demand notes, which are obligations that permit a Fund to invest fluctuating amounts,
which may change daily without penalty, pursuant to direct arrangements between the Fund, as lender, and the borrower. These obligations have interest rates that fluctuate from time to time and frequently are secured by letters of credit or other
credit support arrangements provided by banks. Use of letters of credit or other credit support arrangements will not adversely affect the tax-exempt status of variable rate demand notes.
Because they are direct lending arrangements between the lender and borrower, variable rate demand notes generally will not be traded and no
established secondary market generally exists for them, although they are redeemable at face value. If variable rate demand notes are not secured by letters of credit or other credit support arrangements, a Funds right to demand payment will
be dependent on the ability of the borrower to pay principal and interest on demand. Each obligation purchased by a Fund will meet the quality criteria established by GEAM for the purchase of debt securities. GEAM considers on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand obligations in the relevant Funds portfolio.
Participation Interests
.
Certain Funds may purchase from financial institutions participation interests in certain Municipal
Obligations. A participation interest gives the Fund an undivided interest in the Municipal Obligation in the proportion that the Funds participation interest bears to the total principal amount of the Municipal Obligation. These instruments
may have fixed, floating or variable rates of interest. If the participation interest is unrated, or has been given a rating below one that is otherwise permissible for purchase by a Fund, the participation interest will be backed by an irrevocable
letter of credit or guarantee of a bank that the Funds Board has determined meets certain quality standards, or the payment obligation otherwise will be collateralized by Government Securities. A Fund will have the right, with
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respect to certain participation interests, to demand payment, on a specified number of days notice, for all or any part of the Funds participation interest in the Municipal
Obligation, plus accrued interest. The Funds intend to exercise their right to demand payment only upon a default under the terms of the Municipal Obligation, or to maintain or improve the quality of their investment portfolios. A Fund will invest
no more than 5% of the value of its total assets in participation interests.
Zero Coupon Obligations
.
Certain Funds may
invest in zero coupon obligations. Zero coupon obligations generally pay no cash interest (or dividends in the case of preferred stock) to their holders prior to maturity. Accordingly, such securities usually are issued and traded at a deep discount
from their face or par value and generally are subject to greater fluctuations of market value in response to changing interest rates than securities of comparable maturities and credit quality that pay cash interest (or dividends in the case of
preferred stock) on a current basis. Although each of these Funds will receive no payments on its zero coupon obligations prior to their maturity or disposition, it will be required for federal income tax purposes generally to include in its
dividends each year an amount equal to the annual income that accrues on its zero coupon obligations. Such dividends will be paid from the cash assets of the Fund, from borrowings or by liquidation of portfolio securities, if necessary, at a time
that the Fund otherwise would not have done so. To the extent these Funds are required to liquidate thinly traded securities, the Funds may be able to sell such securities only at prices lower than if such securities were more widely traded. The
risks associated with holding securities that are not readily marketable may be accentuated at such time. To the extent the proceeds from any such dispositions are used by these Funds to pay distributions, each of those Funds will not be able to
purchase additional income-producing securities with such proceeds, and as a result its current income ultimately may be reduced.
Certain
Funds may invest up to 10% of their assets in zero coupon debt obligations. Zero coupon obligations are generally divided into two categories: Pure Zero Obligations, which are those that pay no interest for their entire life and
Zero/Fixed Obligations, which pay no interest for some initial period and thereafter pay interest currently. In the case of a Pure Zero Obligation, the failure to pay interest currently may result from the obligations having no
stated interest rate, in which case the obligation pays only principal at maturity and is sold at a discount from its stated principal. A Pure Zero Obligation may, in the alternative, provide for a stated interest rate, but provide that no interest
is payable until maturity, in which case accrued, unpaid interest on the obligation may be capitalized as incremental principal. The value to the investor of a zero coupon obligation consists of the economic accretion either of the difference
between the purchase price and the nominal principal amount (if no interest is stated to accrue) or of accrued, unpaid interest during the life or payment deferral period of the obligation.
Structured and Indexed Securities
.
Certain Funds may invest in structured and indexed securities, the value of which is linked
to currencies, interest rates, commodities, indexes or other financial indicators (reference instruments). The interest rate or the principal amount payable at maturity or redemption may be increased or decreased depending on changes in
the value of the reference instrument. Structured or indexed securities may be positively or negatively indexed, so that appreciation of the reference instrument may produce an increase or a decrease in interest rate or value at maturity of the
security. In addition, the change in the interest rate or value at maturity of the security may be some multiple of the change in value of the reference instrument. Thus, in addition to the credit risk of the securitys issuer, the Funds will
bear the market risk of the reference instrument.
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Mortgage Related Securities
.
Certain Funds may invest in mortgage related
securities, which represent pools of mortgage loans assembled for sale to investors by various governmental agencies, such as Ginnie Mae, by government related organizations, such as Fannie Mae and Freddie Mac, as well as by private issuers, such as
commercial banks, savings and loan institutions, mortgage bankers and private mortgage insurance companies.
The average maturity of
pass-through pools of mortgage related securities in which certain of the Funds may invest varies with the maturities of the underlying mortgage instruments. In addition, a pools stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level of interest rates, general economic and social conditions, the location of the mortgaged property and age of the mortgage. Because prepayment rates of individual mortgage
pools vary widely, the average life of a particular pool cannot be predicted accurately.
Mortgage related securities may be classified as
private, governmental or
government-related,
depending on the issuer or guarantor. Private mortgage related securities represent pass-through pools consisting principally of conventional residential mortgage
loans created by non-governmental issuers, such as commercial banks, savings and loan associations and private mortgage insurance companies. Governmental mortgage related securities are backed by the full faith and credit of the United States.
Ginnie Mae, the principal U.S. guarantor of these securities, is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. Government-related mortgage related securities are not backed by the full faith and
credit of the United States. Issuers include Fannie Mae and Freddie Mac. Fannie Mae is a government-sponsored corporation owned entirely by private stockholders, which is subject to general regulation by the Secretary of Housing and Urban
Development. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest by Fannie Mae. Freddie Mac is a stockholder-owned corporation chartered by Congress, which is subject to general regulation by
the Secretary of Housing and Urban Development. Participation certificates representing interests in mortgages from Freddie Macs national portfolio are guaranteed as to the timely payment of interest and ultimate collection of principal by
Freddie Mac. Fannie Mae and Freddie Mac have been operating under a conservatorship since 2008, with the FHFA acting as their conservator, and receive certain financing support from and have access to certain borrowing arrangements with the U.S.
Treasury. The status of these entities and the value of their securities and the securities which they guarantee could be affected to the extent the entities no longer receive such support.
Private, governmental or
government-related
entities may create mortgage loan pools offering
pass-through
investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may be shorter than previously customary. The portfolio manager assesses new types of mortgage related securities as they are developed and offered to determine their appropriateness for investment by the relevant
Fund.
Mortgage related securities may not be readily marketable. To the extent any of these securities are not readily marketable in the
judgment of the portfolio manager, these Funds will limit their investments in these securities, together with other illiquid instruments, to not more than 10% of the value of the net assets of each Fund.
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Several risks are associated with mortgage related securities generally. The monthly cash inflow
from the underlying loans, for example, may not be sufficient to meet the monthly payment requirements of the mortgage related security. Prepayments of principal by mortgagors or mortgage foreclosures will shorten the term of the underlying mortgage
pool for a mortgage related security. Early returns of principal will affect the average life of the mortgage related securities remaining in a Fund. The occurrence of mortgage prepayments is affected by factors including the level of interest
rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the average life of a pool. Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, thus affect the yield of a Fund. Because prepayments of principal generally occur when interest rates are declining, a Fund will likely have to reinvest the proceeds of prepayments at lower interest rates than those at which its
assets were previously invested, resulting in a corresponding decline in the Funds yield. Thus, mortgage related securities may have less potential for capital appreciation in periods of falling interest rates than other fixed income
securities of comparable maturity, although those other fixed income securities may have a comparable risk of decline in market value in periods of rising interest rates. To the extent that a Fund purchases mortgage related securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to any unamortized premium.
Certain Funds may enter into
transactions involving mortgage-backed securities in the TBA market. As with other delayed-delivery transactions, in the TBA market, the seller agrees to deliver to a buyer mortgage-backed securities for an agreed upon price on an agreed upon
date. However, at the time of the transaction, the seller makes no guarantee as to which or how many securities are to be delivered and the buyer agrees to accept any mortgage-backed securities that meet specified terms. For example, the
buyer and the seller might agree upon the interest rate and terms of the underlying mortgages, but the seller would not identify the specific underlying mortgages until shortly before the TBA mortgage-backed securities are issued. In addition
to the risks described above and the risk that the underlying mortgages may be less favorable than anticipated by a Fund, investments in TBA mortgage-backed securities are also subject to the risks described in this SAI under Derivatives
and When-Issued and Delayed-Delivery Securities.
Adjustable Rate Mortgage-Related Securities
. Certain Funds
may invest in adjustable rate mortgage related securities. Adjustable Rate Mortgages (ARMs) have interest rates that reset at periodic intervals, thereby allowing certain Funds to participate in increases in interest rates through
periodic adjustments in the coupons of the underlying mortgages, resulting in both higher current yields and lower price fluctuation than would be the case with more traditional long-term debt securities. Furthermore, if prepayments of principal are
made on the underlying mortgages during periods of rising interest rates, these Funds generally will be able to reinvest these amounts in securities with a higher current rate of return. None of these Funds, however, will benefit from increases in
interest rates to the extent that interest rates rise to the point at which they cause the current yield of ARMs to exceed the maximum allowable annual or lifetime reset limits (or caps) for a particular mortgage. In addition,
fluctuations in interest rates above these caps could cause ARMs to behave more like long-term fixed rate securities in response to extreme movements in interest rates. As a result, during periods of volatile interest rates, these Funds net
asset values may fluctuate more than if they did not purchase ARMs. Moreover, during periods of rising interest rates, changes in the coupon of ARMs will slightly lag behind changes in market rates, creating the potential for some principal loss for
unit-holders who redeem their Units of these Funds before the interest rates on the underlying mortgages are adjusted to reflect current market rates.
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Collateralized Mortgage Obligations.
Certain Funds may invest in collateralized
mortgage obligations (CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage related securities. Payments of principal and interest on the mortgages are passed through to the holders of the CMOs on the
same schedule as they are received, although certain classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending upon the type of CMOs in which a Fund invests, the investment may be
subject to a greater or lesser risk of prepayment than other types of mortgage related securities.
Further, if a Fund purchases
mortgage-backed or asset-backed securities that are subordinated to other interests in the same mortgage pool, the Fund as a holder of those securities may only receive payments after the pools obligations to other investors have
been satisfied. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may limit substantially the pools ability to make payments of principal or interest to the Fund as a holder of such subordinated securities,
reducing the values of those securities or in some cases rendering them worthless; the risk of such defaults is generally higher in the case of mortgage pools that include so-called subprime mortgages. An unexpectedly high or low rate of
prepayments on a pools underlying mortgages may have a similar effect on subordinated securities. A mortgage pool may issue securities to various levels of subordination; the risk of non-payment affects securities at each level, although the
risk is greater in the case of more highly subordinated securities.
Ginnie Mae Certificates
. Ginnie Mae Certificates are
securities representing part ownership of a pool of mortgage loans. These loans, issued by lenders such as mortgage bankers, commercial banks and savings and loan associations, are insured either by the Federal Housing Administration or by the
Veterans Administration. Each pool of mortgage loans is assembled and, after being approved by Ginnie Mae, is sold to investors through broker-dealers in the form of certificates representing participations in the pool. Ginnie Mae guarantees the
timely payment of principal and interest of each mortgage in the pool and its guarantee is backed by the full faith and credit of the U.S. Government. Ginnie Mae Certificates differ from bonds in that a borrower pays the principal over the term of
the loan rather than in a lump sum at maturity. Ginnie Mae Certificates are called pass-through certificates because both principal and interest payments on the mortgages (including prepayments) are passed through to the holder of the
certificate.
The average life of Ginnie Mae Certificates varies with the maturities of the underlying mortgages. Prepayments of any
mortgages in the pool will usually result in the return of the greatest part of principal invested well before the maturity of the mortgages in the pool. The volume of such prepayments of principal in a given pool of mortgages will influence the
actual yield of the Ginnie Mae Certificate.
Real Estate Related Investments
. The Diversified Fund may invest in real
estate related securities. There are significant risks inherent in real estate related investments. The securities of issuers that develop, own, construct, manage, or sell residential, commercial, or industrial real estate, are subject to all of the
risks associated with the direct ownership of real estate. These risks include: declines in the value of real estate, adverse changes in the climate for real estate, risks related to general and local economic conditions, over-building and increased
competition, increases in property taxes and operating expenses, changes in zoning laws, casualty or condemnation losses, limitations on rents, changes in neighborhood values, the appeal of properties to tenants, leveraging of interests in real
estate, increases in prevailing interest rates, lack of availability of financing, costs resulting from clean-up of environmental
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problems or liability to third parties for damages arising from environmental problems, and natural disasters, acts of war and terrorist attacks. The securities of issuers whose products and
services are related to the real estate industry are subject to the risk that the value of those securities will be adversely affected by one or more of the foregoing risks.
In addition to the risks discussed above, equity REITs may be affected by any changes in the value of the underlying property owned by the
trusts, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skill and are not diversified. Such trusts are also subject to heavy cash flow dependency, defaults
by borrowers, self-liquidation, and the possibility of failing to qualify for special tax treatment under Subchapter M of the Code and to maintain an exemption under the 1940 Act. Finally, certain REITs may be self-liquidating in that a specific
term of existence is provided for in the trust document. Such trusts run the risk of liquidating at an economically inopportune time.
Government Stripped Mortgage Related Securities
.
Certain Funds may invest in government stripped mortgage related securities
issued and guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. These securities represent beneficial ownership interests in either periodic principal distributions (principal-only or PO) or interest distributions
(interest-only or IO) on mortgage related certificates issued by Ginnie Mae, Freddie Mac or Fannie Mae. The certificates underlying the government stripped mortgage related securities represent all or part of the beneficial
interest in pools of mortgage loans. These Funds will invest in government stripped mortgage related securities in order to enhance yield or to benefit from anticipated appreciation in value of the securities at times when GEAM believes that
interest rates will remain stable or increase. In periods of rising interest rates, the expected increase in the value of government stripped mortgage related securities may offset all or a portion of any decline in value of the securities held by
these Funds.
Investing in government stripped mortgage related securities involves risks normally associated with investing in mortgage
related securities issued by the government or government related entities. In addition, the yields on government stripped mortgage related securities are extremely sensitive to prepayment on the mortgage loans underlying the certificates
collateralizing the securities. If a decline in the level of prevailing interest rates results in a rate of principal prepayments higher than anticipated, distributions of principal will be accelerated, thereby reducing the yield to maturity on IO
government stripped mortgage related securities and increasing the yield to maturity on PO government stripped mortgage related securities. Sufficiently high prepayment rates could result in these Funds not fully recovering their initial investment
in an IO government stripped mortgage related security. The sensitivity of an IO security that represents the interest portion of a particular class, as opposed to the interest portion of an entire pool, to interest rate fluctuations, may be
increased because of the characteristics of the principal portion to which they relate.
Government stripped mortgage related securities
are currently traded in an OTC market maintained by several large investment banking firms. No assurance can be given that these Funds will be able to effect a trade in a government stripped mortgage related security at a desired time. These Funds
will acquire government stripped mortgage related securities only if a secondary market exists for the securities at the time of acquisition. Except for government stripped mortgage related securities based on fixed rate Freddie Mac and Fannie Mae
mortgage certificates that meet certain liquidity criteria established by a Funds Board, each Fund treats government stripped mortgage related securities as illiquid and will limit each of these Funds investments in these securities,
together with other illiquid investments, to not more than 10% of the net assets of each Fund.
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Asset-Backed and Receivable-Backed Securities
.
Certain Funds may invest in
securities issued by trusts and special purpose corporations with principal and interest payouts backed by, or supported by, any of various types of assets. These assets typically include receivables related to the purchase of automobiles, credit
card loans, and home equity loans. These securities generally take the form of a structured type of security, including pass-through, pay-through, and stripped interest payout structures similar to the CMO structure. Investments in these and other
types of asset-backed securities must be consistent with the investment objectives and policies of the Funds.
The yield characteristics
of asset-backed securities differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying
assets generally may be prepaid at any time. As a result, if a Fund purchases such a security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have
the opposite effect of increasing yield to maturity. Alternatively, if a Fund purchases these securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity. The
portfolio manager will seek to manage these risks (and potential benefits) by diversifying its investments in such securities and through hedging techniques.
Asset-backed securities involve certain risks that are not posed by other types of CMO securities, resulting mainly from the fact that
asset-backed securities do not usually contain the complete benefit of a security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state
and Federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to
support payments on these securities.
Further, if a Fund purchases asset-backed securities that are subordinated to other
interests in the same mortgage pool, the Fund as a holder of those securities may only receive payments after the pools obligations to other investors have been satisfied. An unexpectedly high rate of defaults on the mortgages held by a
mortgage pool may limit substantially the pools ability to make payments of principal or interest to the Fund as a holder of such subordinated securities, reducing the values of those securities or in some cases rendering them worthless; the
risk of such defaults is generally higher in the case of mortgage pools that include so-called subprime mortgages. An unexpectedly high or low rate of prepayments on a pools underlying mortgages may have a similar effect on
subordinated securities. A mortgage pool may issue securities to various levels of subordination; the risk of non-payment affects securities at each level, although the risk is greater in the case of more highly subordinated securities.
Collateralized Bond Obligations (CBOs), Collateralized Loan Obligations (CLOs) and Other Collateralized Debt
Obligations (CDOs)
. Certain Funds may invest in CBOs, CLOs and other CDOs, which are debt instruments backed solely by a pool of other debt securities. The risks of an investment in a CBO, CLO or other CDO depend largely on the
type of the collateral securities (which would have the risks described elsewhere in this document for that type of security) and the class of the CBO, CLO or other CDO in which a
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Fund invests. Some CBOs, CLOs and other CDOs have credit ratings, but are typically issued in
various classes with various priorities. Normally, CBOs, CLOs and other CDOs are privately offered and sold (that is, not registered under the securities laws) and may be characterized by the Funds as illiquid securities, but an active dealer market
may exist for CBOs, CLOs and other CDOs that qualify for Rule 144A transactions. In addition to the normal interest rate, default and other risks of fixed income securities discussed elsewhere in this document, CBOs, CLOs and other CDOs carry
additional risks, including 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, the Funds may invest in CBOs, CLOs or
other CDOs that are subordinate to other classes, volatility in values, and the complex structure of the security may not be fully understood at the time of investment and produce disputes with the issuer or unexpected investment results.
Exchange Traded Funds and Other Index-Related Securities
.
Certain Funds may invest in exchange traded funds, which are baskets
of securities designed to generally track an index or a foreign market, such as iShares or Standard & Poors Depositary Receipts. These securities are considered to be investment companies for purposes of each Funds investment
limitations.
Mortgage Dollar Rolls
.
Certain Funds may, with respect to 33 1/3% of their total assets, enter into
mortgage dollar rolls in which the Fund sells securities for delivery in the current month and simultaneously contracts with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities on a
specified future date. The Fund loses the right to receive principal and interest paid on the securities sold. However, the Fund would benefit to the extent of any proceeds received for the securities sold and the lower forward price for the future
purchase (often referred to as the drop) or fee income plus the interest earned on the cash proceeds of the securities sold until the settlement date of the forward purchase. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage repayments that would have been realized on the securities sold as part of the mortgage dollar roll, the use of this technique will diminish the investment performance of the Fund compared with what such performance
would have been without the use of mortgage dollar rolls. The Fund will hold and maintain in a segregated account until the settlement date cash or liquid assets in an amount equal to the forward purchase price. The benefits derived from the use of
mortgage dollar rolls may depend upon the portfolio managers ability to predict correctly mortgage prepayments and interest rates. There is no assurance that mortgage dollar rolls can be successfully employed.
For financial reporting and tax purposes, each of these Funds propose to treat mortgage dollar rolls as two separate transactions: one
involving the purchase of a security and a separate transaction involving a sale. The Funds do not currently intend to enter into mortgage dollar rolls that are accounted for as a financing.
Short Sales Against the Box
.
Certain Funds may sell securities short against the box. Whereas a short sale is the
sale of a security a Fund does not own, a short sale is against the box if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable
without further consideration for, securities of the same issue as the securities sold short. Swap transactions, futures contracts and other derivative-type instruments that reflect the equivalent of a short sale or a short position are not
considered to be a short sale or short position for this purpose or for purposes of determining whether a short sale or position is considered to be against the box.
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Borrowing for Long-term or Leveraging Purposes
.
The Tax-Exempt Fund may borrow, in
an amount not to exceed 10% of the value of its total assets for long-term or leveraging purposes. The Tax-Exempt Fund may leverage its investments by purchasing securities with borrowed money. In leveraging its investments, the Tax-Exempt Fund will
borrow money only from banks. Borrowing money to purchase securities will increase the Tax-Exempt Funds exposure to capital risk and higher current expenses. Any gain in the value of securities purchased with borrowed money or income earned
from these securities that exceeds the interest paid on the amount borrowed would cause the Tax-Exempt Funds net asset value per Unit to increase faster than would otherwise be the case. There can be no assurance that the Tax-Exempt Fund will
be able to realize a higher return on its investment portfolio than the then-current interest rate on borrowed money. If the Tax-Exempt Funds current investment income were not sufficient to meet interest costs on borrowings, it could be
necessary for the Fund to liquidate certain of its investments, thereby reducing the net asset value attributable to the Funds Units.
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PORTFOLIO HOLDINGS
The Funds portfolio holdings must be adequately protected to prevent the misuse of that information by a third party to the potential
detriment of the shareholders. Accordingly, the Funds have adopted, and the Board has approved, policies and procedures designed to ensure that the disclosure of the Funds portfolio holdings is in the best interest of the Funds
shareholders in the manner described below. GEAM and the Board may amend these policies and procedures at any time without prior notice.
Various non-Fund advisory clients of GEAM may hold securities substantially similar to those securities held by the Funds. Although GEAM has
also adopted policies and procedures regarding the selective disclosure of the contents of those other portfolios, those policies and procedures contain different procedures and limitations than the policies and procedures that apply to the
disclosure of the Funds portfolio holdings.
The Funds portfolio holdings are made public, as required by law, in the
Funds annual and semi-annual reports. These reports are filed with the SEC and mailed to shareholders within 60 days after the end of the relevant fiscal period. In addition, as required by law, the Funds portfolio holdings as of fiscal
quarter end are reported to the SEC, and posted to the Funds website, within 60 days after the end of the Funds first and third fiscal quarters so that they are available to any interested person.
The following information is also available on the Funds website (http://www.gefunds.com/elfun) or by calling 1-800-242-0134:
1. A complete listing of each Funds portfolio holdings and related information (such as number of shares, value and percentage of the
portfolio) as of each month-end will be available to any interested person, no earlier than 30 calendar days following the month-end;
2.
Top ten portfolio holdings and related information (such as number of shares, value and percentage of the portfolio) for all Funds as of each month-end will be available to any interested person, no earlier than 15 calendar days after the month-end;
and
3. Characteristics of securities (such as number of shares, principal amount of bonds, percentage of portfolio, sector, country,
regional, quality and duration breakdowns, depending on the type of account) held in any of the Funds based on a Funds entire portfolio (or a portion thereof) as of each month-end will be available to any interested person, no earlier than 15
calendar days after the month-end.
Fund portfolio holdings may be posted earlier or later than reflected above as a result of regulatory
requirements.
For the Money Market Fund, in order to comply with amendments to Rule 2a-7 under the 1940 Act, information concerning the
Money Market Funds holdings, as well as its weighted average maturity and weighted average life, will be posted on the Funds website five business days after the end of the month and will remain posted for six months thereafter.
The Funds portfolio holdings information will be available on the Funds website until updated for the next appropriate period.
This information may not be disclosed to any person earlier than the date it has been posted to the Funds website.
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The Funds and GEAM reserve the right to make the Funds portfolio holdings and related
information available on the Funds website earlier or later than permitted above if it is determined prior to such disclosure that (1) there is a legitimate business purpose to do so (as described below in the paragraphs related to
selective disclosures of Fund portfolio holdings information); (2) any actual or potential conflicts of interest between the Funds and their affiliates are reviewed and considered; and (3) the timing of such disclosure is not expected to
result in harm to the Funds. Prior to such disclosure being released and made available to the public on the Funds website, the following condition must be met: (a) Any Senior Vice President or Vice President of GEAMs Legal
Department or GEAMs General Counsel; (b) any Manager of GEAMs Compliance Department; and (c) the Chief Investment Officer (or other individual in a senior management position) of the applicable Fund, (i) must be informed
of each arrangement involving the proposed disclosure of the Funds portfolio holdings information in a timeframe different from the standard timeframe, (ii) must analyze it to determine potential and actual conflicts of interests in an
effort to minimize those conflicts to the extent reasonable and practicable and (iii) must authorize its occurrence.
Portfolio
managers and other senior officers of GEAM may disclose or confirm the ownership by a Fund of any individual holdings or number of holdings to the press or other interested persons as long as such information has been previously publicly disclosed
in accordance with the above. For example, a portfolio manager discussing a particular Fund may indicate that such Fund holds a security only if the Funds holding of such security has been publicly disclosed.
Selective (i.e. non-public) disclosures of portfolio holdings information relating to the Funds, even if subject to the conditions specified
in the portfolio holdings policies and procedures, should be done only where legitimate business purposes of the Funds are served and the potential and actual conflicts of interest between the Funds and their affiliates are reviewed and considered.
Selective disclosures could be considered to serve the legitimate business purposes of the Funds, if: (1) done to further the
interests of the Funds and (2) the disclosure is not expected to result in harm to the Funds (such harm could occur by permitting third parties to trade ahead of, or front run, the Funds or to effect trades in shares of the Funds with portfolio
holdings information that other current or potential investors do not have). For example, certain vendors of GEAM or the Funds provide services that are essential in the operations of the Funds, or assist GEAM in providing services to the Funds or
in conducting its investment management business activities in general. In order to properly perform these services, these vendors typically need to obtain Fund portfolio holdings information on a very frequent and timely basis, often on the same
day it is derived. In addition, certain institutional Fund clients (and their representatives) may require us to provide them with more timely portfolio holdings information for their review, in fulfillment of their fiduciary obligations.
Potential and actual conflicts of interest between the Funds and their affiliates must also be reviewed and considered. For example, there may
be situations where the selective disclosure of a Funds portfolio holdings information facilitates portfolio management activities or the potential growth of the Funds, which could legitimately serve the common interests of both the Funds and
GEAM. However, such selective disclosures should not be made for the benefit of GEAM or its affiliates, such as the receipt of compensation for the disclosure of those portfolio holdings, without also considering whether the disclosure would be in
the interests of the Funds or, at a minimum, result in no harm to the Funds.
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The following conditions must be met in order to disclose Fund portfolio holdings information
before it is released and made available to the public:
(1)(a) Any Senior Vice President or Vice President of GEAMs Legal department
or GEAMs General Counsel; (b) any Manager of GEAMs Compliance department; and (c) the Chief Investment Officer
,
or other individual in a senior management position of the applicable Fund, (i) must be informed of
each arrangement involving selective disclosure of Fund portfolio holdings information, (ii) must analyze it to determine potential and actual conflicts of interest in an effort to minimize those conflicts to the extent reasonable and
practicable and (iii) must authorize its occurrence
;
and
(2) Depending on the type of recipient, the recipient of the
information must agree in writing to maintain the confidentiality of the information provided and not to share it with anyone other than those persons who, on a need-to-know basis, assist it in fulfilling its fiduciary obligations (or the recipient
must be subject to professional or ethical obligations not to disclose or improperly use the information, such as would apply to independent public accounting firms and legal counsel), and not to trade on the basis of the information provided in any
account over which it has influence or control, until the public release of the information; and
(3) GEAMs Relationship Management
department must maintain a list of all entities that receive selective disclosure of portfolio holdings and the reason for such disclosure.
The following entities may also be provided Fund portfolio holdings information on a daily basis without any delay in transmission without
being subject to the above conditions:
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|
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Entities that are subject to professional or ethical obligations not to disclose or improperly use the information (
e.g.,
independent public accounting firms and legal counsel).
|
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Broker-dealers or futures commission merchants in connection with the purchase or sale of securities, requests for price quotations on securities or bids on securities.
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A custodian in connection with the provision of custodial services to the mutual fund.
|
As of
the date of this SAI, the Funds provide their portfolio holdings to the following entities as of a date more frequent than month-end and/or prior to the time lag period (
i.e.,
30 days or 15 days) set forth above:
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Custodian (sub-custodians) and accounting agent;
|
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Securities lending agent(s);
|
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Transfer agent (in the event of a redemption or purchase in-kind);
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Legal counsel to the Funds, GEAM or non-interested trustees of the Funds;
|
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Provider(s) of attribution and/or portfolio analysis, including:
|
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FactSet Research Systems, Inc.
|
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Richards & Tierney, Inc.
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Other recipients could include various stock markets and exchanges, regulatory authorities and, to a more limited extent, the issuers of securities held by the Funds with respect to only the securities of the particular
issuer.
|
Neither the Funds nor GEAM receive separate compensation with respect to the selective disclosure of portfolio
holdings from any recipient of such information.
The Funds will make reasonable efforts to work with the entities listed above to obtain
written acknowledgements and to implement the conditions described above. GEAMs Compliance department will analyze no less frequently than annually the shareholder records of the Funds in an effort to determine whether any Fund client or
critical vendor violated the no trading ban that is in effect until the public release of the portfolio holdings information. GEAMs Compliance department will review the findings of the analysis with GEAMs Legal department. However, such
a monitoring effort is not likely to detect every misuse of that information, particularly if concealed in some fashion. Certain employees of GEAM and GE Investment Distributors, Inc. (GEID or the Distributor) may also have
access to that non-public portfolio information, but those employees will normally be subject to a code of ethics and other policies and procedures intended to prevent misconduct.
There can be no assurance that the Funds policies and procedures on disclosure of portfolio holdings will protect the Funds from misuse
of such information by individuals or entities that come into possession of the information.
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INVESTMENT RESTRICTIONS
The Funds are subject to certain fundamental and non-fundamental investment policies and limitations. Under the 1940 Act, fundamental
investment policies and limitations may not be changed without the approval of the holders of a majority of the outstanding voting units of the Funds affected by such change. Non-fundamental policies may be changed by a majority vote of the Board at
any time.
Fundamental Investment Restrictions for all Funds other than the Diversified Fund
1. Investment in the Securities of any one Issuer. (a) No Fund may invest more than 5% of its total assets in the securities (other than
Government Securities and, in the case of the International Fund, other than securities issued or guaranteed by a foreign country or its instrumentalities) of a single issuer, except that up to 25% of the value of the assets of the Money Market
Fund, the Income Fund and the Tax-Exempt Fund may be invested without regard to this limitation. (b) No Fund may purchase more than 10% (or 15%, in the case of the Income Fund, the Tax-Exempt Fund and the International Fund) of the outstanding
securities of any class of issuer, treating all debt securities of an issuer as a single class for purposes of this restriction. (c) No Fund may purchase more than 10% of the outstanding voting securities of any one issuer. Securities of a
foreign government will be treated as a single issuer for purposes of this restriction. The Tax-Exempt Fund will regard each state and each of its political subdivisions, agencies and instrumentalities as a single issuer; if private companies are
responsible for payment of principal and interest, the
Tax-Exempt
Fund will regard each as a separate issuer for purposes of this restriction.
2. Investment in a Particular Industry. No Fund may invest more than 25% of the value of its total assets in the securities of issuers in any
one industry. The Tax-Exempt Fund may invest more than 25% of the value of its total assets in securities issued or guaranteed by a state, municipality or other political subdivision, unless the securities are backed only by the assets and revenues
of
non-governmental
users. For purposes of this restriction, the term industry will be deemed to include the government of any country other than the United States, but not the U.S. Government. In addition,
domestic bank obligations held by the Money Market Fund and the Tax-Exempt Fund are excluded from this restriction. However, each foreign countrys banks are regarded as a separate industry.
3. Borrowing. The Funds may not borrow money, except that (i) the Money Market Fund may enter into reverse repurchase agreements,
(ii) the Tax-Exempt Fund may borrow for long-term or leveraging purposes in an amount not to exceed 10% of the value of its total assets and (iii) each Fund may borrow for temporary or emergency purposes, including the meeting of
redemption requests and cash payments of dividends and distributions that might otherwise require the untimely disposition of securities, in an amount not to exceed, in the case of the Income Fund and the Tax-Exempt Fund, 10% of the value of the
Funds total assets, and in the case of the International Fund and the Money Market Fund, 20% of the value of the Funds total assets. The International Fund and Elfun Trusts can borrow money from banks with minimum assets of one billion
dollars as long as, immediately after the borrowing, asset coverage of 300% exists. Whenever borrowings (including reverse repurchase agreements) of 5% or more of either the Income Funds, the International Funds or the Money Market
Funds total assets are outstanding, the respective Fund will not make any additional investments.
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4. Lending. No Fund may lend its assets or money to other persons, except through
(a) lending its portfolio securities in an amount not to exceed 30%, in the case of Elfun Trusts and the International Funds, or 33 1/3% in the case of the Income Funds, the Tax-Exempt Funds or the Money Market
Funds, net assets taken at market value; (b) in the case of the International Fund, the purchase of obligations of persons not in control of, or under common control with, the Fund (including obligations of restricted securities);
(c) in the case of the Income Fund, entering into repurchase agreements; (d) in the case of the Income Fund and the Tax-Exempt Fund, entering into security lending agreements and purchasing debt obligations; and (e) in the case of
Elfun Trusts, the Income Fund and the Tax-Exempt Fund, trading in financial futures contracts, options on financial futures contracts, securities indexes and securities. The Tax-Exempt Fund will not make any loan if more than 20% of its assets would
be subject to security lending agreements.
5. Purchase Securities on Margin; Short Sales. No Fund may purchase securities on margin or
make short sales, except that the Money Market Fund may make short sales against the box and in order to achieve better net results on portfolio transactions or lower brokerage commission rates, the International Fund may join with other investment
companies or client accounts managed by GEAM in the purchase or sale of securities. For purposes of this restriction, the deposit or payment of initial or variation margin in connection with futures contracts, financial futures contracts or related
options, and options on securities, options on securities indexes and options on currencies will not be deemed to be a purchase of securities on margin by a Fund.
6. Participation in the Underwriting of Securities. No Fund may participate in the underwriting of securities or joint trading accounts,
except to the extent that the sale of portfolio securities in accordance with the Funds investment objective, policies and limitations may be deemed to be an underwriting, and except that the Income and the Tax-Exempt Funds may acquire
securities under circumstances in which, if the securities were sold, the Fund might be deemed to be an underwriter for purposes of the Securities Act of 1933, as amended.
7. Real Estate. No Fund, other than the Income Fund, may purchase or sell real estate and neither Elfun Trusts nor the Money Market Fund may
invest in real estate limited partnership interests, except that a Fund, other than the
Tax-Exempt
Fund, may (a) engage in the purchase or sale of real estate as necessary to provide it with an office for
the transaction of business, (b) invest in the securities of real estate investment trusts or in the securities of companies that invest or deal in real estate, mortgages or interests in real estate or mortgages and (c) invest in
securities secured by real estate.
8. Commodities. No Fund may purchase or sell commodities or commodities contracts, except that each
Fund, other than the Money Market Fund, may invest in futures contracts and related options and other similar contracts (including, in the case of the Income Fund and the International Fund, foreign currency forward, futures and options contracts)
as described in this Statement of Additional Information and in the Prospectus.
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9. Restricted Securities and Illiquid Investments. No Fund may purchase securities which are
illiquid or restricted (as those terms are described below and in the Prospectus), if, in the case of Elfun Trusts, the Income Fund, the Money Market Fund and the International Fund, more than 10% of the net assets of the Fund would be invested in
any combination of these securities, and, in the case of the Tax-Exempt Fund, no more than 5% of the net assets of the Fund would be invested in any combination of these securities. For purposes of this restriction, illiquid investments are
securities that cannot be disposed of by a Fund within seven days in the ordinary course of business at approximately the amount which the Fund has valued the securities; restricted securities are securities that are subject to contractual or legal
restrictions on transfer, excluding for purposes of this restriction, restricted securities that are eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended, that have been determined to be liquid by the Funds
Board of Trustees based upon the trading markets for the securities.
10. Other Investment Companies. (a) Elfun Trusts, the
International Fund or the Money Market Fund may not invest in the securities of other investment companies except by purchase in the open market where no commission or profit to a sponsor or dealer results, other than the customary brokers
commission. (b) Elfun Trusts, the Income Fund, the International Fund or the Money Market Fund may not invest in the securities of closed-end investment companies if the Fund would own more than 3% of the total outstanding voting stock of the
company or more than 5% of the value of the Funds total assets would be invested in the securities of any one investment company or the aggregate investment by the Fund in all investment companies would have a value in excess of 10% of the
Funds total assets. (c) The Income Fund may not purchase the securities of other investment companies, except for money market funds and investment in equity securities issued by foreign banks provided that all other investment companies
having the same adviser as the Income Fund would not own more than 10% of the total outstanding voting securities of the foreign bank. (d) The Tax-Exempt Fund may not invest in the securities of other investment companies. The limitations
described above do not apply if the investment is part of a plan of merger, consolidation, reorganization or acquisition.
11. Options.
Neither the Income Fund nor the Tax-Exempt Fund may purchase put options on securities if more than 10% of the Funds net assets would be invested in premiums on options or if the aggregate value of the obligations underlying the put options
written by the Fund exceed 50% of the Funds net assets.
12. Pledging. Neither the Income Fund nor the Tax-Exempt Fund may pledge,
mortgage or hypothecate its assets except (a) to secure borrowings, the Income Fund and the Tax-Exempt Fund may pledge securities which together with all securities previously pledged do not exceed 5% of the Funds total assets and
(b) the Income Fund and the Tax-Exempt Fund may make premium and margin payments in connection with transactions involving financial futures contracts and options on financial futures contracts, securities indexes and securities.
13. Transactions with Affiliates. Neither the Income Fund nor the Tax-Exempt Fund may purchase from or sell to any of its officers or
Trustees, or the officers or directors of GEAM, its portfolio securities.
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14. Options, Straddles and Spreads. The International Fund may not purchase or sell put options,
call options, straddles, spreads or combinations of put options, call options, straddles and spreads, except as described in this Statement of Additional Information and the Prospectus, and the Money Market Fund may not purchase or sell put options,
call options, straddles, spreads or combinations of put options, call options, straddles and spreads, if the value of the Money Market Funds aggregate investment in these types of securities would exceed 5% of its total assets.
15. Mineral Exploration. The Tax-Exempt Fund may not invest in oil, gas, or other mineral leases or production agreements, although the Fund
may invest in municipal bonds secured by mineral interests.
16. Affiliate Ownership. Neither Elfun Trusts, the Tax-Exempt Fund nor the
Income Fund may purchase or retain securities of any company if, to the knowledge of GEAM or the Funds Trustees, officers or Trustees of the Fund or officers and directors of GEAM individually own more than 1/2 of 1% of the outstanding
securities of the company and together they beneficially own more than 5% of the securities.
17. Control/Management. The Tax-Exempt Fund
may not invest in companies for the purpose of exercising control or management.
Notes to Fundamental Investment Restrictions
The percentage limitations in the restrictions listed above apply at the time of purchases of securities and a later increase or decrease in
percentage resulting from a change in value of net assets, outstanding securities, or in any ratings, will not be deemed to result in a violation of the restriction. For purposes of fundamental investment restriction number 2, the Funds may use the
industry classifications reflected by the Directory of Companies Required to File Annual Reports with the SEC, Bloomberg Inc. and the S&P 500 Composite Stock Price Index (the S&P
500
®
Index). In addition, each Fund may select its own industry classifications, provided such classifications are reasonable.
Non-Fundamental Investment Restrictions for all Funds other than the Diversified Fund
The Funds have adopted the following additional investment restrictions applicable (except as noted) to all Funds. These are not fundamental and may be changed
by the Board without unitholder approval.
1. Unseasoned Issuers, Restricted Securities and Illiquid Investments. No Fund may purchase
securities if, as a result of the purchase, the Fund would then have more than 5% of its total assets invested in securities of companies (including predecessors) that have been in continuous operation for fewer than three years. No Fund may invest
more than 15% of its total assets (10% in the case of the Tax-Exempt Fund), in the aggregate, in the securities of unseasoned issuers, restricted securities and illiquid investments, excluding, for purposes of this 15% restriction, restricted
securities that are eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended, that have been determined to be liquid by the Funds Board of Trustees based upon the trading markets for the securities (Rule
144A Securities). In addition, no Fund may invest more than 50% of its net assets in the securities of unseasoned issuers and restricted securities, including, for purposes of this 50% restriction, Rule 144A Securities.
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2. Warrants. No Fund may purchase warrants if, as a result, the investment (valued at the
lower of cost or market) would exceed 5% of the value of the Funds net assets of which not more than 2% of the value of the Funds net assets may be invested in warrants not listed on the NYSE or the American Stock Exchange. The Money
Market Fund may not invest in any form of warrants.
3. Mineral Exploration. Neither Elfun Trusts nor the International Fund may
invest in oil, gas, or other mineral exploration or development programs, or leases, although the Funds may invest in securities of companies involved in these programs or leases. The Income Fund may not invest in oil, gas, or other mineral
exploration or development programs or partnerships, or leases. The Money Market Fund may not invest in oil, gas, or other mineral exploration or development programs.
4. Pledging. Neither Elfun Trusts nor the International Fund may pledge more than 10% of its assets, except as provided in this Statement of
Additional Information and in the Prospectus. The Money Market Fund may not pledge, mortgage or hypothecate its assets except for emergency or extraordinary purposes.
5. Hedging. No Fund may (a) enter into forward foreign currency exchange or futures contracts or foreign currency options contracts to
sell foreign currencies, except for the purpose of hedging to protect portfolio securities against the decline in the value of currency or to
lock-in
the dollar value of an anticipated disbursement or receipt
in a foreign currency, (b) purchase and write put and call options on stock indexes, purchase and sell stock index futures and invest in interest in rate futures contracts and options on interest rate futures contracts, except for the purpose
of hedging or (c) enter into foreign currency futures if the aggregate margin deposits made by the Fund exceed 5% of the Funds total assets excluding amounts in-the-money.
6. Affiliate Ownership. Neither the International Fund nor the Money Market Fund may purchase or retain securities of any company if, to the
knowledge of GEAM or the Funds Trustees, officers or trustees of the Fund or officers and directors of GEAM individually own more than 1/2 of 1% of the outstanding securities of the company and together they beneficially own more than 5% of
the securities.
7. Control/Management. Neither the Income Fund, the International Fund nor Elfun Trusts may invest in companies for the
purpose of exercising control or management.
8. Real Estate. In connection with the fundamental restriction prohibiting the Tax-Exempt
Fund and the International Fund from investing in real estate, the Tax-Exempt Fund and the International Fund may not invest in real estate limited partnerships. The Income Fund may not purchase or sell real estate, except that the Fund may
(a) engage in the purchase or sale of real estate as necessary to provide it with an office for the transaction of business, (b) invest in the securities of real estate investment trusts in an amount not to exceed 10% of the Funds
net assets or in the securities of companies that invest or deal in real estate, mortgages or interests in real estate or mortgages and (c) invest in securities secured by real estate.
9. Other Investment Companies. In connection with the fundamental restriction prohibiting the Income Fund from investing in the securities of
other investment companies, the Income Fund may not invest in the securities of these other investment companies, except by purchase in the open market where no commission or profit to a sponsor or dealer results, other than the customary
brokers commission.
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10. Options. The Money Market Fund may not purchase or sell options on securities, options on
stock index futures or financial futures unless they are written by other persons and listed on a national securities or commodities exchange and any premiums on the options held by the Fund may not exceed 20% of the Funds total net assets.
The International Fund may not write, sell or purchase additional options if as a result thereof the value of the options will exceed 5% of its net assets or if the value of the stock underlying calls written would exceed 25% of its net assets.
11. Loans. The Trust Agreement of Elfun Trusts does not restrict the power of the Trustees to make loans to individuals. While it is not the
policy of the trustees of Elfun Trusts to make loans, the registration statement filed with the SEC under the Securities Act of 1933 and the 1940 Act reserved for Elfun Trusts freedom of action to make interest-bearing loans to unit-holders. The
loans are to be secured by Elfun Trusts Units of the unit-holder, either with or without other collateral, in principal amounts aggregating not more than 15% of the then total assets of Elfun Trusts. This policy does not restrict the authority
of Elfun Trusts with respect to its investment in financial futures contracts and options contracts on financial futures, securities indices and securities.
12. Investment in the Securities of any one Issuer. (a) The International Fund will not invest more than 5% of its total assets in the
securities (other than Government Securities) of a single issuer. (b) Neither the Income Fund, the Tax-Exempt Fund nor the International Fund may purchase more than 10% of the outstanding securities of any class of issuer, treating all debt
securities of an issuer as a single class for purposes of this restriction.
13. Investment in a Particular Industry. The Tax-Exempt Fund
will not exclude domestic bank obligations in determining the amount of its assets which may be invested in a particular industry.
14.
Name Requirement. Each of the Funds, with the exception of Elfun Trusts, invests at least 80% of its net assets plus borrowings for investment purposes in the type of investments implied by its name. Each of these Funds will provide shareholders at
least 60 days prior notice before any change in this non-fundamental policy.
15. Senior Securities. No Fund may issue senior securities,
except as otherwise permitted by its fundamental policies or by applicable law. (Each Fund hereby undertakes to seek unitholder approval of this policy as a fundamental policy as part of the next unitholder meeting of the Fund, when and if such
unitholder meeting occurs).
Notes to Non-Fundamental Investment Restrictions
The percentage limitations in the restrictions listed above apply at the time of purchases of securities and a later increase or decrease in
percentage resulting from a change in value of net assets, outstanding securities, or in any ratings, will not be deemed to result in a violation of the restriction. For purposes of non-fundamental investment restriction number 13, the Funds may use
the industry classifications reflected by the Directory of Companies Required to File Annual Reports with the SEC, Bloomberg Inc. and the S&P 500
®
Index. In addition, each Fund may select
its own industry classifications, provided such classifications are reasonable.
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Fundamental Investment Restrictions for the Diversified Fund
1. Investments in the Securities of any one Issuer. The Fund may not invest more than 5% of its total assets in the securities (other than
Government Securities) of a single issuer, except that up to 25% of the value of the total assets of the Fund may be invested without regard to this limitation. (b) The Fund may not purchase more than 10% of the outstanding securities of any
class of issuer, treating all debt securities of an issuer as a single class for purposes of this restriction. (c) The Fund may not purchase more than 10% of the outstanding voting securities of any one issuer.
2. Investment in a Particular Industry. The Fund may not invest more than 25% of the value of its total assets in the securities of issuers in
any one industry. For purposes of this restriction, the term industry will be deemed to include the government of any country other than the United States, but not the U.S. Government. However, each foreign countrys banks are regarded as a
separate industry.
3. Borrowing. The Fund may not borrow money, except that it may (a) borrow from banks (as defined in the 1940
Act) and through reverse repurchase agreements in amounts up to 33 1/3% of its total assets (including the amount borrowed), (b) to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary
purposes, (c) obtain such short-term credits as may be necessary for the clearance of purchases and sales of portfolio securities, (d) purchase securities on margin to the extent permitted by applicable law, (e) engage in transactions
in dollar rolls and other similar transactions, and (f) as otherwise permitted by applicable law.
4. Lending. The Fund may not lend
it assets or money to other persons, except (a) by purchasing debt obligations (including privately placed debt obligations), (b) by lending cash or securities as permitted by applicable law, (c) by entering into repurchase
agreements, (d) by investing in futures contracts on securities and securities indices and options on such futures contracts, and (e) as otherwise permitted by applicable law.
5. Senior Securities. The Fund may not issue senior securities, except as otherwise permitted by its fundamental policy on borrowing or by
applicable law.
6. Participation in the Underwriting of Securities. The Fund may not participate in the underwriting of securities or
joint trading accounts, except to the extent that the sale of portfolio securities in accordance with the Funds investment objective, policies and limitations may be deemed to be an underwriting.
7. Real Estate. The Fund may not purchase or sell real estate, except (1) that the Fund may: (a) invest in mortgage-related
securities and securities secured by real estate, mortgages, or interests in real estate or mortgages, (b) purchase securities of issuers that invest or deal in real estate, mortgages or interests in real estate or mortgages (e.g., real estate
investment trusts), (c) engage in the purchase and sale of real estate as necessary to provide it with an office for the transaction of business, (d) acquire real estate or interests in real estate securing an issuers obligations,
and (e) invest in real estate limited partnerships; and (2) as otherwise permitted by applicable law.
8. Commodities. The Fund
may not purchase or sell commodities or commodities contracts, except as otherwise permitted by law.
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Notes to Fundamental Investment Restrictions for the Diversified Fund
The percentage limitations in the restrictions listed above apply at the time of purchases of securities and a later increase or decrease in percentage
resulting from a change in value of net assets, outstanding securities, or in any ratings, will not be deemed to result in a violation of the restriction. For purposes of fundamental investment restriction number 2, the Diversified Fund may use the
industry classifications reflected by the Directory of Companies Required to File Annual Reports with the SEC, Bloomberg Inc. and the S&P 500
®
Index. In addition, the Diversified Fund may
select its own industry classifications, provided such classifications are reasonable.
Non-Fundamental Investment Restrictions for the
Diversified Fund
The Diversified Fund has also adopted the following additional investment restrictions. These are not
fundamental and may be changed by the Board without unitholder approval.
1. Unseasoned Issuers, Restricted Securities and Illiquid
Investments. The Fund may not purchase securities if, as a result of the purchase, the Fund would then have more than 5% of its total assets invested in securities of companies (including predecessors) that have been in continuous operation for
fewer than three years. The Fund may not purchase illiquid investments if more than 15% of its net assets, taken at market value, would be invested in such illiquid investments. For purposes of this restriction, illiquid investments are
securities that cannot be disposed of by the Fund within seven days in the ordinary course of business. The Fund may not invest more than 15% of its total assets, in the aggregate, in the securities of unseasoned issuers, restricted securities and
illiquid investments, excluding, for purposes of this 15% restriction, restricted securities that are eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended, that have been determined to be liquid by the Funds
Board of Trustees based upon the trading markets for the securities (Rule 144A Securities). In addition, the Fund may not invest more than 50% of its net assets in the securities of unseasoned issuers and restricted securities,
including, for purposes of this 50% restriction, Rule 144A Securities.
2. Warrants. The Fund may not purchase warrants if, as a
result, the investment (valued at the lower of cost or market) would exceed 5% of the value of the Funds net assets of which not more than 2% of the value of the Funds net assets may be invested in warrants not listed on the NYSE or the
American Stock Exchange.
3. Mineral Exploration. The Fund may not invest in oil, gas, or other mineral exploration or development
programs, or leases, although the Fund may invest in securities of companies involved in these programs or leases.
4. Pledging. The Fund
may not pledge more than 10% of its assets, except as provided in this Statement of Additional Information and in the Prospectus.
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5. Hedging. The Fund may not (a) enter into forward foreign currency exchange or futures
contracts or foreign currency options contracts to sell foreign currencies, except for the purpose of hedging to protect portfolio securities against the decline in the value of currency or to
lock-in
the
dollar value of an anticipated disbursement or receipt in a foreign currency, (b) purchase and write put and call options on stock indexes, purchase and sell stock index futures and invest in interest in rate futures contracts and options on
interest rate futures contracts, except for the purpose of hedging or (c) enter into foreign currency futures if the aggregate margin deposits made by the Fund exceed 5% of the Funds total assets excluding amounts in-the-money.
6. Affiliate Ownership. The Fund may not purchase or retain securities of any company if, to the knowledge of GEAM or the Funds
Trustees, officers or trustees of the Fund or officers and directors of GEAM individually own more than 1/2 of 1% of the outstanding securities of the company and together they beneficially own more than 5% of the securities.
7. Other Investment Companies. The Fund may not (a) invest in the securities of other investment companies except by purchase in the open
market where no commission or profit to a sponsor or dealer results, other than customary brokers commission; (b) invest in the securities of closed-end investment companies if the Fund would own more than 3% of the total outstanding
voting stock of the company or more than 5% of the value of the Funds total assets would be invested in the securities of any one investment company or the aggregate investment by the Fund in all investment companies would have a value in
excess of 10% of the Funds total assets. The limitations described above do not apply to the extent an investment is otherwise permitted by applicable law or if the investment is part of a plan of merger, consolidation, reorganization or
acquisition.
Notes to Non-Fundamental Investment Restrictions for the Diversified Fund
The percentage limitations in the restrictions listed above apply at the time of purchases of securities and a later increase or decrease in percentage
resulting from a change in value of net assets, outstanding securities, or in any ratings, will not be deemed to result in a violation of the restriction.
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