As filed with the Securities and Exchange Commission on June 30, 2006
Securities Act File No. 333-61831
Investment Company Act File No. 811-05410
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
Registration Statement Under The Securities Act Of 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 16 /X/
and/or
Registration Statement Under The Investment Company Act Of 1940 /X/
Amendment No. 65 /X/
(Check appropriate box or boxes)
ING PRIME RATE TRUST
(Exact Name of Registrant Specified in Charter)
7337 E. Doubletree Ranch Road
Scottsdale, AZ 85258
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 992-0180
Huey P. Falgout, Jr. With copies to:
ING Investments, LLC Jeffrey S. Puretz, Esq.
7337 East Doubletree Ranch Road Dechert LLP
Scottsdale, AZ 85258 1775 I Street, NW
(Name and Address of Agent for Service) Washington, DC 20006
______________
APPROXIMATE DATE OF PROPOSED OFFERING:
As soon as practical after the effective date of this Registration Statement
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment
plan, check the following box. /X/
It is proposed that this filing will become effective:
/X/ When declared effective pursuant to Section 8(c) of the Securities Act of
1933.
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ING PRIME RATE TRUST (25 MILLION)
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement consists of the following papers and documents:
- Cover Sheet
- Contents of Registration Statement
- Supplement dated June 30, 2006.
- ING Prime Rate Trust (25 Million Common Shares) Prospectus dated June
30, 2006.
- ING Prime Rate Trust Statement of Additional Information dated June 30,
2006.
- Part C
- Signature Page
ING PRIME RATE TRUST ("REGISTRANT")
Supplement dated June 30, 2006
to the current Prospectuses
Dated June 30, 2006
The Prospectuses for the Registrant are hereby supplemented with the following
information relating to "Information Regarding Trading of ING's U.S. Mutual
Funds:"
INFORMATION REGARDING TRADING OF ING'S U.S. MUTUAL FUNDS
As discussed in earlier supplements, ING Investments, LLC ("Investments"), the
adviser to the ING Funds, has reported to the Boards of Directors/Trustees (the
"Boards") of the ING Funds that, like many U.S. financial services companies,
Investments and certain of its U.S. affiliates have received informal and formal
requests for information since September 2003 from various governmental and
self-regulatory agencies in connection with investigations related to mutual
funds and variable insurance products. Investments has advised the Boards that
it and its affiliates have cooperated fully with each request.
In addition to responding to regulatory and governmental requests, Investments
reported that management of U.S. affiliates of ING Groep N.V., including
Investments (collectively, "ING"), on their own initiative, have conducted,
through independent special counsel and a national accounting firm, an extensive
internal review of trading in ING insurance, retirement, and mutual fund
products. The goal of this review was to identify any instances of inappropriate
trading in those products by third parties or by ING investment professionals
and other ING personnel. ING's internal review related to mutual fund trading is
now substantially completed. ING has reported that, of the millions of customer
relationships that ING maintains, the internal review identified several
isolated arrangements allowing third parties to engage in frequent trading of
mutual funds within ING's variable insurance and mutual fund products, and
identified other circumstances where frequent trading occurred, despite measures
taken by ING intended to combat market timing. ING further reported that each of
these arrangements has been terminated and fully disclosed to regulators. The
results of the internal review were also reported to the independent members of
the Boards.
Investments has advised the Boards that most of the identified arrangements were
initiated prior to ING's acquisition of the businesses in question in the U.S.
Investments further reported that the companies in question did not receive
special benefits in return for any of these arrangements, which have all been
terminated.
Based on the internal review, Investments has advised the Boards that the
identified arrangements do not represent a systemic problem in any of the
companies that were involved.
In September 2005, ING Funds Distributor, LLC ("IFD"), the distributor of
certain ING Funds, settled an administrative proceeding with the NASD regarding
three
arrangements, dating from 1995, 1996 and 1998, under which the administrator to
the then-Pilgrim Funds, which subsequently became part of the ING Funds, entered
into formal and informal arrangements that permitted frequent trading. Under the
terms of the Letter of Acceptance, Waiver and Consent ("AWC") with the NASD,
under which IFD neither admitted nor denied the allegations or findings, IFD
consented to the following sanctions: (i) a censure; (ii) a fine of $1.5
million; (iii) restitution of approximately $1.44 million to certain ING Funds
for losses attributable to excessive trading described in the AWC; and
(iv) agreement to make certification to NASD regarding the review and
establishment of certain procedures.
In addition to the arrangements discussed above, Investments reported to the
Boards that, at this time, these instances include the following, in addition to
the arrangements subject to the AWC discussed above:
- Aeltus Investment Management, Inc. (a predecessor entity to ING
Investment Management Co.) identified two investment professionals who
engaged in extensive frequent trading in certain ING Funds. One was
subsequently terminated for cause and incurred substantial financial
penalties in connection with this conduct and the second has been
disciplined.
- ReliaStar Life Insurance Company ("ReliaStar") entered into agreements
seven years ago permitting the owner of policies issued by the insurer
to engage in frequent trading and to submit orders until 4pm Central
Time. In 2001 ReliaStar also entered into a selling agreement with a
broker-dealer that engaged in frequent trading. Employees of ING
affiliates were terminated and/or disciplined in connection with these
matters.
- In 1998, Golden American Life Insurance Company entered into
arrangements permitting a broker-dealer to frequently trade up to
certain specific limits in a fund available in an ING variable annuity
product. No employee responsible for this arrangement remains at the
company.
For additional information regarding these matters, you may consult the Form 8-K
and Form 8-K/A for each of four life insurance companies, ING USA Annuity and
Life Insurance Company, ING Life Insurance and Annuity Company, ING Insurance
Company of America, and ReliaStar Life Insurance Company of New York, each filed
with the Securities and Exchange Commission (the "SEC") on October 29, 2004 and
September 8, 2004. These Forms 8-K and Forms 8-K/A can be accessed through the
SEC's Web site at http://www.sec.gov. Despite the extensive internal review
conducted through independent special counsel and a national accounting firm,
there can be no assurance that the instances of inappropriate trading reported
to the Boards are the only instances of such trading respecting the ING Funds.
Investments reported to the Boards that ING is committed to conducting its
business with the highest standards of ethical conduct with zero tolerance for
noncompliance. Accordingly, Investments advised the Boards that ING management
was disappointed that its voluntary internal review identified these situations.
Viewed in the context of the breadth and magnitude of its U.S. business as a
whole, ING management does not believe
2
that ING's acquired companies had systemic ethical or compliance issues in these
areas. Nonetheless, Investments reported that given ING's refusal to tolerate
any lapses, it has taken the steps noted below, and will continue to seek
opportunities to further strengthen the internal controls of its affiliates.
- ING has agreed with the ING Funds to indemnify and hold harmless the ING
Funds from all damages resulting from wrongful conduct by ING or its
employees or from ING's internal investigation, any investigations
conducted by any governmental or self-regulatory agencies, litigation
or other formal proceedings, including any proceedings by the SEC.
Investments reported to the Boards that ING management believes that
the total amount of any indemnification obligations will not be
material to ING or its U.S. business.
- ING updated its Code of Conduct for employees reinforcing its employees'
obligation to conduct personal trading activity consistent with the
law, disclosed limits, and other requirements.
- The ING Funds, upon a recommendation from ING, updated their respective
Codes of Ethics applicable to investment professionals with ING
entities and certain other fund personnel, requiring such personnel to
pre-clear any purchases or sales of ING Funds that are not systematic
in nature (i.e., dividend reinvestment), and imposing minimum holding
periods for shares of ING Funds.
- ING instituted excessive trading policies for all customers in its
variable insurance and retirement products and for shareholders of the
ING Funds sold to the public through financial intermediaries. ING
does not make exceptions to these policies.
- ING reorganized and expanded its U.S. Compliance Department, and created
an Enterprise Compliance team to enhance controls and consistency in
regulatory compliance.
OTHER REGULATORY MATTERS.
The New York Attorney General and other federal and state regulators are also
conducting broad inquiries and investigations involving the insurance industry.
These initiatives currently focus on, among other things, compensation and other
sales incentives; potential conflicts of interest; potential anti-competitive
activity; reinsurance; marketing practices (including suitability); specific
product types (including group annuities and indexed annuities); fund selection
for investment products and brokerage sales; and disclosure. It is likely that
the scope of these industry investigations will further broaden before they
conclude. ING has received formal and informal requests in connection with such
investigations, and is cooperating fully with each request. In connection with
one such investigation, affiliates of Investments have been named in a petition
for relief and cease and desist order filed by the New Hampshire Bureau of
Securities Regulation concerning ING's administration of the New Hampshire state
employees deferred compensation plan. ING is cooperating with this regulator to
resolve the matter. Other federal and state regulators could initiate similar
actions in this or other areas of ING's businesses.
3
These regulatory initiatives may result in new legislation and regulation that
could significantly affect the financial services industry, including businesses
in which ING is engaged.
In light of these and other developments, ING continuously reviews whether
modifications to its business practices are appropriate.
At this time, in light of the current regulatory factors, ING U.S. is actively
engaged in reviewing whether any modifications in our practices are appropriate
for the future.
There can be no assurance that these matters, or the adverse publicity
associated with them, will not result in increased fund redemptions, reduced
sale of fund shares, or other adverse consequences to ING Funds.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
4
PROSPECTUS
PROSPECTUS
JUNE 30, 2006
25,000,000 COMMON SHARES
ING PRIME RATE TRUST
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT ING PRIME RATE TRUST
("TRUST") THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. YOU SHOULD
READ IT CAREFULLY BEFORE YOU INVEST, AND KEEP IT FOR FUTURE REFERENCE.
THE TRUST HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC") A
STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED JUNE 30, 2006 CONTAINING
ADDITIONAL INFORMATION ABOUT THE TRUST. THE SAI IS INCORPORATED BY REFERENCE IN
ITS ENTIRETY INTO THIS PROSPECTUS. YOU MAY OBTAIN A FREE COPY OF THE SAI, ANNUAL
SHAREHOLDER REPORT AND SEMI-ANNUAL SHAREHOLDER REPORT BY CONTACTING THE TRUST AT
(800) 992-0180 OR BY WRITING TO THE TRUST AT 7337 EAST DOUBLETREE RANCH ROAD,
SCOTTSDALE, ARIZONA 85258. THE TRUST'S SAI AND ANNUAL AND SEMI-ANNUAL
SHAREHOLDER REPORTS ARE AVAILABLE, FREE OF CHARGE, ON THE TRUST'S WEBSITE AT
www.ingfunds.com. THE PROSPECTUS, SAI AND OTHER INFORMATION ABOUT THE TRUST ARE
ALSO AVAILABLE ON THE SEC'S WEBSITE (http://www.sec.gov). THE TABLE OF CONTENTS
FOR THE SAI APPEARS ON PAGE 30 OF THIS PROSPECTUS.
COMMON SHARES OF THE TRUST TRADE ON THE NEW YORK STOCK EXCHANGE (THE "NYSE")
UNDER THE SYMBOL PPR.
MARKET FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT THE
TRUST. THERE IS NO GUARANTEE THAT THE TRUST WILL ACHIEVE ITS INVESTMENT
OBJECTIVE. INVESTMENT IN THE TRUST INVOLVES CERTAIN RISKS AND SPECIAL
CONSIDERATIONS, INCLUDING RISKS ASSOCIATED WITH THE TRUST'S USE OF LEVERAGE. SEE
"RISK FACTORS AND SPECIAL CONSIDERATIONS" ON PAGES 4 AND 15 FOR A DISCUSSION OF
ANY FACTORS THAT MAKE INVESTMENT IN THE TRUST SPECULATIVE OR HIGH RISK.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[ING LOGO]
WHAT'S INSIDE
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[GRAPHIC] INVESTMENT OBJECTIVE
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES This Prospectus describes ING Prime
Rate Trust's investment objective,
principal investment strategies and
risks.
[GRAPHIC] RISKS
You'll also find:
WHAT YOU PAY TO INVEST.
[GRAPHIC] WHAT YOU PAY TO INVEST A list of the fees and expenses you
pay -- both directly and indirectly
-- when you invest in ING Prime Rate
Trust.
Introduction to ING Prime Rate Trust 1
Prospectus Synopsis 2
What You Pay To Invest -- Trust Expenses 6
Financial Highlights 8
Trading and NAV Information 10
Investment Objective and Policies 11
The Trust's Investments 13
Risk Factors and Special Considerations 15
Transaction Policies 20
Plan of Distribution 21
Use of Proceeds 22
Dividends and Distributions 22
Investment Management and Other Service Providers 23
Description of the Trust 25
Description of Capital Structure 27
Tax Matters 28
More Information 29
Statement of Additional Information Table of Contents 30
(THIS PAGE INTENTIONALLY LEFT BLANK)
INTRODUCTION TO ING PRIME RATE TRUST
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THIS PROSPECTUS IS DESIGNED TO HELP YOU MAKE AN INFORMED DECISION ABOUT MAKING
AN INVESTMENT IN ING PRIME RATE TRUST ("TRUST"). PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE.
Who should invest in the Trust?
ING PRIME RATE TRUST MAY BE A SUITABLE INVESTMENT IF YOU:
- are seeking a high level of current income; and
- are willing to accept the risks associated with an investment in a
leveraged portfolio consisting primarily of senior loans that are
typically below investment grade credit quality.
DESCRIPTION OF THE TRUST
The Trust is a diversified, closed-end management investment company that
seeks to provide investors with as high a level of current income as is
consistent with the preservation of capital. The Trust seeks to achieve
this objective by investing in a professionally managed portfolio comprised
primarily of senior loans, an investment typically not available directly
to individual investors.
Since the senior loans in the Trust's portfolio typically are below
investment grade credit quality and the portfolio is leveraged, the Trust
has speculative characteristics. The Trust cannot guarantee that it will
achieve its investment objective.
Common Shares of the Trust trade on the NYSE under the symbol PPR.
The Trust's investment adviser is ING Investments, LLC. The Trust's
sub-adviser is ING Investment Management Co.
[SIDENOTE]
Risk is the potential that your investment will lose money or not earn as much
as you hope. All mutual funds have varying degrees of risk, depending upon the
securities in which they invest.
This Trust involves certain risks and special considerations, including risks
associated with investing in below investment grade assets and risks associated
with the Trust's use of borrowing and other leverage strategies. See "Risk
Factors and Special Considerations" on pages 4 and 15.
Please read this Prospectus carefully to be sure you understand the principal
investment strategies and risks associated with the Trust. You should consult
the SAI for a complete list of the principal investment strategies and risks.
[GRAPHIC]
If you have any questions about the Trust, please call your investment
professional or us at 1-800-992-0180.
[GRAPHIC] If you have any questions, please call (800) 992-0180.
Introduction to the Trust 1
PROSPECTUS SYNOPSIS
--------------------------------------------------------------------------------
The following synopsis is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus.
DESCRIPTION OF
THE TRUST
THE TRUST The Trust is a diversified, closed-end
management investment company registered under
the Investment Company Act of 1940, as amended
("1940 Act"). It was organized as a
Massachusetts business trust on December 2,
1987. As of June 15, 2006, the Trust's net
asset value ("NAV") per Common Share was $7.48.
NYSE LISTED As of June 15, 2006, the Trust had 145,033,235
Common Shares outstanding, which are traded on
the NYSE under the symbol PPR. At that date,
the last reported sales price of a Common Share
of the Trust was $7.01.
INVESTMENT OBJECTIVE To provide investors with as high a level of
current income as is consistent with the
preservation of capital. There is no assurance
that the Trust will achieve its investment
objective.
ADVISER/SUB-ADVISER The Trust's investment adviser is ING
Investments, LLC ("ING Investments" or
"Adviser"), an Arizona limited liability
company. As of March 31, 2006, ING Investments
managed approximately $44.5 billion in assets.
The Adviser is an indirect, wholly-owned
subsidiary of ING Groep N.V. ("ING Groep")
(NYSE: ING). ING Groep is one of the largest
financial services organizations in the world
with approximately 113,000 employees. Based in
Amsterdam, ING Groep offers an array of
banking, insurance and asset management
services to both individual and institutional
investors.
The Adviser receives an annual fee, payable
monthly, in an amount equal to 0.80% of the
Trust's average daily gross asset value, minus
the sum of the Trust's accrued and unpaid
dividends on any outstanding preferred shares
and accrued liabilities (other than liabilities
for the principal amount of any borrowings
incurred, commercial paper or notes issued by
the Trust and the liquidation preference of any
outstanding preferred shares) ("Managed
Assets"). This definition includes the assets
acquired through the Trust's use of leverage.
ING Investment Management Co. ("ING IM" or
"Sub-Adviser") serves as sub-adviser to the
Trust. See "Investment Management and Other
Service Providers -- Sub-Adviser" on page 23.
ING IM is an affiliate of the Adviser.
DISTRIBUTIONS Income dividends on Common Shares accrue and
are declared and paid monthly. Income dividends
may be distributed in cash or reinvested in
additional full and fractional shares of the
Trust through the Trust's Shareholder
Investment Program.
PRINCIPAL INVESTMENT The Trust seeks to achieve its investment
STRATEGIES objective by investing, under normal
circumstances, at least 80% of its net assets,
plus the amount of any borrowings for
investment purposes, in U.S. dollar denominated
floating rate secured senior loans ("Senior
Loans"). The Trust will provide shareholders
with at least 60 days' prior notice of any
change in this investment policy. Under normal
circumstances, the Trust invests at least 80%
of its assets in Senior Loans made to
corporations or other business entities
organized under U.S. or Canadian law and that
are domiciled in the U.S., Canada or in U.S.
territories or possessions.
The Senior Loans in which the Trust invests
either hold the most senior position in the
capital structure of the borrower or hold an
equal ranking with other senior debt or have
characteristics that the Adviser or Sub-Adviser
believes justifies treatment as senior debt.
These Senior Loans are typically below
investment grade quality.
The Trust typically makes its investments in
Senior Loans by purchasing a portion of the
overall loan, i.e., the Trust becomes one of a
number of lenders participating in the loan.
The Trust may also make its investments in
Senior Loans through the use of derivative
instruments such as participations,
credit-linked notes, credit default swaps, and
total return swaps as long as the reference
obligation for any such instrument is a Senior
Loan. Investments through the use of such
derivative instruments involve counterparty
risk, i.e., the risk that the party from which
such instrument is purchased will not perform
as agreed. The Trust seeks to minimize such
counterparty risk by purchasing such
investments from large, well established and
highly rated counter-parties.
2 Prospectus Synopsis
PROSPECTUS SYNOPSIS
--------------------------------------------------------------------------------
OTHER INVESTMENT Assets not invested in Senior Loans may be
STRATEGIES AND POLICIES invested in unsecured loans, subordinated
loans, short-term debt securities, and equities
acquired in connection with investments in
loans. See "Investment Objective and Policies"
on page 11.
Loans in which the Trust invests typically have
interest rates which reset at least quarterly
and may reset as frequently as daily. The
maximum duration of an interest rate reset on
any loan in which the Trust may invest is one
year. In order to achieve overall reset
balance, the Trust will ordinarily maintain a
dollar-weighted average time until the next
interest rate adjustment on its loans of 90
days or less.
Normally at least 80% of the Trust's portfolio
will be invested in Senior Loans with
maturities of one to ten years. The maximum
maturity on any loan in which the Trust may
invest is ten years.
To seek to increase the yield on the Common
Shares, the Trust may engage in lending its
portfolio securities. Such lending will be
fully secured by investment grade collateral
held by an independent agent.
The Trust may hold a portion of its assets in
short-term interest bearing instruments.
Moreover, in periods when, in the opinion of
the Adviser or Sub-Adviser, a temporary
defensive position is appropriate, up to 100%
of the Trust's assets may be held in cash or
short-term interest bearing instruments. The
Trust may not achieve its investment objective
when pursuing a temporary defensive position.
The Trust may invest up to 20% of its total
assets in U.S. dollar denominated loans,
secured or unsecured, to borrowers that are
organized or located in countries outside the
United States and Canada or U.S. territories
and possessions and up to 15% of its total
assets in investments denominated in the
Organization for Economic Co-operation and
Development ("OECD") currencies (including the
euro), other than the U.S. dollar.
The Trust may engage in executing repurchase
and reverse repurchase agreements.
LEVERAGE To seek to increase the yield on the Common
Shares, the Trust employs financial leverage by
borrowing money and issuing preferred shares.
The timing and terms of leverage will be
determined by the Trust's Board of Trustees
("Board") in consultation with the Adviser or
Sub-Adviser. See "Risk Factors and Special
Considerations -- Leverage" on page 16.
BORROWINGS Under the 1940 Act, the Trust may borrow up to
an amount equal to 33 1/3% of its total assets
(including the proceeds of the borrowings) less
all liabilities other than borrowings. The
Trust's obligations to holders of its debt are
senior to its ability to pay dividends on, or
repurchase, Common Shares and preferred shares,
or to pay holders of Common Shares and
preferred shares in the event of liquidation.
PREFERRED SHARES Under the 1940 Act, the Trust may issue
preferred shares so long as immediately after
any issuance of preferred shares the value of
the Trust's total assets (less all Trust
liabilities and indebtedness that is not senior
indebtedness) is at least twice the amount of
the Trust's senior indebtedness plus the
involuntary liquidation preference of all
outstanding shares.
The Trust is authorized to issue an unlimited
number of shares of a class of preferred stock
in one or more series. In November 2000, the
Trust issued 3,600 shares each of Series M, T,
W, Th and F Auction Rate Cumulative Preferred
Shares, $0.01 par value, $25,000 liquidation
preference per share, for a total issuance of
$450 million ("Preferred Shares"). The Trust's
obligations to holders of the Preferred Shares
are senior to its ability to pay dividends on,
or repurchase, Common Shares, or to pay holders
of Common Shares in the event of liquidation.
The 1940 Act also requires that the holders of
the Preferred Shares, voting as a separate
class, have the right to:
- elect at least two trustees at all
times; and
- elect a majority of the trustees at
any time when dividends on any series
of Preferred Shares are unpaid for
two full years.
In each case, the holders of Common Shares
voting separately as a class will elect the
remaining trustees.
[GRAPHIC] If you have any questions, please call (800) 992-0180.
Prospectus Synopsis 3
PROSPECTUS SYNOPSIS
--------------------------------------------------------------------------------
DIVERSIFICATION The Trust maintains a diversified investment
portfolio, an investment strategy which seeks
to limit exposure to any one issuer or
industry.
As a diversified investment company, the Trust
may not make investments in any one issuer
(other than the U.S. government) if,
immediately after such purchase or acquisition,
more than 5% of the value of the Trust's total
assets would be invested in such issuer, or the
Trust would own more than 25% of any
outstanding issue. The Trust will consider a
borrower on a loan, including a loan
participation, to be the issuer of that loan.
In addition, with respect to a loan under which
the Trust does not have privity with the
borrower or would not have a direct cause of
action against the borrower in the event of the
failure of the borrower to pay scheduled
principal or interest, the Trust will also
separately meet the foregoing requirements and
consider each interpositioned bank (a lender
from which the Trust acquires a loan) to be an
issuer of the loan. This investment strategy is
a fundamental policy that may not be changed
without shareholder approval. With respect to
no more than 25% of its total assets, the Trust
may make investments that are not subject to
the foregoing restrictions.
CONCENTRATION In addition, a maximum of 25% of the Trust's
total assets, measured at the time of
investment, may be invested in any one
industry. This investment strategy is also a
fundamental policy that may not be changed
without shareholder approval.
PLAN OF DISTRIBUTION The Common Shares are offered by the Trust
through the Trust's Shareholder Investment
Program. The Shareholder Investment Program
allows participating shareholders to reinvest
all dividends in additional shares of the
Trust, and also allows participants to purchase
additional Common Shares through optional cash
investments in amounts ranging from a minimum
of $100 to a maximum of $100,000 per month. The
Trust and ING Funds Distributor, LLC ("ING
Funds Distributor" or "Distributor") reserve
the right to reject any purchase order. Please
note that cash, travelers checks, third-party
checks, money orders and checks drawn on
non-U.S. banks (even if payment may be effected
through a U.S. bank) generally will not be
accepted. Common Shares may be issued by the
Trust under the Shareholder Investment Program
only if the Trust's Common Shares are trading
at a premium to NAV. If the Trust's Common
Shares are trading at a discount to NAV, Common
Shares purchased under the Shareholder
Investment Program will be purchased on the
open market. See "Plan of Distribution" on
pages 21 and 22.
Shareholders may elect to participate in the
Shareholder Investment Program by telephoning
the Trust or submitting a completed
Participation Form to DST Systems, Inc.
("DST").
Common Shares also may be offered pursuant to
privately negotiated transactions between the
Trust or the Distributor and individual
investors. Common Shares of the Trust issued in
connection with privately negotiated
transactions will be issued at the greater of
(i) NAV per Common Share of the Trust's Common
Shares or (ii) at a discount ranging from 0% to
5% of the average daily market price of the
Trust's Common Shares at the close of business
on the two business days preceding the date
upon which Common Shares are sold pursuant to
the privately negotiated transaction. See "Plan
of Distribution" on pages 21 and 22.
ADMINISTRATOR The Trust's administrator is ING Funds
Services, LLC ("Administrator"). The
Administrator is an affiliate of the Adviser.
The Administrator receives an annual fee,
payable monthly, in a maximum amount equal to
0.25% of the Trust's Managed Assets.
RISK FACTORS
AND SPECIAL
CONSIDERATIONS
CREDIT RISK ON SENIOR The Trust invests a substantial portion of its
LOANS assets in below investment grade senior loans
and other below investment grade assets. Below
investment grade loans involve a greater risk
that borrowers may not make timely payment of
the interest and principal due on their loans.
They also involve a greater risk that the value
of such loans could decline significantly. If
borrowers do not make timely payments of
4 Prospectus Synopsis
PROSPECTUS SYNOPSIS
--------------------------------------------------------------------------------
the interest due on their loans, the yield on
the Trust's Common Shares will decrease. If
borrowers do not make timely payment of the
principal due on their loans, or if the value
of such loans decreases, the Trust's NAV will
decrease.
INTEREST RATE RISK Changes in short-term market interest rates
will directly affect the yield on the Trust's
Common Shares. If short-term market interest
rates fall, the yield on the Trust's Common
Shares will also fall. To the extent that the
interest rate spreads on loans in the Trust's
portfolio experience a general decline, the
yield on the Trust's Common Shares will fall
and the value of the Trust's assets may
decrease, which will cause the Trust's NAV to
decrease. Conversely, when short-term market
interest rates rise, because of the lag between
changes in such short-term rates and the
resetting of the floating rates on assets in
the Trust's portfolio, the impact of rising
rates will be delayed to the extent of such
lag.
DISCOUNT FROM NAV As with any security, the market value of the
Common Shares may increase or decrease from the
amount that you paid for the Common Shares.
The Trust's Common Shares may trade at a
discount to NAV. This is a risk separate and
distinct from the risk that the Trust's NAV per
Common Share may decrease.
LEVERAGE The Trust's use of leverage through borrowings
and the issuance of Preferred Shares can
adversely affect the yield on the Trust's
Common Shares. To the extent that the Trust is
unable to invest the proceeds from the use of
leverage in assets which pay interest at a rate
which exceeds the rate paid on the leverage,
the yield on the Trust's Common Shares will
decrease. In addition, in the event of a
general market decline in the value of assets
such as those in which the Trust invests, the
effect of that decline will be magnified in the
Trust because of the additional assets
purchased with the proceeds of the leverage. As
of June 15, 2006, the Trust had $558 million of
borrowings outstanding under two credit
facilities totaling $625, and $450 million of
Preferred Shares issued and outstanding.
LIMITED SECONDARY Because of the limited secondary market for
MARKET FOR LOANS loans, the Trust may be limited in its ability
to sell loans in its portfolio in a timely
fashion and/or at a favorable price.
DEMAND FOR LOANS An increase in demand for loans may adversely
affect the rate of interest payable on new
loans acquired by the Trust, and it may also
increase the price of loans in the secondary
market.
IMPACT OF SHAREHOLDER The issuance of Common Shares through the
INVESTMENT PROGRAM AND Shareholder Investment Program and/or through
PRIVATELY NEGOTIATED privately negotiated transactions may have an
TRANSACTIONS adverse effect on prices in the secondary
market for the Trust's Common Shares by
increasing the number of Common Shares
available for sale. In addition, the Common
Shares may be issued at a discount to the
market price for such Common Shares, which may
put downward pressure on the market price for
Common Shares of the Trust.
[GRAPHIC] If you have any questions, please call (800) 992-0180.
Prospectus Synopsis 5
WHAT YOU PAY TO INVEST -- TRUST EXPENSES
--------------------------------------------------------------------------------
The cost you pay to invest in the Trust includes the expenses incurred by the
Trust. In accordance with SEC requirements, the table below shows the expenses
of the Trust, including interest expense on borrowings, as a percentage of the
average net assets of the Trust, and not as a percentage of gross assets or
Managed Assets. By showing expenses as a percentage of net assets, expenses are
not expressed as a percentage of all of the assets that are invested for the
Trust. The Table below assumes that the Trust has issued $450 million of
Preferred Shares and has borrowed an amount equal to 25% of its Managed Assets.
For information about the Trust's expense ratios if the Trust had not borrowed
or issued Preferred Shares, see "Risk Factors and Special Considerations --
Annual Expenses Without Borrowings or Preferred Shares."
--------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Shareholder Investment Program Fees NONE
Privately Negotiated Transactions
Maximum Sales Load on Your Investment
(as a percentage of offering price) 3.00%
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES)
Management and Administrative Fees(1) 1.98%
Interest Expense on Borrowed Funds 2.32%
Other Operating Expenses(2) 0.34%
Total Annual Expenses(3) 4.64%
(1) Pursuant to the Investment Advisory Agreement with the Trust, ING
Investments is paid a fee of 0.80% of the Trust's Managed Assets. Pursuant
to its Administration Agreement with the Trust, the Trust's Administrator
is paid a fee of 0.25% of the Trust's Managed Assets. See "Investment
Management and Other Service Providers -- The Administrator."
(2) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year, which, in turn, are based on "other operating expenses" for
the fiscal year ended February 28, 2006, and do not include the expenses of
borrowing.
(3) If the Total Annual Expenses of the Trust were expressed as a percentage of
Managed Assets (assuming the same 25% borrowing), the Total Annual Expense
ratio would be 2.46%.
6 What You Pay to Invest -- Trust Expenses
WHAT YOU PAY TO INVEST -- TRUST EXPENSES
--------------------------------------------------------------------------------
EXAMPLES
The following hypothetical Examples show the amount of the expenses that an
investor in the Trust would bear on a $1,000 investment that is held for the
different time periods in the table. The examples assume that all dividends and
other distributions are reinvested at NAV and that the percentage amounts listed
under Total Annual Expenses remain the same in the years shown. The tables and
the assumption in the hypothetical examples of a 5.00% annual return are
required by regulations of the SEC applicable to all investment companies. The
assumed 5.00% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Trust's Common Shares. For more complete
descriptions of certain of the Trust's costs and expenses, see "Investment
Management and Other Service Providers."
Example #1
The following Example applies to shares issued in connection with the Trust's
Shareholder Investment Program. This example does not take into account whether
such shares are purchased at a discount or a premium to the Trust's NAV.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
You would pay the following expenses on
a $1,000 investment, assuming a 5%
annual return and where the Trust has
borrowed in an amount equal to 25% of
its Managed Assets $47 $143 $244 $512
You would pay the following expenses on
a $1,000 investment, assuming a 5%
annual return and where the Trust has
not borrowed $18 $ 57 $ 99 $214
Example #2
The following Example applies to shares issued in connection with privately
negotiated transactions, which have the maximum front-end sales load of 3%.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
You would pay the following expenses on
a $1,000 investment, assuming a 5%
annual return and where the Trust has
borrowed in an amount equal to 25% of
its Managed Assets $75 $169 $266 $526
You would pay the following expenses on
a $1,000 investment, assuming a 5%
annual return and where the Trust has
not borrowed $48 $ 86 $126 $237
The purpose of each table is to assist you in understanding the various costs
and expenses that an investor in the Trust will bear directly or indirectly.
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
[GRAPHIC] If you have any questions, please call (800) 992-0180.
What You Pay to Invest -- Trust Expenses 7
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS TABLE
The table below sets forth selected financial information which has been derived
from the financial statements in the Trust's annual shareholder report dated as
of February 28, 2006. The information in the table below has been audited by
KPMG LLP, an independent registered public accounting firm. A report of the
Trust's independent registered public accounting firm along with the Trust's
financial statements is included in the Trust's annual shareholder report dated
as of February 28, 2006. A free copy of the annual shareholder report may be
obtained by calling (800) 992-0180.
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
-----------------------------------------------------
2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 7.47 7.34 6.73 7.20 8.09
Income from investment operations:
Net investment income $ 0.57 0.45 0.46 0.50 0.74
Net realized and unrealized gain (loss) on investments $ 0.12 0.16 0.61 (0.47) (0.89)
Total from investment operations $ 0.69 0.61 1.07 0.03 (0.15)
Distributions to Common Shareholders from net investment income $ (0.46) (0.43) (0.42) (0.45) (0.63)
Distribution to Preferred Shareholders $ (0.11) (0.05) (0.04) (0.05) (0.11)
Net asset value, end of year $ 7.59 7.47 7.34 6.73 7.20
Closing market price at end of period $ 7.02 7.56 7.84 6.46 6.77
Total Investment Return(1)
Total investment return at closing market price(2) % (0.82) 2.04 28.77 2.53 (9.20)
Total investment return at net asset value(3) % 8.53 7.70 15.72 0.44 (3.02)
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 1,100,671 1,082,748 1,010,325 922,383 985,982
Preferred Shares-Aggregate amount outstanding (000's) $ 450,000 450,000 450,000 450,000 450,000
Liquidation and market value per share of Preferred Shares $ 25,000 25,000 25,000 25,000 25,000
Borrowings at end of year (000's) $ 465,000 496,000 225,000 167,000 282,000
Asset coverage per $1,000 of debt(4) $ 2,203 2,140 2,500 2,500 2,350
Average borrowings (000's) $ 509,178 414,889 143,194 190,671 365,126
RATIOS TO AVERAGE NET ASSETS INCLUDING PREFERRED SHARES(5)
Expenses (before interest and other fees related to revolving
credit facility) % 1.64 1.60 1.45 1.49 1.57
Net expenses after expense reimbursement % 3.02 2.21 1.65 1.81 2.54
Gross expenses prior to expense reimbursement % 3.02 2.22 1.65 1.81 2.54
Net investment income % 5.44 4.21 4.57 4.97 6.83
RATIOS TO AVERAGE NET ASSETS PLUS BORROWINGS
Expenses (before interest and other fees related to revolving
credit facility) % 1.58 1.63 1.84 1.82 1.66
Net expenses after expense reimbursement % 2.90 2.26 2.09 2.23 2.70
Gross expenses prior to expense reimbursement % 2.90 2.27 2.09 2.23 2.70
Net investment income % 5.24 4.32 5.82 6.10 7.24
RATIOS TO AVERAGE NET ASSETS
Expenses (before interest and other fees related to revolving
credit facility) % 2.33 2.29 2.11 2.19 2.25
Net expenses after expense reimbursement % 4.27 3.17 2.40 2.68 3.64
Gross expenses prior to expense reimbursement % 4.27 3.18 2.40 2.68 3.64
Net investment income % 7.71 6.04 6.68 7.33 9.79
Portfolio turnover rate % 81 93 87 48 53
Common shares outstanding at end of period (000's) 145,033 145,033 137,638 136,973 136,973
8 Financial Highlights
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
---------------------------------------------------------
2001 2000(6) 1999(6) 1998(7) 1997(7)
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period 8.95 9.24 9.34 9.45 9.61
Income from investment operations:
Net investment income 0.88 0.79 0.79 0.87 0.82
Net realized and unrealized gain (loss) on investments (0.78) (0.30) (0.10) (0.13) (0.02)
Total from investment operations 0.10 -- -- -- --
Distributions to Common Shareholders from net investment income (0.86) (0.78) (0.82) (0.85) (0.82)
Distribution to Preferred Shareholders (0.06) -- 0.03 -- --
Net asset value, end of year 8.09 8.95 9.24 9.34 9.45
Closing market price at end of period 8.12 8.25 9.56 10.31 10.00
Total Investment Return(1)
Total investment return at closing market price(2) 9.10 (5.88) 1.11 12.70 15.04(8)
Total investment return at net asset value(3) 0.19 5.67 7.86 8.01 8.06(8)
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) 1,107,432 1,217,339 1,202,565 1,034,403 1,031,089
Preferred Shares-Aggregate amount outstanding (000's) 450,000 -- -- -- --
Liquidation and market value per share of Preferred Shares 25,000 -- -- -- --
Borrowings at end of year (000's) 510,000 484,000 534,000 -- --
Asset coverage per $1,000 of debt(4) 2,150 3,520 3,250 -- --
Average borrowings (000's) 450,197 524,019 490,978 346,110 131,773
RATIOS TO AVERAGE NET ASSETS INCLUDING PREFERRED SHARES(5)
Expenses (before interest and other fees related to revolving
credit facility) 1.62 -- -- -- --
Net expenses after expense reimbursement 3.97 -- -- -- --
Gross expenses prior to expense reimbursement 3.97 -- -- -- --
Net investment income 9.28 -- -- -- --
RATIOS TO AVERAGE NET ASSETS PLUS BORROWINGS
Expenses (before interest and other fees related to revolving
credit facility) 1.31 1.00(7) 1.05(7) 1.04 1.13
Net expenses after expense reimbursement 3.21 -- -- -- --
Gross expenses prior to expense reimbursement 3.21 -- -- -- --
Net investment income 7.50 6.12 6.00 6.91 7.59
RATIOS TO AVERAGE NET ASSETS
Expenses (before interest and other fees related to revolving
credit facility) 1.81 1.43(7) 1.50(7) 1.39 1.29
Net expenses after expense reimbursement 4.45 -- -- -- --
Gross expenses prior to expense reimbursement 4.45 -- -- -- --
Net investment income 10.39 8.77 8.60 9.23 8.67
Portfolio turnover rate 46 71 68 90 82
Common shares outstanding at end of period (000's) 136,847 136,036 130,206 110,764 109,140
-----------------------------------------------------------------------------------------------------------------------------
(1) Total investment return calculations are attributable to common shares.
(2) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the Trust's
dividend reinvestment plan.
(3) Total investment return at net asset value has been calculated assuming a
purchase at net asset value at the beginning of each period and a sale at
net asset value at the end of each period and assumes reinvestment of
dividends and capital gain distributions in accordance with the provisions
of the dividend reinvestment plan. This calculation differs from total
investment return because it excludes the effects of changes in the market
values of the Trust's shares.
(4) Asset coverage represents the total assets available for settlement of
Preferred Stockholder's interest and notes payables in relation to the
Preferred Shareholder interest and notes payable balance outstanding. The
Preferred Shares were first offered November 2, 2000.
(5) Ratios do not reflect the effect of dividend payments to Preferred
Shareholders; income ratios reflect income earned on assets attributable to
the Preferred Shares; ratios do not reflect any add-back for the
borrowings.
(6) The Adviser agreed to reduce its fee for a period of three years from the
Expiration Date of the November 12, 1996 Rights Offering to 0.60% of the
average daily net assets, plus the proceeds of any outstanding borrowings,
over $1.15 billion.
(7) Calculated on total expenses before impact of earnings credits.
(8) Calculation of total return excludes the effects of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
[GRAPHIC] If you have any questions, please call (800) 992-0180.
Financial Highlights 9
TRADING AND NAV INFORMATION
--------------------------------------------------------------------------------
The following table shows for the Trust's Common Shares for the periods
indicated: (1) the high and low closing prices as shown on the NYSE Composite
Transaction Tape; (2) the NAV per Common Share represented by each of the high
and low closing prices as shown on the NYSE Composite Transaction Tape; and (3)
the discount from or premium to NAV per Share (expressed as a percentage)
represented by these closing prices. The table also sets forth the aggregate
number of shares traded as shown on the NYSE Composite Transaction Tape during
the respective quarter.
PREMIUM/
(DISCOUNT)
PRICE NAV TO NAV
--------------- ------------- -------------- REPORTED
CALENDAR QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW NYSE VOLUME
------ ------ ----- ----- ----- ------ -----------
March 31, 2004 $8.170 $7.710 $7.36 $7.34 11.01% 5.04% 18,287,600
June 30, 2004 8.340 7.670 7.41 7.33 13.47 4.07 15,627,844
September 30, 2004 8.150 7.560 7.42 7.35 10.48 2.58 12,768,704
December 31, 2004 7.950 7.240 7.42 7.35 8.16 (2.44) 17,125,504
March 31, 2005 7.830 7.160 7.48 7.38 5.67 (3.49) 13,877,317
June 30, 2005 7.360 6.800 7.46 7.31 (1.34) (7.23) 17,197,500
September 30, 2005 7.200 6.640 7.48 7.36 (3.10) (10.99) 18,052,800
December 31, 2005 6.890 6.460 7.46 7.40 (7.64) (12.94) 29,717,900
March 31, 2006 7.120 6.720 7.62 7.42 (6.19) (9.43) 21,188,110
On June 15, 2006, the last reported sale price of a Common Share of the Trust's
Common Shares on the NYSE was $7.01. The Trust's NAV on June 15, 2006 was $7.48.
See "Transaction Policies -- Net Asset Value." On June 15, 2006 the last
reported sale price of a share of the Trust's Common Shares on the NYSE $7.01
represented a (6.28)% discount below NAV $7.48 as of that date.
The Trust's Common Shares have traded in the market above, at, and below NAV
since March 9, 1992, when the Trust's Common Shares were listed on the NYSE. The
Trust cannot predict whether its Common Shares will trade in the future at a
premium or discount to NAV, and if so, the level of such premium or discount.
Shares of closed-end investment companies frequently trade at a discount from
NAV.
10 Trading and NAV Information
INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Trust's investment objective is to provide investors with as high a level of
current income as is consistent with the preservation of capital. The Trust
seeks to achieve this investment objective by investing in the types of assets
described below:
1. SENIOR LOANS. Under normal circumstances, at least 80% of the Trust's net
assets, plus the amount of any borrowings for investment purposes, will be
invested in Senior Loans. This investment policy may be changed without
shareholder approval so long as the Trust provides its shareholders with at
least 60 days' prior notice of any changes in this investment policy. Under
normal circumstances, the Trust invests at least 80% of its assets in
Senior Loans made to corporations or other business entities organized
under U.S. or Canadian law and that are domiciled in the U.S., Canada or in
U.S. territories or possessions.
The Senior Loans in which the Trust invests either hold the most senior
position in the capital structure of the borrower or hold an equal ranking
with other senior debt or have characteristics that the Adviser or
Sub-Adviser believes justify treatment as senior debt. These Senior Loans
are typically below investment grade credit quality.
The Trust typically makes its investments in Senior Loans by purchasing a
portion of the overall loan, i.e., the Trust becomes one of a number of
lenders participating in the loan. The Trust may also make its investments
in Senior Loans through the use of derivative instruments such as
participations, credit-linked notes, credit default swaps and total return
swaps as long as the reference obligation for any such instrument is a
Senior Loan. Investments through the use of such derivative instruments
involve counterparty risk, i.e., the risk that the party from which such
instrument is purchased will not perform as agreed. The Trust seeks to
minimize such counterparty risk by purchasing such investments only from
large, well established and highly rated counter-parties.
2. OTHER INVESTMENTS. Under normal circumstances, the Trust may invest up to
20% of its total assets, measured at the time of investment, in a
combination of one or more of the following types of investments ("Other
Investments"):
- loans to borrowers organized outside the U.S. or Canada;
- unsecured floating rate loans, notes and other debt instruments;
- floating rate subordinated loans;
- senior tranches of floating rate asset-backed securities, including
structured notes;
- short-term debt securities; and
- equity securities incidental to investment in loans
3. CASH AND SHORT-TERM INSTRUMENTS. Under normal circumstances, the Trust may
invest in cash and/or short-term instruments. During periods when, in the
opinion of the Adviser or Sub-Adviser, a temporary defensive posture in the
market is appropriate, the Trust may hold up to 100% of its assets in cash
and/or short-term instruments.
4. OTHER INVESTMENT STRATEGIES. The Trust may lend its portfolio securities,
on a short-term or long-term basis, in an amount equal to up to 33 1/3% of
its total assets.
FUNDAMENTAL DIVERSIFICATION POLICIES
1. INDUSTRY DIVERSIFICATION. The Trust may invest in any industry. The Trust
may not invest more than 25% of its total assets in any single industry.
2. BORROWER DIVERSIFICATION. As a diversified investment company, the Trust
may not make investments in any one issuer (other than the U.S. government)
if, immediately after such purchase or acquisition, more than 5% of the
value of the Trust's total assets would be invested in such issuer, or the
Trust would own more than 25% of any outstanding issue. The Trust will
consider the borrower on a loan, including a loan participation, to be the
issuer of such loan. With respect to no more than 25% of its total assets,
the Trust may make investments that are not subject to the foregoing
restrictions.
These fundamental diversification policies may only be changed with approval by
a majority of all shareholders, including the vote of a majority of the holders
of Preferred Shares, and holders of any other preferred shares, voting
separately as a class.
INVESTMENT POLICIES
The Adviser and Sub-Adviser follow certain investment policies set by the
Trust's Board. Some of those policies are set forth below. Please refer to the
SAI for additional information on these and other investment policies.
1. LIMITATIONS ON CURRENCIES. The Trust's investments must be denominated in
U.S. dollars, provided that the Trust may invest up to 15% of its total
assets in investments denominated in the OECD currencies (including the
euro), other than the U.S. dollar. The Trust will engage in currency
exchange transactions to seek to hedge, as closely as practicable, 100% of
the economic impact to the Trust arising from foreign currency
fluctuations.
2. MATURITY. Although the Trust has no restrictions on portfolio maturity,
under normal circumstances, at least 80% of the Trust's total assets will
be invested in assets with remaining maturities of one to ten years. The
maximum maturity on any loan in which the Trust can invest is ten years.
3. INTEREST RATE RESETS. Under normal circumstances, at least 80% of the
Trust's total assets will be invested in assets with rates of interest
which reset either daily, monthly, or quarterly. The maximum duration of an
interest rate reset on any loan investment in which the Trust may invest is
one
[GRAPHIC] If you have any questions, please call 1-800-992-0180.
Investment Objective and Policies 11
INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------
year. In addition, under normal circumstances, the Trust will maintain a
dollar-weighted average time until the next interest rate adjustment on its
loan investments of 90 days or less.
4. LIMITATIONS ON OTHER INVESTMENTS. The Trust may also invest up to 20% of
its total assets, measured at the time of investment, in Other Investments.
The following additional limitations apply to Other Investments:
A. UNSECURED DEBT INSTRUMENTS. The Trust may not invest in unsecured
floating rate loans, notes and other debt instruments, whether or not
senior or subordinated, in an aggregate amount that exceeds 20% of the
Trust's total assets, measured at the time of investment.
B. EQUITIES. The Trust may acquire equity securities only as an incident
to the purchase or ownership of a loan or in connection with a
reorganization of a borrower or its debt.
C. SUBORDINATED LOANS. The Trust may not invest in floating rate
subordinated loans, whether or not secured, in an aggregated amount
that exceeds 5% of its total assets, measured at the time of
investment.
5. INVESTMENT QUALITY; CREDIT ANALYSIS. Loans in which the Trust invests
generally are rated below investment grade credit quality or are unrated.
In acquiring a loan, the Adviser or Sub-Adviser will consider some or all
of the following factors concerning the borrower: ability to service debt
from internally generated funds; adequacy of liquidity and working capital;
appropriateness of capital structure; leverage consistent with industry
norms; historical experience of achieving business and financial
projections; the quality and experience of management; and adequacy of
collateral coverage. The Adviser or Sub-Adviser performs its own
independent credit analysis of each borrower. In so doing, the Adviser or
Sub-Adviser may utilize information and credit analyses from agents that
originate or administer loans, other lenders investing in a loan, and other
sources. The Adviser or Sub-Adviser also may communicate directly with
management of the borrowers. These analyses continue on a periodic basis
for any Senior Loan held by the Trust. See "Risk Factors and Special
Considerations -- Credit Risk on Senior Loans."
6. USE OF LEVERAGE. The Trust may borrow money and issue preferred shares to
the fullest extent permitted by the 1940 Act. See "Policy on Borrowing" and
"Policy on Issuance of Preferred Shares" below.
7. SHORT-TERM INSTRUMENTS. Short-term instruments in which the Trust invests
may include (i) commercial paper rated A-1 by Standard and Poor's or P-1 by
Moody's Investors Service, Inc., or of comparable quality as determined by
the Adviser or Sub-Adviser, (ii) certificates of deposit, banker's
acceptances, and other bank deposits and obligations, and (iii) securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
POLICY ON BORROWING
The Trust has a policy of borrowing for investment purposes. The Trust seeks to
use proceeds from borrowing to acquire loans and other investments which pay
interest at a rate higher than the rate the Trust pays on borrowings.
Accordingly, borrowing has the potential to increase the Trust's total income
available to holders of its Common Shares.
The Trust may issue notes, commercial paper, or other evidences of indebtedness
and may be required to secure repayment by mortgaging, pledging, or otherwise
granting a security interest in the Trust's assets. The terms of any such
borrowings are subject to the provisions of the 1940 Act, and also subject to
the more restrictive terms of the credit agreements relating to borrowings and
additional guidelines imposed by rating agencies which are more restrictive than
the provisions of the 1940 Act. The Trust is permitted to borrow an amount equal
to up to 33 1/3%, or such other percentage permitted by law, of its total assets
(including the amount borrowed) less all liabilities other than borrowings. See
"Risk Factors and Special Considerations -- Leverage" and "Risk Factors and
Special Considerations -- Restrictive Covenants and 1940 Act Restrictions."
POLICY ON ISSUANCE OF PREFERRED SHARES
The Trust has a policy of issuing preferred shares for investment purposes. The
Trust seeks to use the proceeds from preferred shares to acquire loans and other
investments which pay interest at a rate higher than the dividends payable on
preferred shares. The terms of the issuance of preferred shares are subject to
the 1940 Act and to additional guidelines imposed by rating agencies, which are
more restrictive than the provisions of the 1940 Act. Under the 1940 Act, the
Trust may issue preferred shares so long as immediately after any issuance of
preferred shares the value of the Trust's total assets (less all Trust
liabilities and indebtedness that is not senior indebtedness) is at least twice
the amount of the Trust's senior indebtedness plus the involuntary liquidation
preference of all outstanding shares. In November 2000, the Trust issued 18,000
Preferred Shares for a total of $450 million. See "Risk Factors and Special
Considerations -- Leverage."
12 Investment Objective and Policies
THE TRUST'S INVESTMENTS
--------------------------------------------------------------------------------
As stated above under "Investment Objective and Policies", the Trust will invest
primarily in Senior Loans. This section contains a discussion of the
characteristics of Senior Loans, the manner in which those investments are made
and the market for Senior Loans.
SENIOR LOAN CHARACTERISTICS
Senior Loans are loans that are typically made to business borrowers to finance
leveraged buy-outs, recapitalizations, mergers, stock repurchases and internal
growth. Senior Loans generally hold the most senior position in the capital
structure of a borrower and are usually secured by liens on the assets of the
borrowers, including tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. The Trust may also receive guarantees as a form of
collateral.
Senior loans are typically structured to include two or more types of loans
within a single credit agreement. The most common structure is to have a
revolving loan and a term loan. A revolving loan is a loan that can be drawn
upon, repaid fully or partially, and then the repaid portions can be drawn upon
again. A term loan is a loan that is fully drawn upon immediately and once
repaid it cannot be drawn upon again. Sometimes there may be two or more term
loans, and they may be secured by different collateral and have different
repayment schedules and maturity dates. In addition to revolving loans and term
loans, senior loan structures can also contain facilities for the issuance of
letters of credit, and may contain mechanisms for lenders to pre-fund letters of
credit through credit-linked deposits.
The Trust typically invests only in the term loan portions of Senior Loan
structures, although it does sometimes invest in the revolving loan portions and
the pre-funded letters of credit portions.
By virtue of their senior position and collateral, Senior Loans typically
provide lenders with the first right to cash flows or proceeds from the sale of
a borrower's collateral if the borrower becomes insolvent (subject to the
limitations of bankruptcy law, which may provide higher priority to certain
claims such as, for example, employee salaries, employee pensions and taxes).
This means Senior Loans are generally repaid before unsecured bank loans,
corporate bonds, subordinated debt, trade creditors, and preferred or common
stockholders.
Senior Loans typically pay interest at least quarterly at rates which equal a
fixed percentage spread over a base rate such as LIBOR. For example, if the
London Inter-Bank Offered Rate ("LIBOR") were 5.00% and the borrower were paying
a fixed spread of 2.50%, the total interest rate paid by the borrower would be
7.50%. Base rates and, therefore, the total rates paid on Senior Loans float,
i.e., they change as market rates of interest change.
Although a base rate such as LIBOR can change every day, loan agreements for
Senior Loans typically allow the borrower the ability to choose how often the
base rate for its loan will change. Such periods can range from one day to one
year, with most borrowers choosing monthly or quarterly reset periods. During
periods of rising interest rates, borrowers will tend to choose longer reset
periods, and during periods of declining interest rates, borrowers will tend to
choose shorter reset periods. The fixed spread over the base rate on a Senior
Loan typically does not change.
Senior Loans generally are arranged through private negotiations between a
borrower and several financial institutions represented by an agent who is
usually one of the originating lenders. In larger transactions, it is common to
have several agents; however, generally only one such agent has primary
responsibility for ongoing administration of a Senior Loan. Agents are typically
paid fees by the borrower for their services. The agent is primarily responsible
for negotiating the loan agreement which establishes the terms and conditions of
the Senior Loan and the rights of the borrower and the lenders. The agent also
is responsible for monitoring collateral and for exercising remedies available
to the lenders such as foreclosure upon collateral.
Loan agreements may provide for the termination of the agent's agency status in
the event that it fails to act as required under the relevant loan agreement,
becomes insolvent, enters Federal Deposit Insurance Corporation ("FDIC")
receivership or, if not FDIC insured, enters into bankruptcy. Should such an
agent, lender or assignor with respect to an assignment interpositioned between
the Trust and the borrower become insolvent or enter FDIC receivership or
bankruptcy, any interest in the Senior Loan of such person and any loan payment
held by such person for the benefit of the Trust should not be included in such
person's or entity's bankruptcy estate. If, however, any such amount were
included in such person's or entity's bankruptcy estate, the Trust would incur
certain costs and delays in realizing payment or could suffer a loss of
principal or interest. In this event, the Trust could experience a decrease in
the NAV.
The Trust acquires Senior Loans from lenders such as banks, insurance companies,
finance companies, other investment companies and private investment funds. The
Trust may also acquire Senior Loans from U.S. branches of foreign banks that are
regulated by the Federal Reserve System or appropriate state regulatory
authorities.
INVESTMENT BY THE TRUST
The Trust typically invests in Senior Loans primarily by purchasing an
assignment of a portion of a Senior Loan from a third-party, either in
connection with the original loan transaction (i.e., in the primary market) or
after the initial loan transaction (i.e., in the secondary market). When the
Trust purchases a Senior Loan in the primary market, it may share in a fee paid
to the original lender. When the Trust purchases a Senior Loan in the secondary
market, it may pay a fee to, or forego a portion of interest payments from, the
lender making
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The Trust's Investments 13
THE TRUST'S INVESTMENTS
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the assignment. The Trust may also make its investments in Senior Loans through
the use of derivative instruments such as participations, credit-linked notes,
credit default swaps and total return swaps as long as the reference obligation
for any such instrument is a Senior Loan. Investments through the use of such
derivative instruments involve counter party risk, i.e., the risk that the party
from which such instrument is purchased will not perform as agreed. Unlike an
assignment, as described below, the Trust does not have a direct contractual
relationship with the borrower. The Trust seeks to minimize such counter party
risk by purchasing such investments only from large, well established and highly
rated counter parties.
Except for rating agency guidelines imposed on the Trust's portfolio while it
has outstanding Preferred Shares, there is no minimum rating or other
independent evaluation of a borrower limiting the Trust's investments and most
Senior Loans that the Trust may acquire, if rated, will be rated below
investment grade credit quality. See "Risk Factors and Special Considerations --
Credit Risk on Senior Loans."
ASSIGNMENTS. When the Trust is a purchaser of an assignment, it succeeds to all
the rights and obligations under the loan agreement of the assigning lender and
becomes a lender under the loan agreement with the same rights and obligations
as the assigning lender. These rights include the ability to vote along with the
other lenders on such matters as enforcing the terms of the loan agreement,
(E.G., declaring defaults, initiating collection action, etc.). Taking such
actions usually requires at least a vote of the lenders holding a majority of
the investment in the loan, and may require a vote by lenders holding two-thirds
or more of the investment in the loan. Because the Trust typically does not hold
a majority of the investment in any loan, it will not be able by itself to
control decisions that require a vote by the lenders.
ACQUISITION COSTS. When the Trust acquires an interest in a Senior Loan in the
primary market, it typically acquires the loan at par less its portion of the
fee paid to all originating lenders. When the Trust acquires an interest in a
Senior Loan, in the secondary market, it may be at par, but typically the Trust
will do so at premium or discount to par.
SENIOR LOAN MARKET
Total U.S. domestic Senior Loan volume has increased dramatically over the last
10 years. This increase has helped improve the liquidity of Senior Loans.
However, this increase has also been accompanied by an increase in the number of
participants in the Senior Loan market. Currently, the Senior Loan market is
experiencing a narrowing of spreads over LIBOR and some relaxation in credit
standards due to an insufficient number of loans to satisfy the requirements of
all lenders. More loans may become available if the U.S. economy continues to
show signs of improvement.
14 The Trust's Investments
RISK FACTORS AND SPECIAL CONSIDERATIONS
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RISK IS INHERENT IN ALL INVESTING. THE FOLLOWING DISCUSSION SUMMARIZES SOME OF
THE RISKS THAT YOU SHOULD CONSIDER BEFORE DECIDING WHETHER TO INVEST IN THE
TRUST. FOR ADDITIONAL INFORMATION ABOUT THE RISKS ASSOCIATED WITH INVESTING IN
THE TRUST, SEE "ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT
TECHNIQUES" IN THE SAI.
CREDIT RISK ON SENIOR LOANS
The Trust's ability to pay dividends and repurchase its Common Shares is
dependent upon the performance of the assets in its portfolio. That performance,
in turn, is subject to a number of risks, chief among which is credit risk on
the underlying assets.
Credit risk is the risk of nonpayment of scheduled interest or principal
payments. In the event a borrower fails to pay scheduled interest or principal
payments on a Senior Loan held by the Trust, the Trust will experience a
reduction in its income and a decline in the market value of the Senior Loan,
which will likely reduce dividends and lead to a decline in the NAV of the
Trust's Common Shares. See "The Trust's Investments -- Investment by the Trust."
Senior Loans generally involve less risk than unsecured or subordinated debt and
equity instruments of the same issuer because the payment of principal and
interest on Senior Loans is a contractual obligation of the issuer that, in most
instances, takes precedence over the payment of dividends, or the return of
capital, to the issuer's shareholders and payments to bond holders. The Trust
generally invests in Senior Loans that are secured with specific collateral.
However, the value of the collateral may not equal the Trust's investment when
the loan is acquired or may decline below the principal amount of the Senior
Loan subsequent to the Trust's investment. Also, to the extent that collateral
consists of stock of the borrower or its subsidiaries or affiliates, the Trust
bears the risk that the stock may decline in value, be relatively illiquid, or
may lose all or substantially all of its value, causing the Senior Loan to be
undercollateralized. Therefore, the liquidation of the collateral underlying a
Senior Loan may not satisfy the issuer's obligation to the Trust in the event of
non-payment of scheduled interest or principal, and the collateral may not be
readily liquidated.
In the event of the bankruptcy of a borrower, the Trust could experience delays
and limitations on its ability to realize the benefits of the collateral
securing the Senior Loan. Among the credit risks involved in a bankruptcy are
assertions that the pledge of collateral to secure a loan constitutes a
fraudulent conveyance or preferential transfer that would have the effect of
nullifying or subordinating the Trust's rights to the collateral.
The Senior Loans in which the Trust invests are generally rated lower than
investment grade credit quality, i.e., rated lower than "Baa" by Moody's
Investors Service, Inc. ("Moody's") or "BBB" by Standard and Poor's Corporation
("S&P"), or have been issued by issuers who have issued other debt securities
which, if unrated, would be rated lower than investment grade credit quality.
Investment decisions will be based largely on the credit analysis performed by
the Adviser or Sub-Adviser, and not on rating agency evaluation. This analysis
may be difficult to perform. Information about a Senior Loan and its issuer
generally is not in the public domain. Moreover, Senior Loans are not often
rated by any nationally recognized rating service. Many issuers have not issued
securities to the public and are not subject to reporting requirements under
federal securities laws. Generally, however, issuers are required to provide
financial information to lenders and information may be available from other
Senior Loan participants or agents that originate or administer Senior Loans.
INTEREST RATE RISK
During normal market conditions, changes in market interest rates will affect
the Trust in certain ways. The principal effect will be that the yield on the
Trust's Common Shares will tend to rise or fall as market interest rates rise
and fall. This is because almost all of the assets in which the Trust invests
pay interest at rates which float in response to changes in market rates.
However, because the interest rates on the Trust's assets reset over time, there
will be an imperfect correlation between changes in market rates and changes to
rates on the portfolio as a whole. This means that changes to the rate of
interest paid on the portfolio as a whole will tend to lag behind changes in
market rates.
Market interest rate changes may also cause the Trust's NAV to experience
moderate volatility. This is because the value of a loan asset in the Trust is
partially a function of whether it is paying what the market perceives to be a
market rate of interest for the particular loan, given its individual credit and
other characteristics. If market interest rates change, a loan's value could be
affected to the extent the interest rate paid on that loan does not reset at the
same time. As discussed above, the rates of interest paid on the loans in which
the Trust invests have a weighted average reset period that typically is less
than 90 days. Therefore, the impact of the lag between a change in market
interest rates and the change in the overall rate on the portfolio is expected
to be minimal.
To the extent that changes in market rates of interest are reflected not in a
change to a base rate such as LIBOR but in a change in the spread over the base
rate which is payable on loans of the type and quality in which the Trust
invests, the Trust's NAV could also be adversely affected. This is because the
value of a loan asset in the Trust is partially a function of whether it is
paying what the market perceives to be a market rate of interest for the
particular loan, given its individual credit and other characteristics. However,
unlike changes in market rates of interest for which there is only a temporary
lag before the portfolio reflects those changes, changes in a loan's value based
on changes in the market spread on loans in the Trust's portfolio may be of
longer duration.
Finally, substantial increases in interest rates may cause an increase in loan
defaults as borrowers may lack the resources to meet higher debt service
requirements.
[GRAPHIC] If you have any questions, please call 1-800-992-0180.
Risk Factors and Special Considerations 15
RISK FACTORS AND SPECIAL CONSIDERATIONS
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PRE-PAYMENT RISK
If a Senior Loan in which the Trust invests is paid off sooner than scheduled,
and interest rates are falling, the Trust will be forced to reinvest this money
at lower yields.
CHANGES TO NAV
The NAV of the Trust is expected to change in response to a variety of factors,
primarily in response to changes in the creditworthiness of the borrowers on the
loans in which the Trust invests. See "Risk Factors and Special Considerations
-- Credit Risk on Senior Loans" above. Changes in market interest rates may also
have a moderate impact on the Trust's NAV. See "Risk Factors and Special
Considerations -- Interest Rate Risk." Another factor which can affect the
Trust's NAV is changes in the pricing obtained for the Trust's assets. See
"Transaction Policies -- Valuation of the Trust's Assets."
DISCOUNT FROM NAV
The Trust's Common Shares have traded in the market above, at, and below NAV
since March 9, 1992, when the Trust's shares were listed on the NYSE. The
reasons for the Trust's Common Shares trading at a premium to or discount from
NAV are not known to the Trust, and the Trust cannot predict whether its Common
Shares will trade in the future at a premium to or discount from NAV, and if so,
the level of such premium or discount. Shares of closed-end investment companies
frequently trade at a discount from NAV. The possibility that Common Shares of
the Trust will trade at a discount from NAV is a risk separate and distinct from
the risk that the Trust's NAV may decrease.
LEVERAGE
The Trust may borrow an amount equal to up to 33 1/3% (or such other percentage
permitted by law) of its total assets (including the amount borrowed) less all
liabilities other than borrowings. Under the 1940 Act, the Trust may issue
preferred shares so long as immediately after any issuance of preferred shares
the value of the Trust's total assets (less all Trust liabilities and
indebtedness that is not senior indebtedness) is at least twice the amount of
the Trust's senior indebtedness plus the involuntary liquidation preference of
all outstanding shares. In November 2000, the Trust issued 18,000 Preferred
Shares for a total of $450 million. Borrowings and the issuance of preferred
shares are referred to in this Prospectus collectively as "leverage." The Trust
may use leverage for investment purposes, to finance the repurchase of its
Common Shares, and to meet other cash requirements. The use of leverage for
investment purposes increases both investment opportunity and investment risk.
Capital raised through leverage will be subject to interest and other costs, and
these costs could exceed the income earned by the Trust on the proceeds of such
leverage. There can be no assurance that the Trust's income from the proceeds of
leverage will exceed these costs. However, the Adviser or Sub-Adviser seeks to
use leverage for the purposes of making additional investments only if they
believe, at the time of using leverage, that the total return on the assets
purchased with such funds will exceed interest payments and other costs on the
leverage.
In addition, the Adviser or Sub-Adviser intends to reduce the risk that the
costs of the use of leverage will exceed the total return on investments
purchased with the proceeds of leveraging by utilizing leverage mechanisms whose
interest rates float (or reset frequently). In the event of a default on one or
more loans or other interest-bearing instruments held by the Trust, the use of
leverage would increase the loss to the Trust and may increase the effect on the
Trust's NAV. The Trust's lenders and Preferred shareholders have priority to the
Trust's assets over the Trust's Common shareholders.
The Trust currently uses leverage by borrowing money on a floating rate basis
and by the issuance of Preferred Shares. The current rate on the borrowings (as
of June 15, 2006) is 5.47%. The current dividend rate on the Preferred Shares
(as of June 15, 2006) is 5.08%. To cover the annual interest and dividends on
the borrowings and the Preferred Shares for the current fiscal year (assuming
that the current interest and dividend rates remain in effect for the entire
fiscal year and assuming that the Trust borrows an amount equal to 25% of its
Managed Assets and the current Preferred Shares remain outstanding), the Trust
would need to earn 2.56% on its amount of Managed Assets as of June 15, 2006.
The Trust's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. The
funds borrowed pursuant to the credit facilities or obtained through the
issuance of Preferred Shares, or any other preferred shares, may constitute a
substantial lien and burden by reason of their prior claim against the income of
the Trust and against the net assets of the Trust in liquidation.
The Trust is not permitted to declare dividends or other distributions,
including dividends and distributions with respect to Common Shares or Preferred
Shares, or to purchase Common Shares or, Preferred Shares unless (i) at the time
thereof the Trust meets certain asset coverage requirements and (ii) there is no
event of default under any credit facility program that is continuing. See "Risk
Factors and Special Considerations -- Restrictive Covenants and 1940 Act
Restrictions" below. In the event of a default under a credit facility program,
the lenders have the right to cause a liquidation of the collateral (i.e., sell
Senior Loans and other assets of the Trust) and, if any such default is not
cured, the lenders may be able to control the liquidation as well.
In addition, the Trust is not permitted to pay dividends on or redeem Common
Shares unless all accrued dividends on the Preferred Shares and all accrued
interest on borrowings have been paid or set aside for payment.
Because the fee paid to the Adviser will be calculated on the basis of Managed
Assets, the fee will be higher when leverage is utilized, giving the Adviser an
incentive to utilize leverage.
The Trust is subject to certain restrictions imposed by lenders to the Trust and
by guidelines of one or more rating agencies which issue ratings for the
Preferred Shares issued by the Trust. These restrictions impose asset coverage,
fund composition requirements and limits on investment techniques, such as the
use of financial derivative products, that are more stringent than those imposed
on the Trust by the 1940 Act. These covenants or guidelines could impede the
Adviser or Sub-Adviser from fully managing the Trust's portfolio in accordance
with the Trust's investment objective and policies.
16 Risk Factors and Special Considerations
RISK FACTORS AND SPECIAL CONSIDERATIONS
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ANNUAL EXPENSES WITHOUT BORROWINGS OR PREFERRED SHARES
If the Trust were not to have borrowed or have Preferred Shares outstanding, the
remaining expenses, as a percentage of the net assets of the Trust, would be as
follows:
ANNUAL EXPENSES WITHOUT BORROWINGS OR PREFERRED SHARES
(AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES)
Management and Administrative Fees(1) 1.05%
Other Operating Expenses(2) 0.34%
Total Annual Expenses 1.39%
(1) Pursuant to the Investment Advisory Agreement with the Trust, ING
Investments is paid a fee of 0.80% of the Trust's Managed Assets. Pursuant
to its Administration Agreement with the Trust, the Trust's Administrator
is paid a fee of 0.25% of the Trust's Managed Assets. See "Investment
Adviser and Other Service Providers -- The Administrator."
(2) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year, which, in turn, are based on "other operating expenses" for
the fiscal year ended February 28, 2006, and does not include the expenses
of borrowing.
EFFECT OF LEVERAGE
The following table is designed to illustrate the effect on return to a holder
of the Trust's Common Shares of the leverage created by the Trust's use of
borrowing, using an assumed initial interest rate of 4.90%, assuming the Trust
has used leverage by borrowing an amount equal to 25% of the Trust's Managed
Assets and assuming hypothetical annual returns on the Trust's portfolio of
minus 10% to plus 10%. As can be seen, leverage generally increases the return
to shareholders when portfolio return is positive and decreases return when the
portfolio return is negative. Actual returns may be greater or less than those
appearing in the table.
Assumed Portfolio Return,
net of expenses(1).............. (10)% (5)% 0% 5% 10%
Corresponding Return to
Common Shareholders(2).......... (14.97)% (8.31)% (1.64)% 5.03% 11.69%
(1) The "Assumed Portfolio Return" is required by regulation of the SEC and is
not a prediction of, and does not represent, the projected or actual
performance of the Trust.
(2) In order to compute the "Corresponding Return to Common Shareholders," the
"Assumed Portfolio Return" is multiplied by the total value of the Trust's
assets at the beginning of the Trust's fiscal year to obtain an assumed
return to the Trust. From this amount, all interest accrued during the year
is subtracted to determine the return available to shareholders. The return
available to shareholders is then divided by the total value of the Trust's
net assets attributable to Common Shares as of the beginning of the fiscal
year to determine the "Corresponding Return to Common Shareholders."
[GRAPHIC] If you have any questions, please call 1-800-992-0180.
Risk Factors and Special Considerations 17
RISK FACTORS AND SPECIAL CONSIDERATIONS
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IMPACT OF SHAREHOLDER INVESTMENT PROGRAM AND PRIVATELY NEGOTIATED TRANSACTIONS
The issuance of Common Shares through the Trust's Shareholder Investment Program
may have an adverse effect on the secondary market for the Trust's Common
Shares. The increase in the number of the Trust's outstanding Common Shares
resulting from issuances pursuant to the Trust's Shareholder Investment Program
or pursuant to privately negotiated transactions, and the discount to the market
price at which such Common Shares may be issued, may put downward pressure on
the market price for Common Shares of the Trust. Common Shares will not be
issued pursuant to the Trust's Shareholder Investment Program at any time when
Common Shares are trading at a price lower than the Trust's NAV per Common
Share.
LIMITED SECONDARY MARKET FOR LOANS
Although the resale, or secondary, market for loans is growing, it is currently
limited. There is no organized exchange or board of trade on which loans are
traded. Instead, the secondary market for loans is an unregulated inter-dealer
or inter-bank re-sale market.
Loans usually trade in large denominations (typically in $1 million or larger)
and trades can be infrequent. The market has limited transparency so that
information about actual trades may be difficult to obtain. Accordingly, some or
many of the loans in which the Trust invests will be relatively illiquid.
In addition, loans in which the Trust invests may require the consent of the
borrower and/or the agent prior to sale or assignment. These consent
requirements can delay or impede the Trust's ability to sell loans and can
adversely affect the price that can be obtained. The Trust may have difficulty
disposing of loans if it needs cash to repay debt, to pay dividends, to pay
expenses or to take advantage of new investment opportunities. Although the
Trust has not conducted a tender offer since 1992, if it determines to again
conduct a tender offer, limitations of a secondary market may result in
difficulty raising cash to purchase tendered Common Shares.
These considerations may cause the Trust to sell securities at lower prices than
it would otherwise consider to meet cash needs or cause the Trust to maintain a
greater portion of its assets in cash equivalents than it would otherwise, which
could negatively impact performance. The Trust seeks to avoid the necessity of
selling assets to meet such needs by the use of borrowings.
The Trust values its assets daily. However, because the secondary market for
loans is limited, it may be difficult to value loans. Reliable market value
quotations may not be readily available for some loans and valuation of such
loans may require more research than for liquid securities. In addition,
elements of judgment may play a greater role in valuation of loans, than for
securities with a more developed secondary market, because there is less
reliable, objective market value data available. In addition, if the Trust
purchases a relatively large portion of a loan to generate extra income
sometimes paid to large lenders, the limitations of the secondary market may
inhibit the Trust from selling a portion of the loan and reducing its exposure
to a borrower when the Adviser or Sub-Adviser deems it advisable to do so.
LENDING PORTFOLIO SECURITIES
To generate additional income, the Trust may lend portfolio securities in an
amount equal to up to 33 1/3% of the Trust's total assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower default or fail
financially. The Trust intends to engage in lending portfolio securities only
when such lending is fully secured by investment grade collateral held by an
independent agent.
DEMAND FOR LOANS
Although the volume of loans has increased in recent years, demand for loans has
also grown. An increase in demand may benefit the Trust by providing increased
liquidity for loans and higher sales prices, but it may also adversely affect
the rate of interest payable on loans acquired by the Trust, the rights provided
to the Trust under the terms of a loan agreement, and increase the price of
loans that the Trust wishes to purchase in the secondary market.
UNSECURED LOANS AND SUBORDINATED LOANS
Subject to the aggregate 20% limit on Other Investments, the Trust may invest up
to 20% of its total assets in unsecured floating rate loans, notes and other
debt instruments and 5% of its total assets in floating rate subordinated loans.
Unsecured loans and subordinated loans share the same credit risks as those
discussed above under "Credit Risk on Senior Loans" except that unsecured loans
are not secured by any collateral of the borrower and subordinated loans are not
the most senior debt in a borrower's capital structure. Unsecured loans do not
enjoy the security associated with collateralization and may pose a greater risk
of nonpayment of interest or loss of principal than do secured loans. The
primary additional risk in a subordinated loan is the potential loss in the
event of default by the issuer of the loan. Subordinated loans in an insolvency
bear an increased share, relative to senior secured lenders, of the ultimate
risk that the borrower's assets are insufficient to meet its obligations to its
creditors.
SHORT-TERM DEBT SECURITIES
Subject to the aggregate 20% limit on Other Investments, the Trust may invest in
short-term debt securities. Short-term debt securities are subject to the risk
of the issuer's inability to meet principal and interest payments on the
obligation and also may be subject to price volatility due to such factors as
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
Because short-term debt securities pay interest at a fixed-rate, when interest
rates decline, the value of the Trust's short-term debt securities can be
expected to rise, and when interest rates rise, the value of those securities
can be expected to decline.
18 Risk Factors and Special Considerations
RISK FACTORS AND SPECIAL CONSIDERATIONS
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CALL RISK
During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the Fund
to reinvest in lower yielding securities. This is known as call or prepayment
risk. Lower-grade securities frequently have call features that allow the issuer
to repurchase the security prior to its stated maturity. An issuer may redeem a
lower-grade obligation if the issuer can refinance the debt at a lower cost due
to declining interest rates or an improvement in the credit standing of the
issuer.
INVESTMENT IN NON-U.S. AND NON-CANADIAN ISSUERS
Subject to the aggregate 20% limit on Other investments, the Trust may invest up
to 20% of its total assets in U.S. dollar denominated loans, secured or
unsecured, to borrowers that are organized or located in countries outside the
United States and Canada or U.S. territories and possessions and up to 15% of
its total assets in investments denominated in OECD currencies (including the
Euro), other than the U.S. dollar.
INVESTMENTS IN EQUITY SECURITIES INCIDENTAL TO INVESTMENT IN LOANS
Subject to the aggregate 20% on Other Investments, the Trust may acquire equity
securities as an incident to the purchase or ownership of a loan or in
connection with a reorganization of a borrower or its debt. Investments in
equity securities incidental to investment in loans entail certain risks in
addition to those associated with investment in loans. The value of these
securities may be affected more rapidly, and to a greater extent, by
company-specific developments and general market conditions. These risks may
increase fluctuations in the Trust's NAV. The Trust may frequently possess
material non-public information about a borrower as a result of its ownership of
a loan of such borrower. Because of prohibitions on trading in securities of
issuers while in possession of such information the Trust might be unable to
enter into a transaction in a security of such a borrower when it would
otherwise be advantageous to do so.
BORROWINGS UNDER THE CREDIT FACILITY PROGRAM
The Trust has a policy of borrowing to acquire income-producing investments
which, by their terms, pay interest at a rate higher than the rate the Trust
pays on borrowings. Accordingly, borrowing has the potential to increase the
Trust's total income. The Trust currently is a party to two credit facilities
with financial institutions that permit the Trust to borrow up to an aggregate
of $625 million. Interest is payable on the credit facilities by the Trust at a
variable rate that is tied to either LIBOR, the federal funds rate, or a
commercial paper based rate and includes a facility fee on unused commitments.
As of June 15, 2006, the Trust had outstanding borrowings under the credit
facilities of approximately $558 million. Collectively, the lenders under the
credit facilities have a security interest in all assets of the Trust. Under
each of the credit facilities, the lenders have the right to liquidate Trust
assets in the event of default by the Trust under such credit facility, and the
Trust may be prohibited from paying dividends in the event of certain adverse
events or conditions respecting the Trust or Adviser or Sub-Adviser until the
credit facility is repaid in full or until the event or condition is cured.
RANKING OF SENIOR INDEBTEDNESS
The rights of lenders to receive payments of interest on and repayments of
principal of any borrowings made by the Trust under the credit facility program
are senior to the rights of holders of Common Shares and Preferred Shares with
respect to the payment of dividends or upon liquidation.
RESTRICTIVE COVENANTS AND 1940 ACT RESTRICTIONS
The credit agreements governing the credit facility program ("Credit
Agreements") include usual and customary covenants for their respective type of
transaction, including limits on the Trust's ability to (i) issue preferred
shares, (ii) incur liens or pledge portfolio securities, (iii) change its
investment objective or fundamental investment restrictions without the approval
of lenders, (iv) make changes in any of its business objectives, purposes or
operations that could result in a material adverse effect, (v) make any changes
in its capital structure, (vi) amend the Trust documents in a manner which could
adversely affect the rights, interests or obligations of any of the lenders,
(vii) engage in any business other than the businesses currently engaged in,
(viii) create, incur, assume or permit to exist certain debt except for certain
specified types of debt, and (ix) permit any of its Employee Retirement Security
Act ("ERISA") affiliates to cause or permit to occur an event that could result
in the imposition of a lien under the Internal Revenue Code or ERISA. In
addition, the Credit Agreements do not permit the Trust's asset coverage ratio
(as defined in the Credit Agreements) to fall below 300% at any time ("Credit
Agreement Asset Coverage Test").
Under the requirements of the 1940 Act, the Trust must have asset coverage of at
least 300% immediately after any borrowing, including borrowing under the credit
facility program. For this purpose, asset coverage means the ratio which the
value of the total assets of the Trust, less liabilities and indebtedness not
represented by senior securities, bears to the aggregate amount of borrowings
represented by senior securities issued by the Trust. The Credit Agreements
limit the Trust's ability to pay dividends or make other distributions on the
Trust's Common Shares, or purchase or redeem Common Shares, unless the Trust
complies with the Credit Agreement Asset Coverage Test. In addition, the Credit
Agreements do not permit the Trust to declare dividends or other distributions
or purchase or redeem Common Shares or any preferred shares (i) at any time that
an event of default under a Credit Agreement has occurred and is continuing; or
(ii) if, after giving effect to such declaration, the Trust would not meet the
Credit Agreement Asset Coverage Test set forth in the Credit Agreements.
[GRAPHIC] If you have any questions, please call 1-800-992-0180.
Risk Factors and Special Considerations 19
TRANSACTION POLICIES
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NET ASSET VALUE
The NAV per Common Share of the Trust is determined each business day as of the
close of regular trading ("Market Close") on the New York Stock Exchange
("NYSE") (normally 4:00 p.m. Eastern time unless otherwise designated by the
NYSE). The Trust is open for business every day the NYSE is open. The NYSE is
closed on all weekends and on all national holidays and Good Friday. Trust
shares will not be priced on those days. The NAV per Common Share is determined
by dividing the value of the Trust's loan assets plus all cash and other assets
(including interest accrued but not collected) less all liabilities (including
accrued expenses but excluding capital and less the liquidation preference of
any outstanding preferred shares) by the number of Common Shares outstanding.
The NAV per Common Share is made available for publication.
VALUATION OF THE TRUST'S ASSETS
The assets in the Trust's portfolio are valued daily in accordance with the
Trust's Loan Valuation Procedures adopted by the Board. A majority of the
Trust's assets are valued using quotations supplied by a third-party loan
pricing service. However, the loans in which the Trust invests are not listed on
any securities exchange or board of trade. Some loans are traded by
institutional investors in an over-the-counter secondary market that has
developed in the past several years. This secondary market generally has fewer
trades and less liquidity than the secondary markets for other types of
securities. Some loans have few or no trades. Accordingly, determinations of the
value of loans may be based on infrequent and dated trades. Because there is
less reliable, objective market value data available, elements of judgment may
play a greater role in valuation of loans than for other types of securities.
For further information, see "Risk Factors and Special Considerations -- Limited
Secondary Market for Loans."
Loans are normally valued at the mean of the means of one or more bid and asked
quotations obtained from a pricing service or other sources believed to be
reliable. Loans for which reliable market value quotations are not readily
available from a pricing service may be valued with reference to another loan or
a group of loans for which reliable market value quotations are readily
available and whose characteristics are comparable to the loan being valued.
Under this approach, the comparable loan or loans serve as a proxy for changes
in value of the loan being valued. The Trust has engaged an independent pricing
service to provide quotations from dealers in loans and to calculate values
under this proxy procedure.
It is expected that most of the loans held by the Trust will be valued with
reference to quotations from the independent pricing service or with reference
to the proxy procedure described above. The Adviser or Sub-Adviser may believe
that the price for a loan derived from quotations or the proxy procedure
described above is not reliable or accurate. Among other reasons, this may be
the result of information about a particular loan or borrower known to the
Adviser or Sub-Adviser that they believe may not be known to the pricing service
or reflected in a price quote. In this event, the loan is valued at fair value
under procedures established by the Board, and in accordance with the provisions
of the 1940 Act.
Under these procedures, fair value is determined by the Adviser or Sub-Adviser
and monitored by the Board through its Valuation, Proxy and Brokerage Committee.
In fair valuing a loan, consideration is given to several factors, which may
include, among others, the following:
- the characteristics of and fundamental analytical data relating to the
loan, including the cost, size, current interest rate, period until
the next interest rate reset, maturity and base lending rate of the
loan, the terms and conditions of the loan and any related agreements,
and the position of the loan in the borrower's debt structure;
- the nature, adequacy and value of the collateral, including the
Trust's rights, remedies and interests with respect to the collateral;
- the creditworthiness of the borrower and the cash flow coverage of
outstanding principal and interest, based on an evaluation of its
financial condition, financial statements and information about the
borrower's business, cash flows, capital structure and future
prospects;
- information relating to the market for the loan, including price
quotations for, and trading in, the loan and interests in similar
loans and the market environment and investor attitudes towards the
loan and interests in similar loans;
- the reputation and financial condition of the agent of the loan and
any intermediate participants in the loans;
- the borrower's management; and
- the general economic and market conditions affecting the fair value of
the loan.
Securities for which the primary market is a national securities exchange are
stated at the last reported sale price on the day of valuation. Securities
reported by NASDAQ National Market System will be valued at the NASDAQ Official
Closing Price on the valuation day. Debt and equity securities traded in the
over-the-counter market and listed securities for which no sale was reported on
that date are valued at the mean between the last reported bid and asked price.
Valuation of short term cash equivalent investments is at amortized cost.
Securities maturing in 60 days or less are valued at amortized cost, which, when
combined with accrued interest, approximates market value.
ACCOUNT ACCESS
Unless your Common Shares are held through a third-party fiduciary or in an
omnibus registration at your bank or brokerage firm, you may be able to access
your account information over the internet at www.ingfunds.com, or via a touch
tone telephone by calling (800) 992-0180 and selecting Option 1. Should you wish
to speak with a Shareholder
20 Transaction Policies
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Services Representative, you may call the toll-free number listed above and
select Option 2.
PRIVACY POLICY
The Trust has adopted a policy concerning investor privacy. To review the
privacy policy, contact a Shareholder Services Representative at (800) 992-0180
and select Option 1, obtain a policy over the internet at www.ingfunds.com, or
see the privacy promise that accompanies this Prospectus.
HOUSEHOLDING
To reduce expenses, we may mail only one copy of the Trust's Prospectus and each
annual and semi-annual shareholder report to those addresses shared by two or
more accounts. If you wish to receive individual copies of these documents,
please call us at (800) 992-0180 or speak to your investment professional. We
will begin sending you individual copies 30 days after receiving your request.
PLAN OF DISTRIBUTION
--------------------------------------------------------------------------------
SHAREHOLDER INVESTMENT PROGRAM
The following is a summary of the Shareholder Investment Program ("Program").
Shareholders are advised to review a fuller explanation of the Program contained
in the Trust's SAI.
Common Shares are offered by the Trust through the Program. The Program allows
participating shareholders to reinvest all dividends ("Dividends") in additional
Common Shares of the Trust, and also allows participants to purchase additional
Common Shares through optional cash investments in amounts ranging from a
minimum of $100 to a maximum of $100,000 per month.
The Trust and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third-party checks, money orders and
checks drawn on non-U.S. banks (even if payment may be effected through a U.S.
bank) generally will not be accepted.
Common Shares will be issued by the Trust under the Program when the Trust's
Common Shares are trading at a premium to NAV. If the Trust's Common Shares are
trading at a discount to NAV, Common Shares issued under the Program will be
purchased on the open market. Common Shares issued under the Program directly
from the Trust will be acquired at the greater of (i) NAV at the close of
business on the day preceding the relevant investment date or (ii) the average
of the daily market price of the Common Shares during the pricing period minus a
discount of 5% for reinvested Dividends and 0% to 5% for optional cash
investments. Common Shares issued under the Program when shares are trading at a
discount to NAV will be purchased in the market by DST at market price. Shares
issued by the Trust under the Program will be issued without a fee or a
commission.
Shareholders may elect to participate in the Program by telephoning the Trust or
submitting a completed Participation Form to DST, the Program administrator. DST
will credit to each participant's account funds it receives from: (a) Dividends
paid on Trust shares registered in the participant's name, and (b) optional cash
investments. DST will apply all Dividends and optional cash investments received
to purchase Common Shares as soon as practicable beginning on the relevant
investment date (as described below) and not later than six business days after
the relevant investment date, except when necessary to comply with applicable
provisions of the federal securities laws. For more information on the Trust's
distribution policy, see "Dividends and Distributions."
In order for participants to purchase shares through the Program in any month,
the Program administrator must receive from the participant any optional cash
investment by the relevant investment date. The relevant investment date will be
set in advance by the Trust, upon which optional cash investments are first
applied by DST to the purchase of Common Shares. Participants may obtain a
schedule of relevant dates, including investments dates, the dates by which
optional cash investment payments must be received and the dates which shares
will be paid by calling ING's Shareholder Services Department at (800) 992-0180.
Participants will pay a pro rata share of brokerage commissions with respect to
DST's open market purchases in connection with the reinvestment of Dividends or
purchases made with optional cash investments.
The Program is intended for the benefit of investors in the Trust. The Trust
reserves the right to exclude from participation, at any time, (i) persons or
entities who attempt to circumvent the Program's standard $100,000 maximum by
accumulating accounts over which they have control or (ii) any other persons or
entities, as determined in the sole discretion of the Trust.
Currently, persons who are not shareholders of the Trust may not participate in
the Program. The Board may elect to change this policy at a future date, and
permit non-shareholders to participate in the Program. Shareholders may request
to receive their Dividends in cash at any time by giving DST written notice or
by contacting ING's Shareholder Services Department at (800) 992-0180 and
selecting Option 2. Shareholders may elect to close their account at any time by
giving DST written notice. When a participant closes their account, the
participant upon request will receive a certificate for full Common Shares in
the account. Fractional Common
[GRAPHIC] If you have any questions, please call (800) 992-0180.
Transaction Policies 21
PLAN OF DISTRIBUTION
--------------------------------------------------------------------------------
Shares will be held and aggregated with other fractional Common Shares being
liquidated by DST as agent of the Program and paid for by check when actually
sold.
The automatic reinvestment of Dividends does not affect the tax characterization
of the Dividends (i.e., capital gains and income are realized even though cash
is not received). If shares are issued pursuant to the Program's dividend
reinvestment provisions or cash purchase provisions at a discount from market
price, participants may have income equal to the discount.
Additional information about the Program may be obtained by contacting ING's
Shareholder Services Department at (800) 992-0180 and selecting Option 2.
PRIVATELY NEGOTIATED TRANSACTIONS
The Common Shares may also be offered pursuant to privately negotiated
transactions between the Trust or the Distributor and specific investors.
Generally, such investors will be sophisticated institutional investors. The
terms of such privately negotiated transactions will be subject to the
discretion of the management of the Trust. In determining whether to sell Common
Shares pursuant to a privately negotiated transaction, the Trust will consider
relevant factors including, but not limited to, the attractiveness of obtaining
additional funds through the sale of Common Shares, the purchase price to apply
to any such sale of Common Shares and the person seeking to purchase the Common
Shares.
Common Shares issued by the Trust in connection with privately negotiated
transactions will be issued at the greater of (i) NAV per Common Share of the
Trust's Common Shares or (ii) at a discount ranging from 0% to 5% of the average
of the daily market price of the Trust's Common Shares at the close of business
on the two business days preceding the date upon which Common Shares are sold
pursuant to the privately negotiated transaction. The discount to apply to such
privately negotiated transactions will be determined by the Trust with regard to
each specific transaction. The Trust will not pay any commissions with regard to
privately negotiated transactions, but an investor may be subject to a front end
sales load of up to 3% paid to or retained by a third party broker-dealer
through which such transaction may be effected.
USE OF PROCEEDS
--------------------------------------------------------------------------------
It is expected that 100% of the net proceeds of Common Shares issued pursuant to
the Shareholder Investment Program and privately negotiated transactions will be
invested in Senior Loans and other securities consistent with the Trust's
investment objective and policies. Pending investment in Senior Loans, the
proceeds, which are expected to be used within three months, will be used to pay
down the Trust's outstanding borrowings under its credit facilities. See
"Investment Objective and Policies -- Policy on Borrowing."
As of June 15, 2006, the Trust's outstanding borrowings under its credit
facilities was $558 million. By paying down the Trust's borrowings, the Trust
can avoid adverse impacts on yields pending investment of such proceeds in
Senior Loans. As investment opportunities are subsequently identified, it is
expected that the Trust will reborrow amounts previously repaid and invest such
amounts in additional Senior Loans.
DIVIDENDS AND DISTRIBUTIONS
--------------------------------------------------------------------------------
DISTRIBUTION POLICY. Income dividends are declared and paid monthly. Income
dividends consist of interest accrued and amortization of fees earned less any
amortization of premiums paid and the estimated expenses of the Trust, including
fees payable to ING Investments. Income dividends are calculated monthly under
guidelines approved by the Trustees. Each dividend is payable to shareholders of
record on the 10th day of the following month (unless it is a holiday, in which
case the next business day is the record date). Accrued amounts of fees
received, including facility fees, will be taken in as income and passed on to
shareholders as part of dividend distributions. Any fees or commissions paid to
facilitate the sale of portfolio Senior Loans in connection with tender offers
or other portfolio transactions may reduce the dividend yield.
Capital gains, if any, are declared and paid annually. Because the Trust
currently has capital loss carry forwards, it is not anticipated that capital
gains distributions will be made for the foreseeable future.
DIVIDEND REINVESTMENT. Unless you instruct the Trust to pay you dividends in
cash, dividends and distributions paid by the Trust will be reinvested in
additional Common Shares of the Trust. You may request to receive dividends in
cash at any time by giving DST written notice or by contacting the ING's
Shareholder Services Department at (800) 992-0180 and selecting Option 2.
22 Plan of Distribution
INVESTMENT MANAGEMENT AND OTHER
SERVICE PROVIDERS
--------------------------------------------------------------------------------
ADVISER
ING INVESTMENTS, an Arizona limited liability company, serves as the Adviser to
the Trust and has overall responsibility for the management of the Trust under
the general supervision of the Board. Its principal business address is 7337
East Doubletree Ranch Road, Scottsdale, Arizona 85258.
The Trust and the Adviser have entered into an investment advisory agreement
("Investment Advisory Agreement") that requires ING Investments to provide all
investment advisory and portfolio management services for the Trust. The
Investment Advisory Agreement with ING Investments may be canceled by the Board
upon 60 days' written notice.
ING Investments is registered with the SEC as an investment adviser. ING
Investments is an indirect wholly-owned subsidiary of ING Groep. ING Groep is
one of the largest financial services organizations in the world with
approximately 113,000 employees. ING Investments began investment management in
April, 1995, and serves as an investment adviser to registered investment
companies as well as structured finance vehicles. As of March 31, 2006, ING
Investments had assets under management of approximately $44.5 billion.
The Adviser bears the expenses of providing the services described above. The
Adviser currently receives from the Trust an annual fee, paid monthly, of 0.80%
of the Trust's Managed Assets.
For more information regarding the basis for the Board's approval of the
investment advisory or investment sub-advisory relationships, please refer to
the annual shareholder report dated February 28, 2006.
SUB-ADVISER
ING Investments has engaged a sub-adviser to provide the day-to-day management
of the Trust's portfolio. The sub-adviser has, at least in part, been selected
primarily on the basis of its successful application of a consistent,
well-defined, long-term investment approach over a period of several market
cycles.
ING Investments is responsible for monitoring the investment program and
performance of the sub-adviser. Under the terms of the sub-advisory agreement,
the agreement can be terminated by either ING Investments or the Board. In the
event the sub-advisory agreement is terminated, the sub-adviser may be replaced
subject to any regulatory requirements or ING Investments may assume day-to-day
investment management of the Trust.
ING INVESTMENT MANAGEMENT CO.
ING Investment Management Co., a Connecticut corporation, serves as Sub-Adviser
to the Trust. Founded in 1972, ING IM is registered with the SEC as an
investment adviser. ING IM is an indirect, wholly-owned subsidiary of ING Groep,
and is an affiliate of ING Investments. ING IM has acted as adviser or
sub-adviser to mutual funds since 1994 and has managed institutional accounts
since 1972.
As of March 31, 2006, ING IM managed over $60 billion in assets. Its principal
business address is 230 Park Avenue, New York, NY 10169. For its services, ING
IM is entitled to receive a sub-advisory fee of 0.36%, expressed as an annual
rate based on the average daily Managed Assets of the Trust. This sub-advisory
fee is paid by ING Investments, not by the Trust.
PORTFOLIO MANAGEMENT. The following individuals comprise the investment
committee of the Trust and share responsibility for the day-to-day management of
the Trust's portfolio:
DANIEL A. NORMAN. Mr. Norman is Senior Vice President and Senior Portfolio
Manager in the Senior Debt Group, and has served in that capacity since November
1999. Mr. Norman has managed the Trust since April 1995 and is responsible for
the operations, analytics, legal and marketing areas for the Trust. Mr. Norman
also serves as Senior Vice President of the Trust, and he serves as Senior Vice
President of ING Senior Income Fund, another closed-end fund sub-advised by ING
IM that invests primarily in Senior Loans. Mr. Norman co-manages the Trust with
Mr. Bakalar.
JEFFREY A. BAKALAR. Mr. Bakalar is Senior Vice President and Senior Portfolio
Manager in the Senior Debt Group, and has served in that capacity since November
1999. Mr. Bakalar also serves as Senior Vice President of the Trust and as
Senior Vice President of ING Senior Income Fund, another closed-end fund
sub-advised by ING IM that invests primarily in Senior Loans. Mr. Bakalar
co-manages the Trust with Mr. Norman.
CURTIS F. LEE. Mr. Lee is Senior Vice President and Chief Credit Officer in the
Senior Debt Group and has served in that capacity since January 2001. Mr. Lee
also serves as Senior Vice President and Chief Credit Officer of the Fund (since
January 2001), and he serves as Senior Vice President and Chief Credit Officer
of ING Prime Rate Trust, another closed-end fund sub-advised by ING IM that
invests primarily in Senior Loans. As Chief Credit Officer, Mr. Lee is
responsible for implementing best credit practices within the Senior Debt Group,
beginning with the original credit underwriting and approval process through
ongoing credit monitoring and review. Mr. Lee also oversees loan workout and
negotiation strategies. Mr. Lee serves on the valuation committee and acts as
the primary liaison on valuation and credit matters as requested by the Board of
Trustees, internal and external auditors and regulatory authorities.
ADDITIONAL INFORMATION REGARDING PORTFOLIO MANAGERS
The SAI provides additional information about each portfolio manager's
compensation, other accounts managed by each portfolio manager and each
portfolio manager's ownership of securities in the Trust.
[GRAPHIC] If you have any questions, please call 1-800-992-0180.
Investment Adviser and Other Service Providers 23
INVESTMENT MANAGEMENT AND OTHER
SERVICE PROVIDERS
--------------------------------------------------------------------------------
THE ADMINISTRATOR
The Administrator of the Trust is ING Funds Services, LLC ("ING Funds
Services"). Its principal business address is 7337 East Doubletree Ranch Road,
Scottsdale, Arizona 85258. The Administrator is a wholly-owned subsidiary of ING
Groep and the immediate parent company of the Adviser.
Under an administration agreement ("Administration Agreement") between the
Administrator and the Trust, ING Funds Services administers the Trust's
corporate affairs subject to the supervision of the Board. In that connection,
the Administrator monitors the provisions of the Senior Loan agreements and any
agreements with respect to interests in Senior Loans and is responsible for
recordkeeping with respect to the Senior Loans in the Trust's repurchase offers
portfolio. ING Funds Services also furnishes the Trust with office facilities
and furnishes executive personnel together with clerical and certain
recordkeeping and administrative services. These services include preparation of
annual and other reports to shareholders and to the SEC. The Administrator also
handles the filing of federal, state and local income tax returns not being
furnished by the Custodian or Transfer Agent (as defined below). The
Administration Agreement also requires the Administrator to assist in managing
and supervising all aspects of the general day-to-day business activities and
operations of the Trust, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services. The
Administrator provides the Trust with office space, equipment and personnel
necessary to administer the Trust. The Administrator has authorized all of its
officers and employees who have been elected as officers of the Trust to serve
in such capacities. All services furnished by the Administrator under the
Administration Agreement may be furnished by such officers or employees of the
Administrator.
The Trust pays the Administrator an administration fee, computed daily and
payable monthly. The Administration Agreement states that the Administrator is
entitled to receive a fee at an annual rate of 0.25% of the Trust's Managed
Assets. The Administration Agreement may be canceled by the Board upon 60 days'
written notice.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the Common
Shares is DST Systems, Inc., whose principal business address is 333 W. 11th
Street, Kansas City, Missouri 64105.
CUSTODIAN
The Trust's securities and cash are held and maintained under a Custody
Agreement with State Street Bank and Trust Company, whose principal place of
business is 801 Pennsylvania Avenue, Kansas City, Missouri 64105.
24 Investment Adviser and Other Service Providers
DESCRIPTION OF THE TRUST
--------------------------------------------------------------------------------
The Trust is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
December 2, 1987, as amended (Declaration of Trust). The Board is responsible
for protecting the interests of shareholders. The Trustees are experienced
executives who oversee the Trust's activities, review contractual arrangements
with companies that provide services to the Trust and review the Trust's
performance.
The Declaration of Trust provides that the Trustees of the Trust may authorize
separate classes of shares of beneficial interest. The Trustees have authorized
an unlimited number of shares of beneficial interest, without par value, all of
which were initially classified as Common Shares. The Declaration of Trust also
authorizes the creation of an unlimited number of shares of beneficial interest
with preference rights, including preferred shares, without par value, in one or
more series, with rights as determined by the Board, by action of the Board
without the approval of the shareholders. The following table shows the number
of (i) shares authorized, (ii) shares held by the Trust for its own account and
(iii) shares outstanding, for each class of authorized securities of the Trust
as of June 15, 2006.
NUMBER HELD BY
NUMBER TRUST FOR ITS NUMBER
TITLE OF CLASS AUTHORIZED OWN ACCOUNT OUTSTANDING
--------------------------- ---------- -------------- -----------
Common Shares unlimited 0 145,033,235
Preferred Shares, Series M 3,600 0 3,600
Preferred Shares, Series T 3,600 0 3,600
Preferred Shares, Series W 3,600 0 3,600
Preferred Shares, Series Th 3,600 0 3,600
Preferred Shares, Series F 3,600 0 3,600
The Common Shares outstanding are fully paid and nonassessable by the Trust.
Holders of Common Shares are entitled to share equally in dividends declared by
the Board payable to holders of Common Shares and in the net assets of the Trust
available for distribution to holders of Common Shares after payment of the
preferential amounts payable to holders of any outstanding Preferred Shares.
Neither holders of Common Shares nor holders of Preferred Shares have
pre-emptive or conversion rights and Common Shares are not redeemable. Upon
liquidation of the Trust, after paying or adequately providing for the payment
of all liabilities of the Trust and the liquidation preference with respect to
any outstanding preferred shares, and upon receipt of such releases, indemnities
and refunding agreements as they deem necessary for their protection, the
Trustees may distribute the remaining assets of the Trust among the holders of
the Common Shares. Under the rules of the NYSE applicable to listed companies,
the Trust is required to hold an annual meeting of shareholders in each year. If
the Trust is converted to an open-end investment company or if for any other
reason Common Shares are no longer listed on the NYSE (or any other national
securities exchange the rules of which require annual meetings of shareholders),
the Trust does not intend to hold annual meetings of shareholders.
The Trust is responsible for paying the following expenses, among others: the
fees payable to the Adviser; the fees payable to the Administrator; the fees and
certain expenses of the Trust's custodian and transfer agent, including the cost
of providing records to the Administrator in connection with its obligation of
maintaining required records of the Trust; the charges and expenses of the
Trust's legal counsel, legal counsel to the Trustees who are not "interested
persons" of the Trust, as defined in the 1940 Act and independent accountants;
commissions and any issue or transfer taxes chargeable to the Trust in
connection with its transactions; all taxes and corporate fees payable by the
Trust to governmental agencies; the fees of any trade association of which the
Trust is a member; the costs of share certificates representing Common Shares of
the Trust; organizational and offering expenses of the Trust and the fees and
expenses involved in registering and maintaining registration of the Trust and
its Common Shares with the SEC, including the preparation and printing of the
Trust's registration statement and prospectuses for such purposes; allocable
communications expenses with respect to investor services, and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders; fees for independent
loan pricing services; the cost of insurance; and litigation and indemnification
expenses and extraordinary expenses not incurred in the ordinary course of the
Trust's business.
Under Massachusetts law, shareholders, including holders of Preferred Shares,
could under certain circumstances be held personally liable for the obligations
of the Trust. However, the Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust would be unable to meet its
obligations.
Holders of Common Shares are entitled to one vote for each share held and will
vote with the holders of any outstanding Preferred Shares or any other preferred
shares on each matter submitted to a vote of holders of Common Shares, except as
described under "Description of Capital Structure -- Preferred Shares."
Shareholders are entitled to one vote for each share held. The Common Shares,
Preferred Shares and any other preferred shares do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of Common
Shares, Preferred Shares and any other preferred shares voting for the election
of Trustees can elect all of the Trustees standing for election by such holders,
and, in such event, the holders of the remaining shares of Common Shares,
Preferred Shares and any other preferred shares will not be able to elect any of
such Trustees.
[GRAPHIC] If you have any questions, please call 1-800-992-0180.
Description of the Trust 25
DESCRIPTION OF THE TRUST
--------------------------------------------------------------------------------
So long as any Preferred Shares or any other Preferred Shares are outstanding,
holders of Common Shares will not be entitled to receive any dividends of or
other distributions from the Trust, unless at the time of such declaration, (1)
all accrued dividends on preferred shares or accrued interest on borrowings has
been paid and (2) the value of the Trust's total assets (determined after
deducting the amount of such dividend or other distribution), less all
liabilities and indebtedness of the Trust not represented by senior securities,
is at least 300% of the aggregate amount of such securities representing
indebtedness and at least 200% of the aggregate amount of securities
representing indebtedness plus the aggregate liquidation value of the
outstanding preferred shares (expected to equal the aggregate original purchase
price of the outstanding preferred shares plus redemption premium, if any,
together with any accrued and unpaid dividends thereon, whether or not earned or
declared and on a cumulative basis). In addition to the requirements of the 1940
Act, the Trust is required to comply with other asset coverage requirements as a
condition of the Trust obtaining a rating of the Preferred Shares from a rating
agency. These requirements include an asset coverage test more stringent than
under the 1940 Act.
The Trust will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon Trustees individually but only upon the property of the Trust and
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
CONVERSION TO OPEN-END FUND
The Trustees may at any time propose conversion of the Trust to an open-end
management investment company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing. In
considering whether to submit an open-ending proposal to shareholders, the
Trustees might consider, among other factors, the differences in operating
expenses between open-end and closed-end funds (due to the expenses of
continuously selling shares and of standing ready to effect redemptions), the
potentially adverse tax consequences to non-redeeming shareholders once a fund
is open-ended, and the impact of open-ending on portfolio management policies.
Such a conversion would require the approval of both a majority of the Trust's
outstanding Common Shares and preferred shares voting together as a single class
and a majority of the outstanding preferred shares voting as a separate class on
such conversion. Conversion of the Trust to an open-end investment company would
require the redemption of all outstanding preferred shares, including the
Preferred Shares, which would eliminate the leveraged capital structure of the
Trust with respect to the Common Shares. A delay in conversion could result
following shareholder approval due to the Trust's inability to redeem the
preferred shares. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their next computed NAV less any
redemption charge as might be in effect at the time of redemption. If the Trust
is converted to an open-end management investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and its
shares would no longer be listed on the NYSE. If the Trust were to experience
significant redemptions as an open-end fund, the decrease in total assets could
result in a higher expense ratio and inefficiencies in portfolio management. In
this regard, the Trust could reserve the right to effect redemptions in-kind
with portfolio securities, which would subject redeeming shareholders to
transaction costs in liquidating those securities.
REPURCHASE OF COMMON SHARES
In recognition of the possibility that the Trust's Common Shares may trade at a
discount to their NAV, the Trust may from time to time take action to attempt to
reduce or eliminate a market value discount from NAV by repurchasing its Common
Shares in the open market or by tendering its Common Shares at NAV. So long as
any Preferred Shares are outstanding, the Trust may not purchase, redeem or
otherwise acquire any Common Shares unless (1) all accumulated dividends on the
Preferred Shares have been paid or set aside for payment through the date of
such purchase, redemption or other acquisition and (2) at the time of such
purchase, redemption or acquisition asset coverage requirements set forth in the
Declaration of Trust and the Trust's Certificate of Designation for Preferred
Shares are met. Repurchases of Common Shares may result in the Trust being
required to redeem preferred shares to satisfy asset coverage requirements.
FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES OF THE TRUST
The investment objective of the Trust, certain policies of the Trust specified
herein as fundamental and the investment restrictions of the Trust described in
the SAI are fundamental policies of the Trust and may not be changed without a
Majority Vote of the shareholders of the Trust. The term Majority Vote means the
affirmative vote of (a) more than 50% of the outstanding shares of the Trust or
(b) 67% or more of the shares present at a meeting if more than 50% of the
outstanding shares of the Trust are represented at the meeting in person or by
proxy, whichever is less. All other policies of the Trust may be modified by
resolution of the Board.
26 Description of the Trust
DESCRIPTION OF CAPITAL STRUCTURE
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COMMON SHARES
The Trust's Declaration of Trust authorizes the issuance of an unlimited number
of Common Shares of beneficial interest, without par value. All Common Shares
have equal rights to the payment of dividends and the distribution of assets
upon liquidation. Common Shares will, when issued, be fully paid and
non-assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting.
Whenever preferred shares are outstanding, holders of Common Shares will not be
entitled to receive any distributions from the Trust, unless at the time of such
declaration, (1) all accrued dividends on Preferred Shares or accrued interest
on borrowings have been paid and (2) the value of the Trust's total assets
(determined after deducting the amount of such dividend or other distribution),
less all liabilities and indebtedness of the Trust not represented by senior
securities, is at least 300% of the aggregate amount of such securities
representing indebtedness and at least 200% of the aggregate amount of
securities representing indebtedness plus the aggregate liquidation value of the
outstanding preferred shares. In addition to the requirements of the 1940 Act,
the Trust is required to comply with other asset coverage requirements as a
condition of the Trust obtaining a rating of the preferred shares from a rating
agency. These requirements include asset coverage tests more stringent than
under the 1940 Act. See "Preferred Shares" below.
BORROWINGS
The Trust's Declaration of Trust authorizes the Trust, without the prior
approval of holders of Common Shares, to borrow money. In this connection, the
Trust may issue notes or other evidence of indebtedness (including bank
borrowings or commercial paper) and may secure any such borrowings by
mortgaging, pledging or otherwise granting a security interest in the Trust's
assets. See "Risk Factors and Special Considerations -- Leverage."
PREFERRED SHARES
Under the 1940 Act, the Trust is permitted to have outstanding more than one
series of preferred shares as long as no single series has priority over another
series nor holders of preferred shares have pre-emptive rights to purchase any
other preferred shares that might be issued.
The Trust's Declaration of Trust authorizes the issuance of a class of preferred
shares (which class may be divided into two or more series) as the Trustees may,
without shareholder approval, authorize. The preferred shares have such
preferences, voting powers, terms of redemption, if any, and special or relative
rights or privileges (including conversion rights, if any) as the Trustee may
determine and as are set forth in the Trust's Certificate of Designation
establishing the terms of the preferred shares. The number of shares of the
preferred class or series authorized is unlimited, and the shares authorized may
be represented in part by fractional shares. Under the Trust's Certificate of
Designation, the Trustees have authorized the creation of 18,000 Auction Rate
Cumulative Preferred Shares, without par value, with a liquidation preference of
$25,000 per share, classified as Series M, T, W, Th and F Auction Rate
Cumulative Preferred Shares.
Any decision to offer preferred shares is subject to market conditions and to
the Board and the Adviser's continuing belief that leveraging the Trust's
capital structure through the issuance of preferred shares is likely to achieve
the benefits to the Common Shares described in this Prospectus for long-term
investors. The terms of the preferred shares will be determined by the Board in
consultation with the Adviser (subject to applicable law and the Trust's
Declaration of Trust) if and when it authorizes a preferred shares offering.
The Preferred Shares have complete priority over the Common Shares as to
distribution of assets. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Trust, holders of
preferred shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares.
[GRAPHIC] If you have any questions, please call 1-800-992-0180.
Description of Capital Structure 27
TAX MATTERS
--------------------------------------------------------------------------------
The following information is meant as a general summary for U.S. shareholders.
Please see the SAI for additional information. Investors should rely on their
own tax adviser for advice about the particular federal, state and local tax
consequences to them of investing in the Trust.
The federal income tax treatment of the Trust's Preferred Shares is not entirely
clear, but the Trust believes, based on the advice of its counsel, that the
Preferred Shares will constitute stock of the Trust. It is possible, however,
that the IRS might take a contrary position, asserting, for example, that the
Preferred Shares constitute debt of the Trust. The discussion below assumes that
the Preferred Shares are stock.
The Trust will distribute all or substantially all of its net investment income
and net realized capital gains, if any, to its shareholders each year. Although
the Trust will not be taxed on amounts it distributes, most shareholders will be
taxed on amounts they receive. A particular distribution generally will be
taxable as either ordinary income or long-term capital gain. The Trust will
allocate a proportionate amount of each type of its income to the Common Shares
and to the Preferred Shares. It generally does not matter how long a shareholder
has held the Trust's Common Shares or Preferred Shares or whether the
shareholder elects to receive distributions in cash or reinvest them in
additional Trust's Common Shares or Preferred Shares. For example, if the Trust
designates a particular distribution as a long-term capital gains distribution,
it will be taxable to a shareholder at his or her long-term capital gains rate.
Dividends from the Trust are generally not eligible for the reduced rate of tax
that may apply to certain qualifying dividends on corporate stock.
Current tax law generally provides for a maximum tax rate for individual
taxpayers of 15% on long-term capital gains and from certain qualifying
dividends on corporate stock. Although, these rate reductions do not apply to
corporate taxpayers, such taxpayers may be entitled to a corporate dividends
received deduction with respect to their share of eligible domestic corporate
dividends received by the Trust, or to foreign shareholders. The following are
guidelines for how certain distributions by the Fund are generally taxed to
individual taxpayers:
- Distributions of earnings from qualifying dividends and qualifying
long-term capital gains will be taxed at a maximum rate of 15%.
- Note that distributions of earnings from dividends paid by certain
"qualified foreign corporations" can also qualify for the lower tax
rates on qualifying dividends.
- A shareholder will also have to satisfy a more than 60-day holding
period with respect to any distributions of qualifying dividends in
order to obtain the benefit of the lower tax rate.
- Distributions of earnings from non-qualifying dividends interest
income, other types of ordinary income and short-term capital gains
will be taxed at the ordinary income tax rate applicable to the
taxpayer.
Dividends declared by the Trust in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
Each shareholder will receive an annual statement summarizing the shareholder's
dividend and capital gains distributions.
If a shareholder invests through a tax-deferred account, such as a retirement
plan, the shareholder generally will not have to pay tax on dividends until they
are distributed from the account. These accounts are subject to complex tax
rules, and shareholders should consult a tax adviser about investment through a
tax-deferred account.
There may be tax consequences to a shareholder if the shareholder sells the
Trust's Common Shares or Preferred Shares. A shareholder will generally have a
capital gain or loss, which will be long-term or short-term, generally depending
on how long the shareholder holds those Common Shares or Preferred Shares. If a
shareholder exchanges shares, the shareholder may be treated as if he or she
sold them. Shareholders are responsible for any tax liabilities generated by
their own transactions.
As with all investment companies, the Trust may be required to withhold U.S.
federal income tax at the current rate of 28% of all taxable distributions
payable to a shareholder if the shareholder fails to provide the Trust with his
or her correct taxpayer identification number or to make required
certifications, or if the shareholder has been notified by the IRS that he or
she is subject to backup withholding. Backup withholding is not an additional
tax; rather, it is a way in which the IRS ensures it will collect taxes
otherwise due. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability.
28 Tax Matters
MORE INFORMATION
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DISTRIBUTION ARRANGEMENTS
Pursuant to the terms of a distribution agreement ("Distribution Agreement"),
ING Funds Distributor will act as the Trust's distributor for the optional cash
investments under the Trust's Shareholder Investment Program and for privately
negotiated transactions. The Distribution Agreement provides that ING Fund's
Distributor does not receive compensation or commissions from the Trust for such
services. In addition, no fees or commissions will be paid by the Trust or its
shareholders in connection with the reinvestment of dividends and capital gains
distributions. ING Funds Distributor's principal business address is 7337 East
Doubletree Ranch Road, Scottsdale, Arizona 85258. ING Funds Distributor, ING
Investments, the Trust's Adviser, and ING IM, the Trust's Sub-Adviser, are
indirect, wholly-owned subsidiaries of ING Groep. See "Plans of Distribution" in
the SAI.
The Trust bears the expenses of issuing the Common Shares. These expenses
include, but are not limited to, the expense of preparation and printing of the
Prospectus and SAI, the expense of counsel and independent registered public
accounting firm and others.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for the
Trust by Dechert LLP, 1775 I Street, NW, Washington, DC, counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP serves as the independent registered public accounting firm for the
Trust. The principal address of KPMG is 355 South Grand Avenue, Los Angeles,
California 90071.
REGISTRATION STATEMENT
The Trust has filed with the SEC a Registration Statement under the Securities
Act of 1933, relating to the Common Shares offered hereby. For further
information with respect to the Trust and its Common Shares, reference is made
to such Registration Statement and the exhibits filed therein.
[GRAPHIC] If you have any questions, please call 1-800-992-0180.
More Information 29
STATEMENT OF ADDITIONAL INFORMATION
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Table of Contents
PAGE
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Change of Name 2
Investment Objective 2
Investment Restrictions 2
Additional Information About Investments and Investment Techniques 4
Trustees and Officers 12
Compensation Table 23
Investment Management and Other Service Providers 25
Code of Ethics 33
Portfolio Transactions 34
Net Asset Value 35
Federal Taxation 36
Advertising and Performance Data 40
General Information 42
Financial Statements 42
30 Statement of Additional Information
ING PRIME RATE TRUST
7337 EAST DOUBLETREE RANCH ROAD
SCOTTSDALE, ARIZONA 85258
(800) 992-0180
25,000,000 COMMON SHARES OF BENEFICIAL INTEREST
--------------------------------------------------------------------------------
TRUST ADVISORS AND AGENTS
--------------------------------------------------------------------------------
ADVISER
ING Investments, LLC
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258
SUB-ADVISER
ING Investment Management Co.
230 Park Avenue
New York, NY 10169
ADMINISTRATOR
ING Funds Services, LLC
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258
CUSTODIAN
State Street Bank and Trust
801 Pennsylvania Avenue
Kansas City, MO 64105
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
KPMG LLP
99 High Street
Boston, MA 02110
DISTRIBUTOR
ING Funds Distributor, LLC
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258
TRANSFER AGENT
DST Systems, Inc.
333 W. 11th Street
Kansas City, MO 64105
LEGAL COUNSEL
Dechert LLP
1775 I Street, NW
Washington, DC 20006
INSTITUTIONAL INVESTORS AND ANALYSTS
Call ING Prime Rate Trust
(800) 336-3436
THE TRUST HAS NOT AUTHORIZED ANY PERSON TO PROVIDE YOU WITH ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFER. YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS
PROSPECTUS OR OTHER INFORMATION TO WHICH WE HAVE REFERRED YOU. THIS PROSPECTUS
IS NOT AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON SHARES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT
TO THIS PROSPECTUS DOES NOT IMPLY THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME AFTER THE DATE OF THIS PROSPECTUS. HOWEVER,
IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED.
WHEN CONTACTING THE SEC, YOU WILL WANT TO REFER TO THE TRUST'S SEC FILE NUMBER.
THE FILE NUMBER IS AS FOLLOWS:
1940 Act File No. 811-05410
[ING LOGO]
PRPRO-UPRT25M (0606-063006)
ING PRIME RATE TRUST
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258-2034
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
JUNE 30, 2006
ING Prime Rate Trust ("Trust") is a diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended ("1940 Act"). The Trust's investment objective is to provide investors
with as high a level of current income as is consistent with the preservation of
capital. There is no assurance that the Trust will achieve its investment
objective. The Trust is managed by ING Investments, LLC ("ING Investments" or
"Adviser") and sub-advised by ING Investment Management Co. ("ING IM" or
"Sub-Adviser").
This Statement of Additional Information ("SAI") does not constitute a
prospectus, but should be read in conjunction with the Prospectus relating
thereto dated June 30, 2006. Capitalized terms not defined herein are used as
defined in the Prospectuses. This SAI does not include all the information that
a prospective investor should consider before purchasing Common Shares in this
offering, and investors should obtain and read the Prospectus prior to
purchasing such shares. In addition, the Trust's financial statements and the
independent registered public accounting firm's report thereon included in the
annual shareholder report dated February 28, 2006, are incorporated herein by
reference. A copy of the Prospectuses may be obtained without charge by
contacting the Trust at the address and phone number written above.
TABLE OF CONTENTS
PAGE
CHANGE OF NAME 2
INVESTMENT OBJECTIVE 2
INVESTMENT RESTRICTIONS 2
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT TECHNIQUES 4
TRUSTEES AND OFFICERS 12
COMPENSATION TABLE 23
INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS 25
CODE OF ETHICS 33
PORTFOLIO TRANSACTIONS 34
NET ASSET VALUE 35
FEDERAL TAXATION 36
ADVERTISING AND PERFORMANCE DATA 40
GENERAL INFORMATION 42
FINANCIAL STATEMENTS 42
The Prospectuses and SAI omit certain information contained in the
registration statement filed with the Securities and Exchange Commission
("SEC"). The registration statement may be obtained from the SEC upon payment of
the fee prescribed, or inspected at the SEC's office for no charge. The
registration statement is also available on the SEC's website (www.sec.gov).
1
CHANGE OF NAME
The Trust changed its name from Pilgrim Prime Rate Trust to Pilgrim America
Prime Rate Trust in April 1996, and then changed its name back to Pilgrim Prime
Rate Trust on November 16, 1998. Effective March 1, 2002, the Trust changed its
name to ING Prime Rate Trust.
INVESTMENT OBJECTIVE
The Trust's investment objective is to obtain as high a level of current
income as is consistent with the preservation of capital. The Trust seeks to
achieve its investment objective by investing under normal circumstances at
least 80% of its net assets, plus the amount of any borrowings for investment
purposes, in U.S. dollar denominated floating rate secured senior loans ("Senior
Loans"). Under normal circumstances, the Trust invests at least 80% of its
assets in Senior Loans made to corporations or other business entities organized
under U.S. or Canadian law and that are domiciled in the U.S., Canada or in U.S.
territories or possessions.
The Senior Loans in which the Trust invests either hold the most senior
position in the capital structure of the borrower or hold an equal ranking with
other senior debt or have characteristics that the Adviser or Sub-Adviser
believes justify treatment as senior debt. These Senior Loans are typically
below investment grade credit quality.
The Trust may invest up to 20% of its total assets in other investments,
including unsecured floating rate loans, notes and other debt securities,
subordinated loans, tranches of floating rate asset-backed securities,
including structured notes, short-term debt instruments, equity securities
acquired in connection with investments in loans and other instruments as
described under "Additional Information About Investments and Investment
Techniques." During periods when, in the opinion of the Trust's Adviser or
Sub-Adviser, a temporary defensive posture in the market is appropriate, the
Trust may hold up to 100% of its assets in cash and/or in short-term debt
instruments.
INVESTMENT RESTRICTIONS
The Trust operates under a number of investment policies and restrictions.
Certain investment restrictions of the Trust are designated as fundamental
policies and as such may not be changed without the approval of a majority of
the Trust's outstanding voting securities. In accordance with the 1940 Act, a
majority of the Trust's outstanding securities means the lesser of (i) 67% or
more of the Trust's shares present at a meeting, if the holders of more than 50%
of the Trust's shares are present or represented by proxy, or (ii) more than 50%
of the Trust's shares. The following investment restrictions have been
designated as fundamental policies. The Trust will not:
1. issue senior securities, except insofar as the Trust may be deemed
to have issued a senior security by reason of (i) entering into certain interest
rate hedging transactions, (ii) entering into reverse repurchase agreements, or
(iii) borrowing money in an amount not exceeding 331/3%, or such other
percentage permitted by law, of the Trust's total assets (including the borrowed
amount) less all liabilities other than borrowings, or (iv) issuing a class or
classes of preferred shares in an amount not exceeding 50%, or such other
percentage permitted by law, of the Trust's total assets less all liabilities
and indebtedness not represented by senior securities.
2. invest more than 25% of its total assets in any industry.
2
3. invest in marketable warrants other than those acquired in
conjunction with Senior Loans and such warrants will not constitute more than 5%
of its assets.
4. make investments in any one issuer other than U.S. government
securities if, immediately after such purchase or acquisition, more than 5% of
the value of the Trust's total assets would be invested in such issuer, or the
Trust would own more than 25% of any outstanding issue, except that up to 25% of
the Trust's total assets may be invested without regard to the foregoing
restrictions. For the purpose of the foregoing restriction, the Trust will
consider the borrower of a Senior Loan to be the issuer of such Senior Loan. In
addition, with respect to a Senior Loan under which the Trust does not have
privity with the borrower or would not have a direct cause of action against the
borrower in the event of the failure of the borrower to pay scheduled principal
or interest, the Trust will also separately meet the foregoing requirements and
consider each interpositioned bank (a lender from which the Trust acquires a
Senior Loan) to be an issuer of the Senior Loan.
5. act as an underwriter of securities, except to the extent that it
may be deemed to act as an underwriter in certain cases when disposing of its
portfolio investments or acting as an agent or one of a group of co-agents in
originating Senior Loans.
6. purchase or sell equity securities (except that the Trust may,
incidental to the purchase or ownership of an interest in a Senior Loan, or as
part of a borrower reorganization, acquire, sell and exercise warrants and/or
acquire or sell other equity securities), real estate, real estate mortgage
loans, commodities, commodity futures contracts, or oil or gas exploration or
development programs; or sell short, purchase or sell straddles, spreads, or
combinations thereof, or write put or call options.
7. make loans of money or property to any person, except that the Trust
(i) may make loans to corporations or other business entities, or enter into
leases or other arrangements that have the characteristics of a loan; (ii) may
lend portfolio instruments; and (iii) may acquire securities subject to
repurchase agreements.
8. purchase shares of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.
9. make investments on margin or hypothecate, mortgage or pledge any of
its assets except for the purpose of securing borrowings as described above in
connection with the issuance of senior securities and then only in an amount up
to 33 1/3% (50% in the case of the issuance of a preferred class of shares), or
such other percentage permitted by law, of the value of the Trust's total assets
(including, with respect to borrowings, the amount borrowed) less all
liabilities other than borrowings (or, in the case of the issuance of senior
securities, less all liabilities and indebtedness not represented by senior
securities).
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in value of the
Trust's investments or amount of total assets will not be considered a violation
of any of the foregoing restrictions.
There is no limitation on the percentage of the Trust's total assets that
may be invested in instruments which are not readily marketable or subject to
restrictions on resale, and to the extent the Trust invests in such instruments,
the Trust's portfolio should be considered illiquid. The extent to which the
Trust invests in such instruments may affect its ability to realize the net
asset value ("NAV") of the Trust in the event of the voluntary or involuntary
liquidation of its assets.
The Trust has also adopted a non-fundamental policy as required by Rule
35d-1 under the 1940 Act to invest, under normal circumstances, at least 80% of
its net assets, plus the amount of any
3
borrowings for investment purposes, in floating rate secured Senior Loans. The
Trust has also adopted a policy to provide its shareholders with at least
60 days' prior notice of any change in such investment policy. If, subsequent to
an investment, the 80% requirement is no longer met, the Trust's future
investments will be made in a manner that will bring the Trust into compliance
with this policy.
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Trust may invest,
subject to its investment objective, policies and restrictions, are described in
the prospectus under "Investment Objective and Policies." Additional information
concerning certain of the Trust's investments and investment techniques is set
forth below.
EQUITY SECURITIES
In connection with its purchase or holding of interests in Senior Loans,
the Trust may acquire (and subsequently sell) equity securities or exercise
warrants that it receives. The Trust will acquire such interests only as an
incident to the intended purchase or ownership of loans or in connection with a
reorganization of a borrower or its debt. The Trust normally will not hold more
than 20% of its total assets in equity securities. Equity securities will not be
treated as Senior Loans; therefore, an investment in such securities will not
count toward the 80% of the Trust's net assets, plus the amount of any
borrowings for investment purposes, that normally will be invested in Senior
Loans. Equity securities are subject to financial and market risks and can be
expected to fluctuate in value.
LEASE PARTICIPATIONS
Senior Loans that the Trust may acquire include particpation interests in
lease fiancings (Lease Participations) where the collateral quality, credit
quality of the borrower and the likelihood of payback are believed by the
Adviser or Sub-Adviser to be the same as those applied to conventional Senior
Loans. A Lease Participation is also required to have a floating interest rate
that is indexed to a benchmark indicator of prevailing interest rates, such as
London Inter-Bank Offered Rate ("LIBOR") or the Prime Rate.
The credit quality standards and general requirements that the Trust
applies to Lease Participations including collateral quality, the credit quality
of the borrower and the likelihood of payback are substantially the same as
those applied to conventional Senior Loans. A Lease Participation is also
required to have a floating interest rate that is indexed to the federal funds
rate, LIBOR, or Prime Rate in order to be eligible for investment.
The Office of the Comptroller of the Currency has established regulations
which set forth circumstances under which national banks may engage in lease
financings. Among other things, the regulation requires that a lease be a
net-full payout lease representing the noncancelable obligation of the lessee,
and that the bank make certain determinations with respect to any estimated
residual value of leased property relied upon by the bank to yield a full return
on the lease. The Trust may invest in lease financings only if the Lease
Participation meets these banking law requirements.
INTEREST RATES AND PORTFOLIO MATURITY
Interest rates on loans in which the Trust invests adjust periodically. The
interest rates are adjusted based on a base rate plus a premium or spread over
the base rate. The base rate usually is LIBOR, the Federal Reserve federal funds
rate, the Prime Rate or other base lending rates used by commercial lenders.
LIBOR usually is an average of the interest rates quoted by several designated
banks
4
as the rates at which they pay interest to major depositors in the London
interbank market on U.S. dollar denominated deposits. The Adviser and
Sub-Adviser believe that changes in short-term LIBOR rates are closely related
to changes in the Federal Reserve federal funds rate, although the two are not
technically linked. The Prime Rate quoted by a major U.S. bank is generally the
interest rate at which that bank is willing to lend U.S. dollars to its most
creditworthy borrowers, although it may not be the bank's lowest available rate.
Loans in which the Trust invests typically have interest rates which reset
at least quarterly and may reset as frequently as daily. The maximum duration of
an interest rate reset on any loan in which the Trust can invest is one year.
The maximum maturity on any loan in which the Trust can invest is ten years. The
Trust's portfolio of loans will ordinarily have a dollar-weighted average time
until the next interest rate adjustment of ninety (90) days or less, although
the time may exceed 90 days. The Trust may find it possible and appropriate to
use interest rate swaps and other investment practices to shorten the effective
interest rate adjustment period of loans. If the Trust does so, it will consider
the shortened period to be the adjustment period of the loan. As short-term
interest rates rise, interest payable to the Trust should increase. As
short-term interest rates decline, interest payable to the Trust should
decrease. The amount of time that will pass before the Trust experiences the
effects of changing short-term interest rates will depend on the dollar-weighted
average time until the next interest rate adjustment on the Trust's portfolio of
loans.
Loans usually have mandatory and optional prepayment provisions. Because of
prepayments, the actual remaining maturity of a loan may be considerably less
than its stated maturity. If a loan is prepaid, the Trust will have to reinvest
the proceeds in other loans or securities which may have a lower fixed spread
over its base rate. In such a case, the amount of interest paid to the Trust
would likely decrease.
In the event of a change in the benchmark interest rate on a loan, the rate
payable to lenders under the loan will, in turn, change at the next scheduled
reset date. If the benchmark rate goes up, the Trust as lender would earn
interest at a higher rate, but only on and after the reset date. If the
benchmark rate goes down, the Trust as lender would earn interest at a lower
rate, but only on and after the reset date.
During normal market conditions, changes in market interest rates will
affect the Trust in certain ways. The principal effect will be that the yield on
the Trust's Common Shares will tend to rise or fall as market interest rates
rise and fall. This is because almost all of the assets in which the Trust
invests pay interest at rates which float in response to changes in market
rates. However, because the interest rates on the Trust's assets reset over
time, there will be an imperfect correlation between changes in market rates and
changes to rates on the portfolio as a whole. This means that changes to the
rate of interest paid on the portfolio as a whole will tend to lag behind
changes in market rates.
Market interest rate changes may also cause the Trust's NAV to experience
moderate volatility. This is because the value of a loan asset in the Trust is
partially a function of whether it is paying what the market perceives to be a
market rate of interest for the particular loan, given its individual credit and
other characteristics. If market interest rates change, a loan's value could be
affected to the extent the interest rate paid on that loan does not reset at the
same time. As discussed above, the rates of interest paid on the loans in which
the Trust invests have a weighted average reset period that typically is less
than 90 days. Therefore, the impact of the lag between a change in market
interest rates and the change in the overall rate on the portfolio is expected
to be minimal.
Finally, to the extent that changes in market rates of interest are
reflected not in a change to a base rate such as LIBOR but in a change in the
spread over the base rate which is payable on loans of the type and quality in
which the Trust invests, the Trust's NAV could be adversely affected. Again,
this is because the value of a loan asset in the Trust is partially a function
of whether it is paying what the
5
market perceives to be a market rate of interest for the particular loan, given
its individual credit and other characteristics. However, unlike changes in
market rates of interest for which there is only a temporary lag before the
portfolio reflects those changes, changes in a loan's value based on changes in
the market spread on loans in the Trust's portfolio may be of longer duration.
OTHER INVESTMENTS
Assets not invested in Senior Loans will generally consist of other
instruments, including loans to borrowers organized outside the U.S. or Canada,
unsecured floating rate loans, notes and other debt instruments, floating rate
subordinated loans up to a maximum of 5% of the Trust's total assets, tranches
of floating rate asset-backed securities, including structured notes, short-term
debt securities, with remaining maturities of 120 days or less (which may have
yields tied to the Prime Rate, commercial paper rates, the federal funds rate or
LIBOR) and equity securities acquired in connection with investments in loans.
Short-term debt instruments may include (i) commercial paper rated A-1 by
Standard & Poor's ("S&P) Ratings Services or P-1 by Moody's Investors Service,
Inc., or of comparable quality as determined by the Adviser or Sub-Adviser,
(ii) certificates of deposit, bankers' acceptances, and other bank deposits and
obligations, and (iii) securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities. During periods when, in the judgment of the
Adviser or Sub-Adviser, a temporary defensive posture in the market is
appropriate, the Trust may hold up to 100% of its assets in cash and/or in
short-term debt instruments.
REPURCHASE AGREEMENTS
The Trust has the ability, pursuant to its investment objective and
policies, to enter into repurchase agreements. A repurchase agreement is a
contract under which the Trust may sell and simultaneously obtain the commitment
of the purchaser to sell the security back to the Trust at an agreed upon price
on an agreed upon date. Repurchase agreements will be considered borrowings by
the Trust, and as such are subject to the restrictions on borrowing. Borrowings
by the Trust create an opportunity for greater total return, but at the same
time increase exposure to capital risk. The Trust will maintain in a segregated
account with its custodian cash or liquid high grade portfolio securities in an
amount sufficient to cover its obligations with respect to the repurchase
agreements. The Trust will receive payment for such securities only upon
physical delivery or evidence of book entry transfer by its custodian.
Regulations of the SEC require either that securities sold by the Trust under a
repurchase agreement be segregated pending repurchase or that the proceeds be
segregated on the Trust's books and records pending repurchase. Repurchase
agreements may involve certain risks in the event of default or insolvency of
the other party, including possible loss from delays or restrictions upon the
Trust's ability to dispose of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
The Trust has the ability, pursuant to its investment objective and
policies, to enter into repurchase agreements if the asset which is the subject
of the repurchase is a loan. Such agreements may be considered to be loans by
the Trust for purposes of the 1940 Act. Each reverse repurchase agreement must
be collateralized fully, in accordance with the provisions of Rule 5b-3 under
the 1940 Act, at all times. Pursuant to such reverse repurchase agreements, the
Trust acquires securities from financial institutions such as brokers, dealers
and banks, subject to the seller's agreement to repurchase and the Trust's
agreement to resell such securities at a mutually agreed upon date and price.
The term of such an agreement is generally quite short, possibly overnight or
for a few days, although it may extend over a number of months (up to one year)
from the date of delivery. The repurchase price generally equals the price paid
by the Trust plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
The securities underlying a reverse
6
repurchase agreement will be marked to market every business day so that the
value of the collateral is at least equal to the value of the loan, including
the accrued interest thereon, and the Adviser or Sub-Adviser will monitor the
value of the collateral. Securities subject to reverse repurchase agreements
will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry
System. If the seller defaults on its repurchase obligation, the Trust will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities is less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Trust's rights with respect
to such securities to be delayed or limited. To mitigate this risk, the Trust
only enters into reverse repurchase agreements with highly rated, large
financial institutions. The Trust may only enter into reverse repurchase
agreements that qualify for an exclusion from any automatic stay of creditors'
rights against the counterparty under applicable insolvency law in the event of
the counterparty's insolvency.
LENDING LOAN INTERESTS AND OTHER PORTFOLIO INSTRUMENTS
To generate additional income, the Trust may lend its portfolio securities,
including interests in Senior Loans, in an amount equal to up to 33 1/3% of the
Trust's total assets to broker-dealers, major banks, or other recognized
domestic institutional borrowers of securities. No lending may be made to any
companies affiliated with the Adviser or Sub-Adviser. During the time portfolio
securities are on loan, the borrower pays the Trust any dividends or interest
paid on such securities, and the Trust may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower who has delivered equivalent collateral or a letter of credit.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower fail financially.
The Trust may seek to increase its income by lending financial instruments
in its portfolio in accordance with present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC. The lending
of financial instruments is a common practice in the securities industry. The
loans are required to be secured continuously by collateral, consistent with the
requirements of the 1940 Act discussed below, maintained on a current basis at
an amount at least equal to the market value of the portfolio instruments
loaned. The Trust has the right to call a loan and obtain the portfolio
instruments loaned at any time on such notice as specified in the transaction
documents. For the duration of the loan, the Trust will continue to receive the
equivalent of the interest paid by the issuer on the portfolio instruments
loaned and may also receive compensation for the loan of the financial
instrument. Any gain or loss in the market price of the instruments loaned that
may occur during the term of the loan will be for the account of the Trust.
The Trust may lend its portfolio instruments so long as the terms and the
structure of such loans are not inconsistent with the requirements of the 1940
Act, which currently require that (a) the borrower pledge and maintain with the
Trust collateral consisting of cash, a letter of credit issued by a domestic
U.S. bank, or securities issued or guaranteed by the U.S. government having a
value at all times not less than 100% of the value of the instruments loaned,
(b) the borrowers add to such collateral whenever the price of the instruments
loaned rises (i.e., the value of the loan is marked to market on a daily basis),
(c) the loan be made subject to termination by the Trust at any time, and
(d) the Trust receives reasonable interest on the loan (which may include the
Trust's investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned instruments and increase in their
market value. The Trust may lend its portfolio instruments to member banks of
the Federal Reserve System, members of the New York Stock Exchange ("NYSE") or
other entities determined by the Adviser or Sub-Adviser to be creditworthy. All
relevant facts and circumstances, including the creditworthiness of the
qualified institution, will be monitored by the Adviser or Sub-Adviser, and will
be considered in making decisions with respect to the lending of portfolio
instruments.
7
The Trust may pay reasonable negotiated fees in connection with loaned
instruments. In addition, voting rights may pass with loaned securities, but if
a material event were to occur affecting such a loan, the Trust will retain the
right to call the loan and vote the securities. If a default occurs by the other
party to such transaction, the Trust will have contractual remedies pursuant to
the agreements related to the transaction, but such remedies may be subject to
bankruptcy and insolvency laws which could materially and adversely affect the
Trust's rights as a creditor. However, the loans will be made only to firms
deemed by the Adviser or Sub-Adviser to be of good financial standing and when,
in the judgment of the Adviser or Sub-Adviser, the consideration which can be
earned currently from loans of this type justifies the attendant risk.
INTEREST RATE HEDGING TRANSACTIONS
The Trust has the ability, pursuant to its investment objectives and
policies, to engage in certain hedging transactions including interest rate
swaps and the purchase or sale of interest rate caps and floors. The Trust may
undertake these transactions primarily for the following reasons: to preserve a
return on or value of a particular investment or portion of the Trust's
portfolio, to protect against decreases in the anticipated rate of return on
floating or variable rate financial instruments which the Trust owns or
anticipates purchasing at a later date, or for other risk management strategies
such as managing the effective dollar-weighted average duration of the Trust's
portfolio. Market conditions will determine whether and in what circumstances
the Trust would employ any of the hedging techniques described below.
Interest rate swaps involve the exchange by the Trust with another party of
their respective commitments to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments on a specified dollar amount, referred
to as the "notional" principal amount, for an obligation to make fixed rate
payments. For example, the Trust may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio that has an interest
rate redetermination period of one year. The Trust could exchange its right to
receive fixed income payments for one year from a borrower for the right to
receive payments under an obligation that readjusts monthly. In such an event,
the Trust would consider the interest rate redetermination period of such Senior
Loan to be the shorter period.
The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor. The Trust will not enter into
swaps, caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Trust or to
the extent the purchase of swaps, caps or floors would be inconsistent with the
Trust's other investment restrictions.
The Trust will usually enter into interest rate swaps on a net basis, i.e.,
where the two parties make net payments with the Trust receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Trust's obligations over its entitlement with respect to
each interest rate swap will be accrued and an amount of cash or liquid
securities having an aggregate NAV at least equal to the accrued excess will be
maintained in a segregated account. If the Trust enters into a swap on other
than a net basis, the Trust will maintain in the segregated account the full
amount of the Trust's obligations under each such swap. The Trust may enter into
swaps, caps and floors with member banks of the Federal Reserve System, members
of the NYSE or other entities determined by ING Investments. If a default occurs
by the other party to such transaction, the Trust will have contractual remedies
pursuant to the agreements related to the transaction but such remedies may be
subject to bankruptcy and insolvency laws which could materially and adversely
affect the Trust's rights as a
8
creditor. The Trust will not treat swaps covered in accordance with applicable
regulatory guidance as senior securities.
The swap, cap and floor market has grown substantially in recent years with
a large number of banks and financial services firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, this
market has become relatively liquid. There can be no assurance, however, that
the Trust will be able to enter into interest rate swaps or to purchase interest
rate caps or floors at prices or on terms the Adviser or Sub-Adviser believes
are advantageous to the Trust. In addition, although the terms of interest rate
swaps, caps and floors may provide for termination, there can be no assurance
that the Trust will be able to terminate an interest rate swap or to sell or
offset interest rate caps or floors that it has purchased.
The successful utilization of hedging and risk management transactions
requires skills different from those needed in the selection of the Trust's
portfolio securities and depends on the Adviser's or Sub- Adviser's ability to
predict correctly the direction and degree of movements in interest rates.
Although the Trust believes that use of the hedging and risk management
techniques described above will benefit the Trust, if the Adviser's or
Sub-Adviser's judgment about the direction or extent of the movement in interest
rates is incorrect, the Trust's overall performance would be worse than if it
had not entered into any such transactions. The Trust will incur brokerage and
other costs in connection with its hedging transactions.
ORIGINATING SENIOR LOANS -- RELIANCE ON AGENTS
The Trust has the ability to act as an agent in originating and
administering a loan on behalf of all lenders or as one of a group of co-agents
in originating Senior Loans. However, the Trust has not acted as agent or
co-agent on any loans, and has no present intention of doing so in the future.
An agent for a loan is required to administer and manage the Senior Loan and to
service or monitor the collateral. The agent is also responsible for the
collection of principal and interest and fee payments from the borrower and the
apportionment of these payments to the credit of all lenders which are parties
to the loan agreement. The agent is charged with the responsibility of
monitoring compliance by the borrower with the restrictive covenants in the loan
agreement and of notifying the lenders of any adverse change in the borrower's
financial condition. In addition, the agent generally is responsible for
determining that the lenders have obtained a perfected security interest in the
collateral securing the Senior Loan.
Lenders generally rely on the agent to collect their portion of the
payments on a Senior Loan and to use the appropriate creditor remedies against
the borrower. Typically under loan agreements, the agent is given broad
discretion in enforcing the loan agreement and is obligated to use the same care
it would use in the management of its own property. The borrower compensates the
agent for these services. Such compensation may include special fees paid on
structuring and funding the Senior Loan and other fees on a continuing basis.
The precise duties and rights of an agent are defined in the loan agreement.
The agent may enforce compliance by the borrower with the terms of the loan
agreement. Agents also have voting and consent rights under the applicable loan
agreement. Action subject to agent vote or consent generally requires the vote
or consent of the holders of some specified percentage of the outstanding
principal amount of the Senior Loan, which percentage varies depending on the
relative loan agreement. Certain decisions, such as reducing the amount or
increasing the time for payment of interest on or repayment of principal of a
Senior Loan, or relating collateral therefor, frequently require the unanimous
vote or consent of all lenders affected.
Pursuant to the terms of a loan agreement, the agent typically has sole
responsibility for servicing and administering a loan on behalf of the other
lenders. Each lender in a Senior Loan is generally
9
responsible for performing its own credit analysis and its own investigation of
the financial condition of the borrower. Generally, loan agreements will hold
the agent liable for any action taken or omitted that amounts to gross
negligence or willful misconduct. In the event of a borrower's default on a
loan, the loan agreements provide that the lenders do not have recourse against
the agent for its activities as agent. Instead, lenders will be required to
look to the borrower for recourse.
In a typical interest in a Senior Loan, the agent administers the loan and
has the right to monitor the collateral. The agent is also required to segregate
the principal and interest payments received from the borrower and to hold these
payments for the benefit of the lenders. The Trust normally looks to the agent
to collect and distribute principal of and interest on a Senior Loan.
Furthermore, the Trust looks to the agent to use normal credit remedies, such as
to foreclose on collateral, monitor credit loan covenants, and notify the
lenders of any adverse changes in the borrower's financial condition or
declarations of insolvency. At times the Trust may also negotiate with the agent
regarding the agent's exercise of credit remedies under a Senior Loan. The agent
is compensated for these services by the borrower as set forth in the loan
agreement. Such compensation may take the form of a fee or other amount paid
upon the making of the Senior Loan and/or an ongoing fee or other amount.
The loan agreements in connection with Senior Loans set forth the standard
of care to be exercised by the agents on behalf of the lenders and usually
provide for the termination of the agent's agency status in the event that it
fails to act properly, becomes insolvent, enters FDIC receivership, or if not
FDIC insured, enters into bankruptcy or if the agent resigns. In the event an
agent is unable to perform its obligations as agent, another lender would
generally serve in that capacity.
ADDITIONAL INFORMATION ON SENIOR LOANS
Senior Loans are direct obligations of corporations or other business
entities and are arranged by banks or other commercial lending institutions and
made generally to finance internal growth, mergers, acquisitions, stock
repurchases, and leveraged buyouts. Senior Loans usually include restrictive
covenants which must be maintained by the borrower. Such covenants, in addition
to the timely payment of interest and principal, may include mandatory
prepayment provisions arising from free cash flow and restrictions on dividend
payments, and usually state that a borrower must maintain specific minimum
financial ratios as well as establishing limits on total debt. A breach of
covenant, which is not waived by the agent, is normally an event of
acceleration, i.e., the agent has the right to call the outstanding Senior Loan.
In addition, loan covenants may include mandatory prepayment provisions stemming
from free cash flow. Free cash flow is cash that is in excess of capital
expenditures plus debt service requirements of principal and interest. The free
cash flow shall be applied to prepay the Senior Loan in an order of maturity
described in the loan documents. Under certain interests in Senior Loans, the
Trust may have an obligation to make additional loans upon demand by the
borrower. The Trust intends to ensure its ability to satisfy such demands by
segregating sufficient assets in high quality short-term liquid investments or
by sufficiently maintaining unused borrowing capacity.
Senior Loans, unlike certain bonds, usually do not have call protection.
This means that investments comprising the Trust's portfolio, while having a
stated one to ten-year term, may be prepaid, often without penalty. The Trust
generally holds Senior Loans to maturity unless it becomes necessary to sell
them to adjust the Trust's portfolio in accordance with the Adviser's or
Sub-Adviser's view of current or expected economic or specific industry or
borrower conditions.
Senior Loans frequently require full or partial prepayment of a loan when
there are asset sales or a securities issuance. Prepayments on Senior Loans may
also be made by the borrower at its election. The rate of such prepayments may
be affected by, among other things, general business and economic conditions, as
well as the financial status of the borrower. Prepayment would cause the actual
duration of
10
a Senior Loan to be shorter than its stated maturity. Prepayment may be deferred
by the Trust. This should, however, allow the Trust to reinvest in a new loan
and recognize as income any unamortized loan fees. In many cases this will
result in a new facility fee payable to the Trust.
Because interest rates paid on these Senior Loans fluctuate periodically
with the market, it is expected that the prepayment and a subsequent purchase of
a new Senior Loan by the Trust will not have a material adverse impact on the
yield of the portfolio. See "Portfolio Transactions."
Under a Senior Loan, the borrower generally must pledge as collateral
assets which may include one or more of the following: cash, accounts
receivable, inventory, property, plant and equipment, both common and preferred
stock in its subsidiaries, trademarks, copyrights, patent rights and franchise
value. The Trust may also receive guarantees as a form of collateral. In some
instances, a Senior Loan may be secured only by stock in a borrower or its
affiliates. There is no assurance, however, that the liquidation of the existing
collateral would satisfy the borrower's obligation in the event of nonpayment of
scheduled interest or principal, or that such collateral could be readily
liquidated.
LOAN PARTICIPATION AND ASSIGNMENTS
The Trust's investment in LOAN PARTICIPATIONS typically will result in the
Trust having a contractual relationship only with the lender and not with the
borrower. The Trust will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender selling the
participation and only upon receipt by the lender of the payments from the
borrower. In connection with purchasing participation, the Trust generally will
have no right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any right of set-off against the borrower,
and the Trust may not directly benefit from any collateral supporting the loan
in which it has purchased the participation. As a result, the Trust may be
subject to the credit risk of both the borrower and the lender that is selling
the participation. In the event of the insolvency of the lender selling a
participation, the Trust may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
When the Trust purchases a LOAN ASSIGNMENT from lenders, it will acquire
direct rights against the borrowers on the loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Trust as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning lender. Because there is no liquid market for such securities,
the Trust anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Trust's ability
to dispose of particular assignments or participation when necessary to meet
redemption of Trust shares, to meet the Trust's liquidity needs or when
necessary in response to a specific economic event, such as deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
assignments and participation also may make it more difficult for the Trust to
value these securities for purposes of calculating its NAV.
THE TRUST MAY BE REQUIRED TO PAY AND RECEIVE VARIOUS FEES AND COMMISSIONS IN THE
PROCESS OF PURCHASING, SELLING AND HOLDING SENIOR LOANS. THE FEE COMPONENT MAY
INCLUDE ANY, OR A COMBINATION OF, THE FOLLOWING ELEMENTS: ARRANGEMENT FEES,
ASSIGNMENT FEES, NON-USE FEES, FACILITY FEES, LETTER OF CREDIT FEES AND TICKING
FEES. ARRANGEMENT FEES ARE PAID AT THE COMMENCEMENT OF A LOAN AS COMPENSATION
FOR THE INITIATION OF THE TRANSACTION. A NON-USE FEE IS PAID BASED UPON THE
AMOUNT COMMITTED BUT NOT USED UNDER THE LOAN. FACILITY FEES ARE ON-GOING ANNUAL
FEES PAID IN CONNECTION WITH A LOAN. LETTER OF CREDIT FEES ARE PAID IF A LOAN
INVOLVES A LETTER OF CREDIT. TICKING FEES ARE PAID FROM THE INITIAL COMMITMENT
INDICATION UNTIL LOAN CLOSING IF FOR AN EXTENDED PERIOD. THE AMOUNT OF FEES IS
NEGOTIATED AT THE TIME OF TRANSACTION.
11
TRUSTEES AND OFFICERS
MANAGEMENT OF THE TRUST
The Trust is governed by its Board of Trustees ("Board"). A trustee who is
not an interested person of the Trust, as defined in the 1940 Act, is an
independent trustee ("Independent Trustee"). The Trustees of the Trust are
listed below.
NUMBER OF
FUNDS IN
FUND
POSITION(S) TERM OF COMPLEX OTHER DIRECTORSHIPS/
HELD OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY TRUSTEESHIPS
NAME, ADDRESS AND AGE WITH TRUST OF TIME SERVED(1) THE PAST 5 YEARS TRUSTEE(2) HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
JOHN V. BOYER Trustee January 2005 - President and Chief Executive 176 None
7337 East Doubletree Present Officer, Franklin and Eleanor
Ranch Rd. Roosevelt Institute (March
Scottsdale, 2006 - Present). Formerly,
Arizona 85258 Executive Director, The Mark
Age: 52 Twain House & Museum(3)
(September 1989 - November
2005).
PATRICIA W. CHADWICK(4) Trustee January 2006 - Consultant and President of 176 None
7337 East Doubletree Present self-owned company, Ravengate
Ranch Rd. Partners LLC (January 2000 -
Scottsdale, Present).
Arizona 85258
Age: 57
J. MICHAEL EARLEY Trustee February 2002 - President and Chief Executive 176 None
7337 East Doubletree Present Officer, Bankers Trust Company,
Ranch Rd. N.A. (June 1992 - Present).
Scottsdale,
Arizona 85258
Age: 61
R. BARBARA GITENSTEIN Trustee February 2002 - President, College of New 176 None
7337 East Doubletree Present Jersey (January 1999 - Present).
Ranch Rd.
Scottsdale,
Arizona 85258
Age: 58
PATRICK W. KENNY Trustee January 2005 - President and Chief Executive 176 Assured Guaranty
7337 East Doubletree Present Officer, International Insurance Ltd. (April 2004
Ranch Rd. Society (June 2001 - Present). - Present).
Scottsdale,
Arizona 85258
Age: 63
WALTER H. MAY Trustee November 1999 - Retired. 176 None
7337 East Doubletree Present
Ranch Rd.
Scottsdale,
Arizona 85258
Age: 69
12
NUMBER OF
FUNDS IN
FUND
POSITION(S) TERM OF COMPLEX OTHER DIRECTORSHIPS/
HELD OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY TRUSTEESHIPS
NAME, ADDRESS AND AGE WITH TRUST OF TIME SERVED(1) THE PAST 5 YEARS TRUSTEE(2) HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------------
JOCK PATTON Chairman and August 1995 - Private Investor (June 1997 - 176 JDA Software Group,
7337 East Doubletree Trustee Present Present). Formerly, Director Inc. (January 1999 -
Ranch Rd. and Chief Executive Officer, Present); and Swift
Scottsdale, Rainbow Multimedia Group, Inc. Transportation Co.
Arizona 85258 (January 1999 - December 2001). (March 2004 -
Age: 60 Present).
SHERYL K. PRESSLER(4) Trustee January 2006 - Consultant (May 2001 - Present). 176 Stillwater Mining
7337 East Doubletree Present Formerly, Chief Executive Company (May 2002 -
Ranch Rd. Officer, Lend Lease Real Estate California HealthCare
Scottsdale, Investments, Inc. (March 2000 Present); Foundation
Arizona 85258 - April 2001). (June 1999 - Present);
Age: 55 and Romanian -
American Enterprise
Fund (February
2004 - Present).
DAVID W.C. PUTNAM Trustee November 1999 - President and Director, F.L. 176 Principled Equity
7337 East Doubletree Present Putnam Securities Company, Market Trust (December
Ranch Rd. Inc. (June 1978 - Present). 1996 - Present); and
Scottsdale, Asian American Bank
Arizona 85258 and Trust Company
Age: 66 (June 1993 -
Present).
ROGER B. VINCENT Trustee February 2002 - President, Springwell 176 AmeriGas Propane, Inc.
7337 East Doubletree Present Corporation, a privately- (January 1998 -
Ranch Rd. held corporate finance Present); and UGI
Scottsdale, advisory firm (March 1989 - Corporation (February
Arizona 85258 Present). 2006 - Present).
Age: 60
TRUSTEES WHO ARE "INTERESTED PERSONS"
JOHN G. TURNER(5) Trustee September 2000 - Retired. Formerly, Vice 176 Hormel Foods
7337 East Doubletree Present Chairman of ING Americas Corporation (March
Ranch Rd. (September 2000 - January 2000 - Present);
Scottsdale, 2002); Director of ShopKo Stores, Inc.
Arizona 85258 ReliaStar Life Insurance (August 1999 -
Age: 66 Company of New York (April Present); and
1975 - December 2001); Conseco, Inc.
and Chairman and Trustee (September 2003 -
of the Northstar affiliated Present).
investment companies (May
1993 - December 2001).
SHAUN P. MATHEWS(3,6) Trustee June 2006 - President, ING USFS Mutual 3 Mark Twain House &
7337 E. Doubletree Present Funds and Investment Museum(3) (September
Ranch Rd. Products (October 2004 - 2002 - Present);
Scottsdale, Present). Formerly, CMO, Connecticut Forum
Arizona 85258 ING USFS (April 2002 - October (May 2002 - Present);
Age: 51 2004), Head of Rollover/Payout Capital Community
(October 2001 - December 2003). College Foundation
(February 2002 -
Present); Holding
Company, Inc.
(May 2000 - Present);
Southland Life
Insurance Company
(June 2002 -
Present); and ING
Capital Corporation,
LLC, ING Funds
Distributor, LLC, ING
13
NUMBER OF
FUNDS IN
FUND
POSITION(S) TERM OF COMPLEX OTHER DIRECTORSHIPS/
HELD OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY TRUSTEESHIPS
NAME, ADDRESS AND AGE WITH TRUST OF TIME SERVED(1) THE PAST 5 YEARS TRUSTEE(2) HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------------
Funds Services, LLC,
ING Investments, LLC
and ING Pilgrim
Funding, Inc. (March
2006 - Present).
(1) Trustees are considered for election by shareholders on an annual basis
and serve until their successors are duly elected and qualified, subject
to the Board's retirement policy which states that each duly elected or
appointed Trustee who is not an "interested person" of the Trust, as
defined in the Investment Company Act of 1940 ("1940 Act") ("Independent
Trustees"), shall retire from service as a Trustee at the conclusion of
the first regularly scheduled meeting of the Board that is held after
the Trustee reaches the age of 70. A unanimous vote of the Board may
extend the retirment date of a Trustee for up to one year. An extension
may be permitted if the retirement would trigger a requirement to hold
a meeting of shareholders of the Trust under applicable law, whether for
purposes of appointing a successor to the Trustee or if otherwise
necessary under applicable law, in which case the extension would apply
until such time as the shareholder meeting can be held or is no longer
needed.
(2) For the purposes of this table, "Fund Complex" means the following
investment companies: ING Equity Trust; ING Funds Trust; ING Global
Advantage and Premium Opportunity Fund; ING Global Equity Dividend
and Premium Opportunity Fund; ING Investment Funds, Inc.; ING Investors
Trust; ING Mayflower Trust; ING Mutual Funds; ING Partners, Inc.; ING
Prime Rate Trust; ING Senior Income Fund; USLICO Series Fund ; ING
Variable Insurance Trust; ING Variable Products Trust; ING VP Emerging
Markets Fund, Inc. and ING VP Natural Resources Trust. The number of
Funds in the Fund Complex is as of June 30, 2006.
(3) Shaun Mathews, President, ING USFS Mutual Funds and Investment Products,
has held a seat on the board of directors of The Mark Twain House
& Museum since September 19, 2002. ING Groep N.V. makes non-material,
charitable contributions to The Mark Twain House & Museum.
(4) Mses. Chadwick and Pressler each commenced services as Trustee on
January 18, 2006.
(5) Messrs. Matthews and Turner are deemed to be "interested persons" of the
Trust as defined in the 1940 Act because of their relationship with ING
Groep., N.V., the parent corporation of the adviser, ING Investments,
LLC and the distributor, ING Funds Distributor, LLC.
(6) Mr. Matthews commenced service as a Trustee on June 14, 2006.
14
OFFICERS
Information about the ING Funds' officers are set forth in the
table below:
TERM OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) DURING THE
NAME, ADDRESS AND AGE POSITIONS HELD WITH THE TRUST OF TIME SERVED(1) LAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------------------------
JAMES M. HENNESSY President and Chief Executive February 2001 - Present President and Chief Executive Officer,
7337 East Doubletree Ranch Rd. Officer ING Investments, LLC(2) (December
Scottsdale, Arizona 85258 2000 - Present). Formerly, Chief
Age: 57 Operating Officer, ING Investments,
LLC(2) (December 2000 - March 2006).
STANLEY D. VYNER Executive Vice President August 2003 - Present Executive Vice President, ING
7337 East Doubletree Ranch Rd. Investments, LLC(2) (July 2000 -
Scottsdale, Arizona 85258 Present) and Chief Investment Risk
Age: 56 Officer (January 2003 - Present).
Formerly, Chief Investment Officer
of the International Portfolios, ING
Investments, LLC(2) (August 2000 -
January 2003).
MICHAEL J. ROLAND Executive Vice President February 2002 - Present Executive Vice President, ING
7337 East Doubletree Ranch Rd. Investments, LLC(2) (December 2001 -
Scottsdale, Arizona 85258 Present). Formerly, Chief Compliance
Age: 48 Officer, Investments, LLC(2), ING Life
Insurance and Annuity Company and
Directed Services, Inc. (October 2004
- December 2005); Chief Financial
Officer and Treasurer, ING
Investments, LLC(2) (December 2001 -
March 2005); and Senior Vice
President, ING Investments, LLC(2)
(June 1998 - December 2001).
JOSEPH M. O'DONNELL Executive Vice President March 2006 - Present Chief Compliance Officer of the ING
7337 East Doubletree Ranch Rd. Funds (November 2004 - Present) and
Scottsdale, Arizona 85258 ING Investments, LLC(3), ING Life
Age: 51 Insurance and Annuity Company and
Directed Services, Inc. (January 2006
- Present) and Executive Vice
President of the ING Funds (March 2006
- Present).
Chief Compliance Officer November 2004 - Present Formerly, Vice President, Chief Legal
Counsel, Chief Compliance Officer and
Secretary of Atlas Securities, Inc.,
Atlas Advisers, Inc. and Atlas Funds
(October 2001 - October 2004); and
Chief Operating Officer and General
Counsel of Matthews International
Capital Management LLC and Vice
President and Secretary of Matthews
International Funds (August 1999 -
May 2001).
ROBERT S. NAKA Executive Vice President March 2006 - Present Executive Vice President and Chief
7337 East Doubletree Ranch Rd. and Chief Operating Officer Operating Officer, ING Funds
Scottsdale, Arizona 85258 Services, LLC(3) and ING Investments,
Age: 43 Assistant Secretary July 1996 - Present LLC(2) (March 2006 - Present); and
Assistant Secretary, ING Funds
Services, LLC(3) (October 2001 -
Present). Formerly, Senior Vice
President (August 1999 - March
2006).
TODD MODIC Senior Vice President, March 2005 - Present Senior Vice President, ING Funds
7337 East Doubletree Ranch Rd. Chief/Principal Financial Services(3) (April 2005 - Present).
Scottsdale, Arizona 85258 Officer and Assistant Formerly, Vice President, ING Funds
Age: 38 Secretary Services, LLC(3) (September 2002 -
March 2005); and Director of
Financial Reporting, ING
Investments, LLC(2) (March 2001 -
September 2002).
DANIEL A. NORMAN Senior Vice President April 1995 - Present Senior Vice President (January 2003
7337 East Doubletree Ranch Rd. - Present) and Senior Portfolio
Manager in the ING Senior Debt Group
(January 2003 - Present), ING
15
TERM OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) DURING THE
NAME, ADDRESS AND AGE POSITIONS HELD WITH THE TRUST OF TIME SERVED(1) LAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------------------------
Scottsdale, Arizona 85258 Treasurer June 1997 - Present Investment Management Co. Formerly,
Age: 48 Senior Vice President and Senior
Portfolio Manager in the Senior
Floating Rate Loan Group, ING
Investment Management Co. (April 1995
- August 2003).
CURTIS F. LEE Senior Vice President and February 2001 - Present Senior Vice President and Chief Credit
7337 East Doubletree Ranch Rd. Chief Credit Officer Officer in the ING Senior Debt Group
Scottsdale, Arizona 85258 of ING Investment Management Co.
Age: 52 (January 2003 - Present). Formerly,
Vice President and Senior Credit
Officer in the Senior Floating
Loan Group of ING Investments, LLC
(September 1999 - August of 2003).
JEFFREY A. BAKALAR Senior Vice President November 1999 - Present Senior Vice President and Senior
7337 East Doubletree Ranch Rd. Portfolio Manager in the ING Senior
Scottsdale, Arizona 85258 Debt Group (January 2003 - Present)
Age: 46 ING Investment Management Co.
Formerly, Senior Vice President and
Senior Portfolio Manager in the Senior
Floating Loan Group of ING
Investments, LLC (November 1999 -
August of 2003).
ELLIOT A. ROSEN Senior Vice President May 2002 - Present Senior Vice President in the ING
7337 East Doubletree Ranch Rd. Senior Debt Group of ING Investment
Scottsdale, Arizona 85258 Management Co. (January 2003 -
Age: 53 Present). Formerly, Senior Vice
President in the Senior Floating Loan
Group of ING Investments, LLC
(February 1999 - August of 2003).
WILLIAM H. RIVOIR III Senior Vice President and February 2001 - Present Senior Vice President and Assistant
7337 East Doubletree Ranch Rd. Assistant Secretary Secretary, (March 2006 - Present),
Scottsdale, Arizona 85258 ING Investment Management Co.
Age: 55 Formerly, Counsel, ING USFS Law
Department (January 2003 - December
2003); and Senior Vice President, ING
Investments, LLC(2) (June 1998 -
December 2002).
KIMBERLY A. ANDERSON Senior Vice President November 2003 - Present Senior Vice President and Assistant
7337 East Doubletree Ranch Rd. Secretary, ING Investments, LLC(3)
Scottsdale, Arizona 85258 (October 2003 - Present). Formerly,
Age: 41 Vice President and Assistant
Secretary, ING Investments, LLC(3)
(January 2001 - October 2003).
ERNEST J. C'DEBACA Senior Vice President May 2006 - Present Senior Vice President, ING Funds
7337 East Doubletree Ranch Rd. Services, LLC (April 2006 - Present);
Scottsdale, Arizona 85258 Counsel, ING U.S. Legal Services
Age: 36 (January 2004 - March 2006); Attorney-
Adviser, U.S. Securities and Exchange
Commission (May 2001 - December 2003)
ROBERT TERRIS Senior Vice President May 2006 - Present Senior Vice President of Operations,
7337 East Doubletree Ranch Rd. ING Funds Services LLC, (May 2006 -
Scottsdale, Arizona 85258 present); formerly, Vice President of
Age: 35 Administration, ING Funds Services,
LLC (September 2001 - May 2006).
ROBYN L. ICHILOV Vice President November 1997 - Present Vice President and Treasurer, ING
7337 East Doubletree Ranch Rd. Funds Services, LLC(3) (October 2001
Scottsdale, Arizona 85258 - Present) and ING Investments,
Age: 38 LLC(2) (August 1997 - Present).
LAUREN D. BENSINGER Vice President August 2003 - Present Vice President and Chief Compliance
7337 East Doubletree Ranch Rd. Officer, ING Funds Distributor,
Scottsdale, Arizona 85258 LLC(4) (July 1995 - Present); and Vice
Age: 52 President (February 1996 - Present)
and Director of Compliance (October
2004 - Present), ING
16
TERM OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) DURING THE
NAME, ADDRESS AND AGE POSITIONS HELD WITH THE TRUST OF TIME SERVED(1) LAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------------------------
Investments, LLC(2). Formerly, Chief
Compliance Officer, ING Investments,
LLC(2). Formerly, Chief Compliance
Officer, ING Investments, LLC(2).
(October 2001 - October 2004).
MARIA M. ANDERSON Vice President September 2004 - Present Vice President, ING Funds Services,
7337 East Doubletree Ranch Rd. LLC(3) (September 2004 - Present).
Scottsdale, Arizona 85258 Formerly, Assistant Vice President,
Age: 48 ING Funds Services, LLC(3) (October
2001 - September 2004); and Manager of
Fund Accounting and Fund Compliance,
ING Investments, LLC(2) (September 1999
- October 2001).
MARY A. GASTON Vice President March 2005 - Present Vice President, ING Funds Services,
7337 East Doubletree Ranch Rd. LLC(3) (April 2005 - Present).
Scottsdale, Arizona 85258 Formerly, Assistant Vice President,
Age: 40 Financial Reporting, ING Investments,
LLC(2) (April 2004 - April 2005);
Manager, Financial Reporting, ING
Funds Services, LLC(3) (August 2002 -
April 2004); and Controller, Z Seven
Fund, Inc. and Ziskin Asset
Management, Inc. (January 2000 - March
2002).
KIMBERLY K. PALMER Vice President March 2006 - Present Vice President, ING Funds Services,
7337 East Doubletree Ranch Rd. LLC(3) (March 2006 - Present).
Scottsdale, Arizona 85258 Formerly, Assistant Vice President,
Age: 49 ING Funds Services, LLC(3) (August
2004 - March 2006), Manager,
Registration Statements, ING Funds
Services, LLC(3) (May 2003 - August
2004); Associate Partner, AMVESCAP PLC
(October 2000 - May 2003); and
Director of Federal Filings and Blue
Sky Filings, INVESCO Funds Group, Inc.
(March 1994 - May 2003).
SUSAN P. KINENS Assistant Vice President February 2003 - Present Assistant Vice President, ING Funds
7337 East Doubletree Ranch Rd. Services, LLC(3) (December 2002 -
Scottsdale, Arizona 85258 Present); and has held various other
Age: 29 positions with ING Funds Services,
LLC(3) for more than the last five
years.
HUEY P. FALGOUT, Jr. Secretary August 2003 - Present Chief Counsel, ING Americas, U.S.
7337 East Doubletree Ranch Rd. Legal Services (September 2003 -
Scottsdale, AZ 85258 Present). Formerly, Counsel, ING
Age: 42 Americas, U.S. Legal Services
(November 2002 - September 2003); and
Associate General Counsel of AIG
American General (January 1999 -
November 2002).
THERESA K. KELETY Assistant Secretary August 2003 - Present Counsel, ING Americas, U.S. Legal
7337 East Doubletree Ranch Rd. Services (April 2003 - Present).
Scottsdale, AZ 85258 Formerly, Senior Associate with
Age: 43 Shearman & Sterling (February 2000
- April 2003).
HEALY WEBB Assistant Secretary May 2006 - Present Managing Paralegal, ING Funds
7337 East Doubletree Ranch Rd. Services, LLC(4) (May 2006 - Present).
Scottsdale, Arizona 85258 Formerly, Supervisor, ING Funds
Age: 37 Services, LLC(4) (August 2005 - May
2006); Project Manager, ING Funds
Services, LLC(3) (February 2002 -
August 2005); and Fund Administration
and Compliance Associate, Capital
Research and Management Company
(August 1998 - January 2002).
(1) The officers hold office until the next annual meeting of the
Trustees and until their successors shall have been elected and
qualified.
(2) ING Investments, LLC was previously named ING Pilgrim Investments,
LLC. ING Pilgrim Investments, LLC is the sucessor in interest to
ING Pilgrim Investments, Inc., which was previously known as
Pilgrim Investments, Inc. and before that was known as Pilgrim
America Investments, Inc.
17
(3) ING Funds Services, LLC was previously named ING Pilgrim Group,
LLC. ING Pilgrim Group, LLC is the sucessor in interest to ING
Pilgrim Group, Inc., which was previously known as Pilgrim
Group, Inc. and before that was known as Pilgrim America Group,
Inc.
(4) ING Funds Distributor, LLC is the sucessor in interest to ING
Funds Distributor, Inc., which was previously known as ING Pilgrim
Securities, Inc., and before that was known as Pilgrim Securities,
Inc., and before that was known as Pilgrim America Securities,
Inc.
18
BOARD
The Board governs the Trust and is responsible for protecting the interests
of the shareholders. The Trustees are experienced executives who oversee the
Trust's activities, review contractual arrangements with companies that provide
services to the Trust, and review the Trust's performance.
FREQUENCY OF BOARD MEETINGS
The Board currently conducts regular meetings eight (8) times a year. The
Audit Committee and the Valuation, Proxy and Brokerage Committee also meet
regularly four (4) times per year, the Investment Review Committee meets six (6)
times per year, the Contracts Committee meets seven (7) timer per year and the
remaining Committees meet as needed. In addition, the Board or the Committees
may hold special meetings by telephone or in person to discuss specific matters
that may require action prior to the next regular meeting. Each Committee listed
below operates pursuant to a Charter approved by the Board.
COMMITTEES
EXECUTIVE COMMITTEE. The Board has an Executive Committee whose function is
to act on behalf of the full Board between meetings when necessary. The
Executive Committee currently consists of two (2) Independent Trustees and one
(1) Trustee who is an "interested person" as defined in the 1940 Act. The
following Trustees serve as members of the Exective Committee: Messrs. Patton,
Turner and Patton. Mr. Patton serves as Chairperson of the Executive Committee.
During the fiscal year ended February 28, 2006, the Executive Committee held two
(2) meetings.
AUDIT COMMITTEE. The functions of the Audit Committee include, among
others, to meet with the independent registered public accounting firm of the
Trust to review the scope of the Trust's audit, the Trust's financial statements
and interim accounting controls, and to meet with management concerning these
matters, among other things. The Audit Committee currently consists of five (5)
Trustees: Messrs. Earley, Kenny, Putnam, Vincent and Ms. Pressler, all of whom
are considered independent under the rules promulgated by the New York Stock
Exchange and, in addition, are not "interested persons" of the Trust as defined
in Section 2(a)(19) of the 1940 Act. Mr. Earley serves as Chairperson of the
Audit Committee and Mr. Kenny has been designated as the Audit Committee's
financial expert under the Sarbanes-Oxley Act.. During the fiscal year ended
February 28, 2006, the Audit Committee held five (5) meetings.
VALUATION, PROXY AND BROKERAGE COMMITTEE. The Board has a Valuation, Proxy
and Brokerage Committee whose functions include, among others, reviewing the
determination of the value of securities held by the Trust for which market
value quotations are not readily available, overseeing management's
administration of proxy voting and overseeing the effectiveness of the
investment adviser's usage of the Trust's brokerage and adviser's compliance
with changing regulations regarding the allocation of brokerage for services
other than pure trade executions. The Valutation, Proxy and Brokerage Committee
currently consists of five (5) Independent Trustees: Messrs. Boyer, May, Patton,
Ms. Chadwick and Dr. Gitenstein. Mr. May serves as Chairperson of the
Valuation, Proxy and Brokerage Committee. During the fiscal year ended February
28, 2006, the Valuation, Proxy and Brokerage Committee held four (4) meetings.
NOMINATING AND GOVERNANCE COMMITTEE. The Board has established a Nominating
and Governance Committee for the purpose of, among other things, (1) identifying
and recommending to the Board candidates it proposes for nomination to fill
Independent Trustees vacancies on the Board; (2) reviewing workload and
capabilities of Independent Board members and recommending changes to size
19
or composition of the Board, as necessary; (3) monitoring regulatory
developments and recommending modifications to the Nominating and Governance
Committee's responsibilities; (4) considering and recommending the creation of
additional committees or changes to Trustee policies and procedures based on
rule changes and "best practices" in corporate governance; (5) reviewing
compensation of Independent Board members and making recommendations for any
changes; and (6) overseeing the Board's annual self evaluation process.
In evaluating candidates, the Nominating and Governance Committee may
consider a variety of factors, but it has not at this time set any specific
minimum qualifications that must be met. Specific qualifications of candidates
for Board membership will be based on the needs of the Board at the time of
nomination. The Nominating and Governance Committee is willing to consider
nominations received from shareholders and shall assess shareholder nominees in
the same manner as it reviews its own nominees. A shareholder nominee for
Trustee should be submitted in writing to the Trust's Secretary. Any such
shareholder nomination should include at a minimum the following information as
to each individual proposed for nominations as Trustee: such individual's
written consent to be named in the proxy statement as a nominee (if nominated)
and to serve as a Trustee (if elected), and all information relating to such
individual that is required to be disclosed in the solicitation of proxies for
election of Trustees, or is otherwise required, in each case under applicable
federal securities laws, rules and regulations.
The Secretary shall submit all nominations received in a timely manner to
the Nominating and Governance Committee. To be timely, any such submission must
be delivered to the Trust's Secretary not earlier than the 90th day prior to
such meeting and not later than the close of business on the later of the 60th
day prior to such meeting or the 10th day following the day on which public
announcement of the date of the meeting is first made, by either the disclosure
in a press release or in a document publicly filed by the Trust with the SEC.
The Nominating and Governance Committee currently consists of five (5)
Trustees: Messrs. Kenny, May, Patton, Vincent and Dr. Gitenstein, all of whom
are considered independent under the rules promulgated by the New York Stock
Exchange and in addition are not "interested persons" of the Trust as defined in
Section 2(a) (19) of the 1940 Act. Dr. Gitenstein serves as Chairperson of the
Nominating and Governance Committee. During the fiscal year ended February 28,
2006, the Nominating and Governance Committee held seven (7) meetings.
INVESTMENT REVIEW COMMITTEE. The Board has established an Investment Review
Committee, to among other things, monitor the investment performance of the
Trust and make recommendations to the Board of Trustees with respect to the
Trust. The International/Balanced/Fixed Income Funds (formerly, the
International and Fixed Income Funds) currently consists of five (5) Independent
Trustees: Messrs. Boyer, May, Patton, Ms. Pressler and Dr. Gitenstein. Mr.
Boyer serves as Chairperson of the International/Balanced/Fixed-Income
Investment Review Committee. During the fiscal year ended February 28, 2006, the
International/Balanced/Fixed-Income Investment Review Committee held six (6)
meetings. The Investment Review Committee for the Domestic Equity Funds
currently consists of five (5) Independent Trustees and one (1) Trustees who is
an "interested persons," as defined in the 1940 Act: Ms. Chadwick and Messrs.
Earley, Kenny, Putnam, Turner and Vincent. Mr. Vincent serves as Chairperson of
the Investment Review Committee for the Domestic Equity Funds. The Investment
Review Committee for the domestic equity funds held six (6) meetings during the
fiscal year ended February 28, 2006.
COMPLIANCE COMMITTEE. The Board has established a Compliance Committee for
the purpose of coordinating activities between the Board and the Chief
Compliance Officer ("CCO") of the Trust. The Compliance Committee facilitates
the flow of information among Board members and the CCO
20
between Board meetings; works with the CCO and management to identify the types
of reports to be submitted by the CCO to the Compliance Committee and the Board;
coordinates CCO oversight activities with other ING Fund boards; and makes
recommendations regarding the role, performance and oversight of the CCO. The
Compliance Committee currently consists of five (5) Independent Trustees:
Messrs. Boyer, Earley, Kenny, Patton and Putnam. Mr. Kenny serves as
Chairperson of the Compliance Committee. During the fiscal year ended February
28, 2006, the Compliance Committee held seven (7) meetings.
CONTRACTS COMMITTEE. The Board has a Contracts Committee for the purpose of
overseeing the annual renewal process relating to investment advisory and
sub-advisory agreements and, at the discretion of the Board, other agreements or
plans involving the ING Funds. The responsibilities of the Contracts Committee,
among other things, include: (1) identifying the scope and format of information
to be provided by services providers in connection with applicable renewals;
(2) providing guidance to independent legal counsel regarding specific
information requests to be made by such counsel on behalf of the Trustees;
(3) evaluating regulatory and other developments that might have an impact on
applicable review and renewal processes; (4) reporting to the Trustees its
recommendations and decisions regarding the foregoing matters; (5) assisting in
the preparation of a written record of the factors considered by Trustees
relating to the approval and renewal of advisory and sub-advisory agreements;
and (6) recommending to the Trustees specific steps to be taken by them
regarding the renewal process, including, for example, proposed schedules of
meetings by the Trustees. The Contracts Committee is not responsible for making
substantive recommendations whether to approve, renew, reject or modify
agreements or plans. The Contracts Committee currently consists of seven
(7) Independent Trustees: Messrs. Boyer, Kenny, May, Patton, Vincent, and
Mses. Chadwick and Pressler. Mr. Vincent serves as Chairperson of the Contracts
Committee. During the fiscal year ended February 28, 2006, the Contracts
Committee held eight (8) meetings.
TRUSTEE OWNERSHIP OF SECURITIES
SHARE OWNERSHIP POLICY
In order to further align the interests of the Independent Trustees with
shareholders, it is the policy of the Board that the Independent Trustees own,
beneficially, shares of one or more funds in the ING Family of Funds at all
times ("Policy"). For purposes of the Policy, beneficial ownership of fund
shares includes (a) ownership of a variable annuity contract or a variable life
insurance policy whose proceeds are invested in a fund; and (b) shares
associated with amounts deferred under ING Funds' deferred compensation plan.
Under this Policy, the initial value of investments in the ING Family of
Funds that are directly or indirectly beneficially owned by a Trustee must equal
at least $50,000. Existing Trustees have a reasonable amount of time from the
date of adoption of this Policy in order to satisfy the foregoing requirements.
A new Trustee must satisfy the foregoing requirements within a reasonable amount
of time of becoming a Trustee. A decline in the value of any Fund investments
will not cause a Trustee to have to make any additional investments under this
Policy.
The following table describes each Trustee's ownership of equity securities
of the Trust and the aggregate holdings of shares of equity securities of all
Funds overseen by the Trustee for the calendar year ended December 31, 2005.
21
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF EQUITY SECURITIES SECURITIES IN ALL REGISTERED INVESTMENT
NAME OF TRUSTEE IN THE TRUST AS OF DECEMBER 31, COMPANIES OVERSEEN BY TRUSTEE IN
2005 FAMILY OF INVESTMENT COMPANIES
-----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
John V. Boyer None None
Patricia W. Chadwick(1) None None
J. Michael Earley None $50,001 - $100,000
R. Barbara Gitenstein None $50,001 - $100,000
Patrick W. Kenny None $10,001 - $50,000(2)
Walter H. May None Over $100,000
Jock Patton $10,001 - $50,000 Over $100,000
Sheryl K. Pressler(1) None None
David W. C. Putnam Over $100,000 Over $100,000
Roger B. Vincent None Over $100,000 and
$10,001 - $50,000(2)
Richard A. Wedemeyer(3) $10,001 - $50,000 $50,001 - $100,000
TRUSTEES WHO ARE INTERESTED PERSONS
Thomas J. McInerney(4) None Over $100,000
John G. Turner None Over $100,000
Shaun P. Mathews(5) None 10,001 - $50,000 and
Over $100,000(2)
(1) Mses. Chadwick and Pressler each commenced services as a Trustee on
January 18, 2006.
(2) Held in a deferred compensation account and/or a 401k account.
(3) Mr. Wedemeyer retired as a Trustee on May 25, 2006.
(4) Mr. McInerney resigned as a member of the Board on April 28, 2006.
(5) Mr. Matthews commenced service as a Trustee on June 14, 2006.
INDEPENDENT TRUSTEE OWNERSHIP OF SECURITIES
Set forth in the table below is information regarding each Independent
Trustee's (and his or her immediate family members') share ownership in
securities of the Trust's investment adviser or principal underwriter, and the
ownership of securities in an entity controlling, controlled by or under common
control with the investment adviser or principal underwriter of the Trust (not
including registered investment companies) as of December 31, 2005.
NAME OF OWNERS VALUE OF PERCENTAGE OF
NAME OF TRUSTEE AND RELATIONSHIP COMPANY TITLE OF CLASS SECURITIES CLASS
TO TRUSTEE
-----------------------------------------------------------------------------------------------------------------
John V. Boyer N/A N/A N/A $0 N/A
Patricia W. Chadwick(1) N/A N/A N/A $0 N/A
J. Michael Earley N/A N/A N/A $0 N/A
R. Barbara Gitenstein N/A N/A N/A $0 N/A
Patrick W. Kenny N/A N/A N/A $0 N/A
Walter H. May N/A N/A N/A $0 N/A
Jock Patton N/A N/A N/A $0 N/A
Sheryl K. Pressler(1) N/A N/A N/A $0 N/A
David W. C. Putnam N/A N/A N/A $0 N/A
22
Roger B. Vincent N/A N/A N/A $0 N/A
Richard A. Wedemeyer(2) N/A N/A N/A $0 N/A
(1) Mses. Chadwick and Pressler each commenced services as a Trustee on January
18, 2006.
(2) Mr. Wedemeyer retired as Trustee on May 25, 2006.
COMPENSATION OF TRUSTEES
Each Trustee is reimbursed for expenses incurred in connection with each
meeting of the Board or any committee attended. Each Independent Trustee is
compensated for his or her services according to a fee schedule and receives a
fee that consists of an annual retainer component and a meeting fee.
The Trust currently pays each Trustee who is not an interested person a PRO
RATA share, as described below, of: (i) an annual retainer of $45,000 (Messrs.
Patton, Earley, May, Boyer, Kenny and Dr. Gitenstein, as Chairpersons of
committees of the Board, each receives an additional annual retainer of $30,000,
$20,000, $10,000, $20,000, $10,000 and $10,000(1), respectively) (additionally,
as Chairperson of the Investment Review and Contracts Committees, Mr. Vincent
receives an additional retainer of $20,000 and $15,000, respectively); (ii)
$7,000 for each in person meeting of the Board (Mr. Patton, as Chairperson of
the Board, receives an additional $1,000 for each Board meeting); (iii) $3,000
per attendance of any committee meeting (Chairpersons of committees of the Board
receive an additional $1,000 for each committee meeting); (iv) $2,000 per
special telephonic meeting; and (v) out-of-pocket expenses. The PRO RATA share
paid by the Trust is based on the Trust's average net assets as a percentage of
the average net assets of all the funds managed by the Adviser or its
affiliates, Directed Services, Inc. and ING Life Insurance and Annuity Company,
for which the Trustees serve in common as Trustees.
The following table sets forth information provided by the Trust's adviser
regarding the compensation of Trustees by the Trust and other funds managed by
ING Investments and its affiliates for the fiscal year ended February 28, 2006.
Officers of the Trust and Trustees who are interested persons of the Trust do
not receive any compensation from the Trust or any other funds managed by ING
Investments.
(1) The Chairperson for the Nominating and Governance Committee is paid on a
quarterly basis and only if the Nominating and Governance Committee has been
active for the quarter. The compensation per quarter to the Chairperson is
$2,500, which if the Nominating and Governance Committee has been active for all
four quarters, will result in the Chairperson receiving the full annual retainer
of $10,000.
COMPENSATION TABLE
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM TRUST AND
COMPENSATION AS PART OF TRUST BENEFITS UPON FUND COMPLEX
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT(1) PAID TO TRUSTEES(2,3)
----------------------------------------------------------------------------------------------------------------------------
John V. Boyer $7,893 N/A N/A $206,000
Trustee
Patricia W. Chadwick(4) $226 N/A N/A $7,000
Trustee
J. Michael Earley $6,909 N/A N/A $183,000
Trustee
R. Barbara Gitenstein $6,376 N/A N/A $170,000
Trustee
Patrick W. Kenny(5) $6,128 N/A N/A $158,000
Trustee
23
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM TRUST AND
COMPENSATION AS PART OF TRUST BENEFITS UPON FUND COMPLEX
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT(1) PAID TO TRUSTEES(2,3)
----------------------------------------------------------------------------------------------------------------------------
Walter H. May $7,145 N/A N/A $187,000
Trustee
Thomas J. McInerney(6,7) $0 N/A N/A $0
Trustee
Jock Patton $9,651 N/A N/A $254,000
Trustee
Sheryl K. Pressler(4) $322 N/A N/A $10,000
Trustee
David W.C. Putnam $4,795 N/A N/A $127,000
Trustee
John G. Turner(6) $0 N/A N/A $0
Trustee
Roger B. Vincent(5) $8,739 N/A N/A $224,000
Trustee
Richard A. Wedemeyer(8) $7,839 N/A $262,000(8) $205,000
Trustee
Shaun P. Matthews(9) $0 N/A N/A $0
Trustee
(1) The Trust has adopted a retirement policy under which a Trustee who has
served as an Independent Trustee for five years or more will be paid by
the ING Funds at the time of his or her retirement an amount equal to
twice the compensation normally paid to the Independent Trustee for one
year of service. A Trustee may elect to receive payment of his or her
retirement benefit in a lump sum or in three substantially equal
payments. If no such election is made the retirement benefit will be paid
in one lump sum. The amount reflected is compensation from all funds in
the Fund Complex.
(2) Represents compensation from 174 funds (total in complex as of February
28, 2006).
(3) Trustee compensation includes compensation paid by Funds that are not
discussed in the Prospectus or SAI.
(4) Mses. Chadwick and Pressler each commenced services as a Trustee on
January 18, 2006.
(5) During the fiscal year ended February 28, 2006, Messers., Kenny and
Vincent deferred $15,468 and $19,510, respectively, of their compensation
from the Fund Complex.
(6) An "Interested Persons," as defined by the Investment Company Act of 1940,
because of their affiliation with ING Groep N.V., the parent corporation
of the Adviser, ING Investments, LLC and the Distributor, ING Funds
Distibutor, LLC. Officers and Trustees who are interested persons do not
receive any compensation from the Trust.
(7) Mr. McInerney resigned as a member of the Board on April 28, 2006
(8) Mr. Wedemeyer retired as Trustee on May 25, 2006.
(9) Mr. Matthews commenced service as a Trustee on June 14, 2006.
24
As of June 15, 2006, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the Trust's Common Shares.
As of June 15, 2006, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the Trust's Preferred Shares.
As of June 15, 2006, no person to the knowledge of the Trust, owned
beneficially or of record more than 5% of the outstanding Common Shares or
Preferred Shares of the Trust except as set forth below:
CLASS AND TYPE OF PERCENTAGE PERCENTAGE
NAME OF TRUST NAME AND ADDRESS OWNERSHIP OF CLASS OF TRUST
-----------------------------------------------------------------------------------------------------------
ING Prime Rate ING Prime Rate Trust
Trust Structured Equity Shelf Holding A/C
Attn: Dan Ryan
7337 E. Doubletree Ranch Road
Scottsdale, AZ 85258 Beneficial Owner 5.96% 5.96%
ING Prime Rate Cede & Co
Trust PO Box 20
Bowling Green Station
New York, NY 10274-0020 Beneficial Owner 81.88% 81.88%
INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS
ADVISER
The investment adviser for the Trust is ING Investments, LLC ("Adviser" or
"ING Investments"), which is registered with the SEC as an investment adviser
and serves as an investment adviser to registered investment companies (or
series thereof), as well as structured finance vehicles. ING Investments,
subject to the authority of the Board, has the overall responsibility for the
management of the Trust's portfolio subject to delegation of certain
responsibilities to ING Investment Management Co. ("Sub-Adviser" or "ING IM")
ING Investments and ING IM are indirect, wholly owned subsidiaries of ING Groep
N.V. ("ING Groep") (NYSE: ING). ING Groep is one of the largest financial
services organizations in the world with approximately 113,000 employees. Based
in Amsterdam, ING Groep offers an array of banking, insurance and asset
management services to both individual and institutional investors.
On February 26, 2001, the name of the Adviser changed from ING Pilgrim
Investments, Inc. to ING Pilgrim Investments, LLC. On March 1, 2002, the name of
the Adviser was changed from ING Pilgrim Investments, LLC to ING Investments,
LLC.
ING Investments serves pursuant to an investment management agreement
("Investment Advisory Agreement") between ING Investments and the Trust. The
Investment Advisory Agreement requires ING Investments to oversee the provisions
of all investment advisory and portfolio management services of the Trust.
Pursuant to a sub-advisory agreement ("Sub-Advisory Agreement") ING Investments
has delegated certain management responsibilities to the Sub-Adviser of the
Trust. ING Investments oversees the investment management of the Sub-Adviser.
25
The Investment Advisory Agreement requires ING Investments to provide,
subject to the supervision of the Board, investment advice and investment
services to the Trust and to furnish advice and recommendations with respect to
investment of the Trust's assets and the purchase or sale of its portfolio
securities. ING Investments also provides investment research and analysis. The
Investment Advisory Agreement provides that ING Investments is not subject to
liability to the Trust for any act or omission in the course of, or connected
with, rendering services under the Agreement, except by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties under the Investment Advisory Agreement.
On August 1, 2003, ING underwent an internal reorganization plan that,
among other things, integrated certain of its portfolio management professionals
across the U.S. under a common management structure known as ING Investment
Management Americas, which includes ING IM. One of the primary purposes of the
integration plan was to promote consistently high levels of performance in terms
of investment standards, research, policies and procedures in the portfolio
management functions related to the Trust. As a result of this integration plan,
the operational and supervisory functions of the Trust's Investment Advisory
Agreement were separated from the portfolio management functions related to the
Trust, with the former continuing to be provided by ING Investments and the
latter provided by ING IM. The portfolio management personnel currently
employed by ING Investments became employees of ING IM, which assumed primary
responsibility for all portfolio management issues, including the purchase,
retention, or sale of portfolio securities.
After an initial term of two years, the Investment Advisory Agreement and
Sub-Advisory Agreement continue in effect from year to year so long as such
continuance is specifically approved at least annually by (a) the Board or (b)
the vote of a "majority" (as defined in the 1940 Act) of the Trust's outstanding
shares voting as a single class; provided that in either event the continuance
is also approved by at least a majority of the Board who are not "interested
persons" (as defined in the 1940 Act) of the Adviser or Sub-Adviser, as the case
may be, by vote cast in person at a meeting called for the purpose of voting on
such approval.
In considering whether to renew the Investment Advisory Agreement and
Sub-Advisory Agreement, the Board considered a number of factors they believed,
in light of the legal advice furnished to them by their independent legal
counsel, and their own business judgment, to be relevant. For information
regarding the basis for the Board's approval of the Investment Advisory
Agreement and Sub-Advisory Agreement for the Trust, please refer to the annual
shareholder report dated February 28, 2006.
The Investment Advisory Agreement is terminable without penalty with not
less than sixty (60) days' notice by the Board or by a vote of the holders of a
majority of the Fund's outstanding shares voting as a single class, or upon not
less than sixty (60) day's notice by the Investment Manager. The Investment
Advisory Agreement will terminate automatically in the event of its assignment
(as defined in the 1940 Act).
ADVISORY FEE
ING Investments receives an annual fee, payable monthly, in an amount equal
to 0.80% of the Managed Assets of the Trust.
TOTAL ADVISORY FEES PAID
For the fiscal years ended February 28, 2006, 2005 and February 29, 2004
ING Investments was paid $16,295,070, $15,215,686 and $12,492,726, respectively,
for services rendered to the Trust.
26
SUB-ADVISER
The Investment Advisory Agreement for the Trust provides that ING
Investments, with the approval of the Trust's Board, may select and employ an
investment adviser to serve as a Sub-Adviser to the Trust, shall monitor the
Sub-Adviser's investment programs and results, and shall coordinate the
investment activities of the Sub-Adviser to ensure compliance with regulatory
restrictions. ING Investments pays all of its expenses arising from the
performance of its obligations under the Investment Advisory Agreement,
including all fees payable to the Sub-Adviser, and executive salaries and
expenses of the officers of the Trust who are employees of ING Investments. The
Sub-Adviser pays all of its expenses arising from the performance of its
obligations under the Sub-Advisory Agreement.
ING IM serves as sub-adviser to the Trust pursuant to a Sub-Advisory
Agreement between ING Investments and ING IM. The Sub-Advisory Agreement
requires ING IM to provide, subject to the supervision of the Board and ING
Investments, a continuous investment program for the Trust and to determine the
composition of the assets of the Trust, including determination of the purchase,
retention or sale of the securities, cash and other investments for the Trust,
in accordance with the Trust's investment objectives, policies and restrictions
and applicable laws and regulations. The Sub-Advisory Agreement also requires
ING IM to use reasonable compliance techniques as the Sub-Adviser or the Board
may reasonably adopt, including any written compliance procedures.
The Sub-Advisory Agreement may be terminated at any time by the Trust by a
vote of the majority of the Board or by a vote of a majority of the outstanding
securities. The Sub-Advisory Agreement also may be terminated by: (i) ING
Investments at any time, upon sixty (60) days' written notice to the Trust and
the Sub-Adviser; (ii) at any time, without payment of any penalty by the Trust,
by the Trust's Board or a majority of the outstanding voting securities of the
Trust upon sixty (60) days' written notice to ING Investments and the
Sub-Adviser; or (iii) by the Sub-Adviser upon three (3) months' written notice
unless the Trust or ING Investments requests additional time to find a
replacement for the Sub-Adviser, in which case, the Sub-Adviser shall allow the
additional time, requested by the Trust or ING Investments, not to exceed three
(3) additional months beyond the initial three (3) month notice period;
provided, however, that the Sub-Adviser may terminate the Sub-Advisory Agreement
at any time without penalty, effective upon written notice to ING Investments
and the Trust, in the event either the Sub-Adviser (acting in good faith) or ING
Investments ceases to be registered as an investment adviser under the
Investment Advisers Act of 1940, as amended or otherwise becomes legally
incapable of providing investment management services pursuant to its respective
contract with the Trust, or in the event ING Investments becomes bankrupt or
otherwise incapable of carrying out its obligations under the Sub-Advisory
Agreement, or in the event that the Sub-Adviser does not receive compensation
for its services from ING Investments or the Trust as required by the terms of
the Sub-Advisory Agreement. Otherwise, the Sub-Advisory Agreement will remain
in effect for two years and will, thereafter, continue in effect from year to
year, subject to the annual appoval of the Board, on behalf of the Trust, or the
vote of a majority of the outstanding voting securities, and the vote, cast in
person at a meetnig duly called and held, of a majority of the Trustees, on
behalf of the Trust, who are not parties to the Sub-Advisory Agreement or
interested persons (as defined in the 1940 Act) of any such party. The
Sub-Advisory Agreement will terminate automatically in the event of an
assignment (as defined in the 1940 Act).
In this capacity, ING IM, subject to the supervision and control of ING
Investments and the Trustees of the Trust, will manage the Trust's portfolio
investments, consistently with its investment objective, and execute any of the
Trust's investment policies that it deems appropriate to utilize from time to
time.
27
TOTAL SUB-ADVISORY FEES PAID
For its services, ING IM is entitled to receive a sub-advisory fee of
0.36%, expressed as an annual rate based on the average daily Managed Assets of
the Trust, and paid by ING Investments. For the fiscal year ended February 28,
2006, 2005 and the seven-month period ended February 29, 2004, ING Investments
paid ING IM, in its capacity as Sub-Adviser, $7,322,781, $6,847,836 and
$3,093,114, respectively, in sub-advisory fees.
PORTFOLIO MANAGERS
OTHER ACCOUNTS MANAGED
The following table shows the number of accounts and total assets in the
accounts managed by each Portfolio Manager as of February 28, 2006:
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS*
------------------------------ ------------------------------ ---------------------------
PORTFOLIO NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
MANAGER ACCOUNTS (IN BILLIONS) ACCOUNTS (IN BILLIONS) ACCOUNTS (IN BILLIONS)
---------------------------------------------------------------------------------------------------------------
Daniel A. 2 $4.5 10 $1.0 0 N/A
Norman
Jeffrey A. 2 $4.5 10 $1.0 0 N/A
Bakalar
Curtis F. 2 $4.5 10 $1.0 0 N/A
Lee
* Of these other accounts, none have an advisory fee based on performance.
POTENTIAL MATERIAL CONFLICTS OF INTEREST
A portfolio manager may be subject to potential conflicts of interest
because the portfolio manager is responsible for other accounts in addition to
the Trust. These other accounts may include, among others, other mutual funds,
separately managed advisory accounts, commingled trust accounts, insurance
separate accounts, wrap fee programs and hedge funds. Potential conflicts may
arise out of the implementation of differing investment strategies for the
portfolio manager's various accounts, the allocation of investment opportunities
among those accounts or differences in the advisory fees paid by the portfolio
manager's accounts.
A potential conflict of interest may arise as a result of the portfolio
manager's responsibility for multiple accounts with similar investment
guidelines. Under these circumstances, a potential investment may be suitable
for more than one of the portfolio manager's accounts, but the quantity of the
investment available for purchase is less than the aggregate amount the accounts
would ideally devote to the opportunity. Similar conflicts may arise when
multiple accounts seek to dispose of the same investment.
A portfolio manager may also manage accounts whose objectives and policies
differ from those of the Trust. These differences may be such that under certain
circumstances, trading activity appropriate for one account managed by the
portfolio manager may have adverse consequences for another account managed by
the portfolio manager. For example, if an account were to sell a significant
position in a security, which could cause the market price of that security to
decrease, while the Trust maintained its position in that security.
28
A potential conflict may arise when a portfolio manager is responsible for
accounts that have different advisory fees - the difference in the fees may
create an incentive for the portfolio manager to favor one account over another,
for example, in terms of access to particularly appealing investment
opportunities. This conflict may be heightened where an account is subject to a
performance-based fee.
As part of its compliance program, ING IM has adopted policies and
procedures reasonably designed to address the potential conflicts of interest
described above.
Finally, a potential conflict of interest may arise because the investment
mandates for certain other accounts, such as hedge funds, may allow extensive
use of short sales, which, in theory, could allow them to enter into short
positions in securities where other accounts hold long positions. ING IM has
policies and procedures reasonably designed to limit and monitor short sales by
the other accounts to avoid harm to the Trust.
COMPENSATION
Compensation consists of (a) fixed base salary; (b) bonus which is based on
ING IM's performance, three- and five-year pre-tax performance of the accounts
the portfolio managers are primarily and jointly responsible for relative to
account benchmarks and peer universe performance, and revenue growth of the
accounts they are responsible for; and (c) long-term equity awards tied to the
performance of our parent company, ING Groep.
Portfolio managers are also eligible to participate in an annual cash
incentive plan. The overall design of the ING IM annual incentive plan was
developed to closely tie pay to performance, structured in such a way as to
drive performance and promote retention of top talent. As with base salary
compensation, individual target awards are determined and set based on external
market data and internal comparators. Investment performance is measured on both
relative and absolute performance in all areas. ING IM has a defined index, the
S&P's LSTA Leveraged Loan Index and, where applicable, peer groups including but
not limited to Russell, Morningstar, Inc. ("Morningstar"), Lipper Analytical
Services, Inc. ("Lipper") and Lehman and set performance goals to appropriately
reflect requirements for each investment team. The measures for each team are
outlined on a "scorecard" that is reviewed on an annual basis. These scorecards
reflect a comprehensive approach to measuring investment performance versus both
benchmarks and peer groups over one- and three-year periods and year-to-date net
cash flow (changes in the accounts' net assets not attributable to changes in
the value of the accounts' investments) for all accounts managed by the team.
The results for overall IIM scorecards are calculated on an asset weighted
performance basis of the individual team scorecards.
Investment professionals' performance measures for bonus determinations are
weighted by 25% being attributable to the overall ING IM performance and 75%
attributable to their specific team results (60% investment performance and 15%
net cash revenue).
Based on job function, internal comparators and external market data,
portfolio managers participate in the ING Long-Term Incentive Plan. Plan awards
are based on the current year's performance as defined by the ING IM component
of the annual incentive plan. The awards vest in three years and are paid in a
combination of ING restricted stock, stock options and restricted performance
units.
Portfolio managers whose base salary compensation exceeds a particular
threshold may participate in ING's deferred compensation plan. The plan provides
an opportunity to invest deferred amounts of compensation in mutual funds, ING
stock or at an annual fixed interest rate. Deferral elections are done on an
annual basis and the amount of compensation deferred is irrevocable.
29
OWNERSHIP OF SECURITIES
The following table shows the dollar range of shares of the Trust owned by
portfolio manager member as of February 28, 2006, including investments by their
immediate family members and amounts invested through retirement and deferred
compensation plans.
PORTFOLIO MANAGER DOLLAR RANGE OF TRUST SHARES OWNED
--------------------------------------------------------------------------------
Daniel A. Norman $100,001 - $500,000
Jeffrey A. Bakalar $10,001 - $50,000
Curtis F. Lee None
ADMINISTRATOR
ING Funds Services, LLC ("Administrator" or "ING Funds Services"), an
affiliate of the Adviser, serves as Administrator for the Trust pursuant to an
administion agreement ("Administration Agreement"). In connection with its
administration of the corporate affairs of the Trust, the Administrator bears
the following expenses: the salaries and expenses of all personnel of the Trust
and the Administrator except for the fees and expenses of Trustees not
affiliated with the Administrator or ING Investments; costs to prepare
information; determination of daily NAV by the recordkeeping and accounting
agent; expenses to maintain certain of the Trust's books and records that are
not maintained by ING Investments, the custodian, or transfer agent; costs
incurred to assist in the preparation of financial information for the Trust's
income tax returns, proxy statements, quarterly, semi-annual, and annual
shareholder reports; costs of providing shareholder services in connection with
any tender offers or to shareholders proposing to transfer their shares to a
third party; providing shareholder services in connection with the dividend
reinvestment plan; and all expenses incurred by the Administrator or by the
Trust in connection with administering the ordinary course of the Trust's
business other than those assumed by the Trust, as described below.
Except as indicated immediately above and under "The Adviser," the Trust is
responsible for the payment of its expenses including: the fees payable to ING
Investments; the fees payable to the Administrator; the fees and certain
expenses of the Trust's custodian and transfer agent, including the cost of
providing records to the Administrator in connection with its obligation of
maintaining required records of the Trust; the charges and expenses of the
Trust's legal counsel, legal counsel to the Trustees who are not "interested
persons" as defined in the 1940 Act and independent accountants; commissions and
any issue or transfer taxes chargeable to the Trust in connection with its
transactions; all taxes and corporate fees payable by the Trust to governmental
agencies; the fees of any trade association of which the Trust is a member; the
costs of share certificates representing Common Shares of the Trust;
organizational and offering expenses of the Trust and the fees and expenses
involved in registering and maintaining registration of the Trust and its Common
Shares with SEC, including the preparation and printing of the Trust's
registration statement and prospectuses for such purposes; allocable
communications expenses with respect to investor services, and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders; the cost of
insurance; and litigation and indemnification expenses and extraordinary
expenses not incurred in the ordinary course of the Trust's business.
For its services, the Administrator is entitled to receive from the Trust a
fee at an annual rate of 0.25% of the Trust's average daily net assets plus the
proceeds of any outstanding borrowings.
Administrative fees paid by the Trust for the fiscal years ended February
28, 2006, 2005, and February 29, 2004 were $5,092,209, $4,754,902 and
$3,903,976, respectively, for services rendered to the Trust.
30
DISTRIBUTOR
Shares of the Trust are distributed by ING Funds Distributor, LLC ("ING
Funds Distributor" or "Distributor"). Pursuant to an Amended and Restated
Distribution Agreement ("Distribution Agreement"), the Distributor, an
affiliate of ING Investments and ING Funds Services, is the principal
underwriter and distributor for the shares of the Trust and acts as agent of the
Trust in the continuous offering of its shares. The Distributor bears all of its
expenses of providing services pursuant to the Distribution Agreement. The Trust
pays the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and the Trust pays for the printing and
distribution of copies thereof used in connection with the offering of shares to
prospective investors. The Trust also pays for supplementary sales literature
and advertising costs.
The Distribution Agreement continues in effect from year to year so long as
such continuance is approved at least annually by a vote of the Board, including
the Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the Distribution Agreement. The Distribution
Agreement automatically terminates in the event of its assignment and may be
terminated at any time without penalty by the Trust or by the Distributor upon
sixty (60) days written notice. Termination by the Trust may be by vote of a
majority of the Board, and a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the Distribution Agreement, or a majority of the outstanding voting securities
of the Trust, as defined under the 1940 Act.
The Common Shares will only be sold on such days as shall be agreed to by
the Trust and ING Funds Distributor. The Common Shares will be sold at market
prices, which shall be determined with reference to trades on the NYSE, subject
to a minimum price to be established each day by the Trust. The mininum price
on any day will not be less than the current NAV per Common Share. The Trust and
ING Funds Distributor will suspend the sale of Common Shares if the per share
price of the Common Shares is less than the minimum price.
Settlements of sales of Common Shares will occur on the third business day
following the date on which any such sales are made. Unless otherwise indicated
in a further prospectus supplement, ING Funds Distributor as underwriter will
act as underwriter on a reasonable efforts basis.
In connection with the sale of the Common Shares on behalf of the Trust,
ING Funds Distributor may be deemed to be an underwriter within the meaning of
the 1940 Act. As described below, ING Funds Distributor also serves as
distributor for the Trust in connection with the sale of Common Shares of the
Trust pursuant to privately negotiated transactions and pursuant to optional
cash investments. In addition, ING Funds Distributor provides administrative
services in connection with a separate at-the-market offering of Common Shares
of the Trust. The offering of Common Shares pursuant to the Distribution
Agreement will terminate upon the earlier of (i) the sale of all Common Shares
subject thereto or (ii) termination of the Distribution Agreement.
PROXY VOTING PROCEDURES
The Board has adopted proxy voting procedures and guidelines to govern the
voting of proxies relating to the Trust's portfolio securities. The Trust's
proxy voting procedures delegate to ING Investments the authority to vote
proxies relating to portfolio securities, and provide a method for responding to
potential conflicts of interest. In delegating voting authority to ING
Investments, the Board has also approved ING Investments' proxy voting
procedures, which require ING Investments to vote proxies in accordance with the
Trust's proxy voting procedures and guidelines. An independent proxy voting
service has been retained to assist in the voting of Trust proxies through the
provision of vote
31
analysis, implementation and recordkeeping and disclosure services. In addition,
the Board established the Valuation, Proxy and Brokerage Committee (formerly,
the Valuation and Proxy Voting Committee) to oversee the implementation of the
Trust's proxy voting procedures. A copy of the proxy voting procedures and
guidelines of the Trust, including the proxy voting procedures of ING
Investments, is attached hereto as Appendix A. Information regarding how the
Trust voted proxies relating to portfolio securities for the one-year period
ending June 30th is available no later than August 31st, of each year through
the ING Funds' website at http://www.ingfunds.com or by accessing the SEC's
EDGAR database at http://www.sec.gov.
SHAREHOLDER INVESTMENT PROGRAM
The Trust maintains a Shareholder Investment Program ("Program"), which
allows participating shareholders to reinvest all dividends and capital gain
distributions ("Dividends") in additional Common Shares of the Trust. The
Program also allows participants to purchase additional Common Shares through
optional cash investments in amounts ranging from a minimum of $100 to a maximum
of $100,000 per month. Common Shares may be issued by the Trust under the
Program only if the Trust's Common Shares are trading at a premium to NAV. If
the Trust's Common Shares are trading at a discount to NAV, Common Shares
purchased under the Program will be purchased on the open market.
If the market price (the volume-weighted average sales price, per share, as
reported on the New York Stock Exchange Composite Transaction Tape as shown
daily on Bloomberg's AQR screen) plus estimated commissions for Common Shares of
the Trust is less than the NAV on the Valuation Date (defined below), DST will
purchase Common Shares on the open market through a bank or securities broker as
provided herein. Open market purchases may be effected on any securities
exchange on which Common Shares of the Trust trade or in the over-the-counter
market. If the Market Price, plus estimated commissions, exceeds the NAV before
DST has completed its purchases, DST will use reasonable efforts to cease
purchasing Common Shares, and the Trust shall issue the remaining Common Shares.
If the Market Price, plus estimated commissions, is equal to or exceeds the NAV
on the Valuation Date, the Trust will issue the Common Shares to be acquired by
the Program. The Valuation Date is a date preceding the DRIP Investment Date and
OCI Investment Date, on which it is determined, based on the Market Price and
NAV of Common Shares of the Trust, whether DST will purchase Common Shares on
the open market or the Trust will issue the Common Shares for the Program. The
Trust may, without prior notice to participants, determine that it will not
issue new Common Shares for purchase pursuant to the Program, even when the
Market Price plus estimated commissions equals or exceeds NAV, in which case DST
will purchase Common Shares on the open market.
Common Shares issued by the Trust under the Program will be issued without
incurring a fee. Common Shares purchased for the Program directly from the
Trust in connection with the reinvestment of Dividends will be acquired on the
DRIP Investment Date at the greater of (i) NAV at the close of business on the
Valuation Date or (ii) the average of the daily Market Price of the shares
during the DRIP Pricing Period, minus a discount of 5%. The DRIP Pricing Period
for a dividend reinvestment is the Valuation Date and the prior Trading Day. A
"Trading Day" means any day on which trades of the Common Shares of the Trust
are reported on the NYSE.
Common Shares purchased directly from the Trust pursuant to optional cash
investments will be acquired on an OCI Investment Date at the greater of (i) NAV
at the close of business on the Valuation Date or (ii) the average of the daily
Market Price of the shares during the OCI Pricing Period minus a discount,
determined at the sole discretion of the Trust and announced in advance, ranging
from 0% to 5%. The OCI Pricing Period for an OCI Investment Date means the
period beginning four Trading Days prior to the Valuation Date through and
including the Valuation Date. The discount for optional cash investments is set
by the Trust and may be changed or eliminated by the Trust without prior notice
to
32
participants at any time. The discount for optional cash investments is
determined on the last business day of each month. In all instances, however,
the discount on Common Shares issued directly by the Trust shall not exceed 5%
of the market price, and Common Shares may not be issued at a price less than
NAV without prior specific approval of shareholders or of the Commission.
Optional cash investments received by DST no later than 4:00 p.m. Eastern time
on the OCI payment Due Date to be invested on the relevant OCI Investment Date.
Subject to the availability of Common Shares registered for issuance under
the Program, there is no total maximum number of Common Shares that can be
issued pursuant to the Program.
See "Federal Taxation - Distributions" for a discussion of the federal
income tax ramifications of obtaining Common Shares under the Program.
PRIVATELY NEGOTIATED TRANSACTIONS
The Common Shares may also be offered pursuant to privately negotiated
transactions between the Trust and specific investors. The terms of such
privately negotiated transactions will be subject to the discretion of the
management of the Trust. In determining whether to sell Common Shares pursuant
to a privately negotiated transaction, the Trust will consider relevant factors
including, but not limited to, the attractiveness of obtaining additional funds
through the sale of Common Shares, the purchase price to apply to any such sale
of Common Shares and the person seeking to purchase the Common Shares.
Common Shares issued by the Trust in connection with privately negotiated
transactions will be issued at the greater of (1) NAV per Common Share of the
Trust's Common Shares or (ii) at a discount ranging from 0.00% to 5.00% of the
average of the daily market price of the Trust's Common Shares at the close of
business on the two business days preceding the date upon which Common Shares
are sold pursuant to the privately negotiated transaction. The discount to apply
to such privately negotiated transactions will be determined by the Trust with
regard to each specific transaction. The Trust will not pay any commissions with
regard to privately negotiated transactions, but an investor may be subject to a
front end sales load of up to 3.00% paid to or retained by a third party
broker-dealer through which such transaction may be effected.
CODE OF ETHICS
The Trust's Distributor, ING Investments and the Trust have each adopted a
code of ethics ("Code of Ethics" or written supervisory procedures) governing
personal trading activities of all Trustees, officers of the Trust and the
Distributor and persons who, in connection with their regular functions, play a
role in the recommendation of any purchase or sale of a security by the Trust or
obtain information pertaining to such purchase or sale. The Code of Ethics is
intended to prohibit fraud against the Trust that may arise from personal
trading of securities that may be purchased or held by the Trust or of Trust
shares. The Code of Ethics also prohibits short-term trading of the Trust by
persons subject to the Code of Ethics. Personal trading is permitted by such
persons subject to certain restrictions; however such persons are generally
required to pre-clear all security transactions with the Trust's Compliance
Department and to report all transactions on a regular basis. The Sub-Adviser
has adopted its own Code of Ethics to govern the personal trading activities of
its personnel.
The Code of Ethics can be reviewed and copied at the SEC's Public Reference
Room located at 100 F Street, NE, Washington, DC 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
(202) 551-8090. The Code of Ethics is available on the SEC's website
(http://www.sec.gov) and copies may also be obtained at prescribed rates by
electronic request at publicinfo@sec.gov, or by writing the SEC's Public
Reference Section at the address listed above.
33
PORTFOLIO TRANSACTIONS
The Trust will generally have at least 80% of its net assets, plus the
amount of any borrowings for investment purposes, invested in Senior Loans. The
remaining assets of the Trust will generally consist of short-term debt
instruments with remaining maturities of 120 days or less, longer-term debt
securities, certain other instruments such as subordinated or unsecured loans up
to a maximum of 5% of the Trust's net assets, interest rate swaps, caps and
floors, repurchase agreements, reverse repurchase agreements and equity
securities acquired in connection with investments in loans. The Trust will
acquire Senior Loans from and sell Senior Loans to banks, insurance companies,
finance companies, and other investment companies and private investment funds.
The Trust may also purchase Senior Loans from and sell Senior Loans to U.S.
branches of foreign banks which are regulated by the Federal Reserve System or
appropriate state regulatory authorities. The Trust's interest in a particular
Senior Loan will terminate when the Trust receives full payment on the loan or
sells a Senior Loan in the secondary market. Costs associated with purchasing or
selling investments in the secondary market include commissions paid to brokers
and processing fees paid to agents. These costs are allocated between the
purchaser and seller as agreed between the parties.
Purchases and sales of short-term debt and other financial instruments for
the Trust's portfolio usually are principal transactions, and normally the Trust
will deal directly with the underwriters or dealers who make a market in the
securities involved unless better prices and execution are available elsewhere.
Such market makers usually act as principals for their own account. On occasion,
securities may be purchased directly from the issuer. Short-term debt
instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Trust that are not transactions with principals will consist
primarily of brokerage commissions or dealer or underwriter spreads between the
bid and asked price, although purchases from underwriters may involve a
commission or concession paid by the issuer.
The Investment Advisory Agreement or Sub-Advisory Agreement authorizes ING
Investments or Sub-Adviser to select the brokers or dealers that will execute
the purchase and sale of investment securities for the Trust. In all purchases
and sales of securities for the portfolio of the Trust, the primary
consideration is to obtain the most favorable execution available. Pursuant to
the Investment Advisory Agreement or Sub-Advisory Agreement, the Adviser or
Sub-Adviser determines, subject to the instructions of and review by the Trust's
Board, which securities are to be purchased and sold by the Trust and which
brokers are to be eligible to execute portfolio transactions of the Trust.
Purchases and sales of securities in the over-the-counter market will generally
be executed directly with a "market-maker," unless in the opinion of the Adviser
or the Sub- Adviser, a better price and execution can otherwise be obtained by
using a broker for the transaction.
In placing portfolio transactions, the Adviser or Sub-Adviser is required
to use their best efforts to choose a broker capable of providing the brokerage
services necessary to obtain the most favorable execution available. The full
range and quality of brokerage services available will be considered in making
these determinations, such as the size of the order, the difficulty of
execution, the operational facilities of the firm involved, capital commitment,
the firm's risk in positioning a block of securities and other factors. While
the Adviser or Sub-Adviser seeks to obtain the most favorable net results in
effecting transactions in the Trust's portfolio securities, brokers or dealers
who provide research services may receive orders for transactions by the Trust.
Such research services ordinarily consist of assessments and analyses of the
business or prospects of a company, industry, or economic sector. The Adviser is
authorized to pay spreads or commissions to brokers or dealers furnishing such
services which are in excess of spreads or commissions that other brokers or
dealers not providing such research may charge for the same transaction, even if
the specific services were not imputed to the Trust and were useful to the
Adviser in advising other clients. Information so received will be in addition
to, and not in lieu of, the services required to be performed by the Adviser
under the Investment Advisory Agreement between the
34
Adviser and the Trust. The expenses of the Adviser or Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Adviser or Sub-Adviser may use any research services obtained
in providing investment advice to its other investment advisory accounts.
Conversely, such information obtained by the placement of business for the
Adviser or Sub-Adviser or other entities advised by the Adviser or Sub-Adviser
will be considered by and may be useful to the Adviser or Sub-Adviser in
carrying out its obligations to the Trust. As permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended ("1934 Act") the Adviser may cause
the Trust to pay a broker-dealer which provides brokerage and research services
(as defined in the 1934 Act) to the Adviser or Sub-Adviser an amount of
disclosed commissions for effecting a securities transaction for the Trust in
excess of the commission which another broker-dealer would have charged for
effecting the transaction.
The Trust does not intend to effect any brokerage transaction in its
portfolio securities with any broker-dealer affiliated directly or indirectly
with the Adviser or Sub-Adviser, except for any sales of portfolio securities
pursuant to a tender offer, in which event the Adviser or Sub-Adviser will
offset against the management fee a part of any tender fees which legally may be
received by such affiliated broker-dealer. To the extent certain services which
the Trust is obligated to pay for under the Investment Advisory Agreement are
performed by the Adviser, the Trust will reimburse the Adviser for the costs of
personnel involved in placing orders for the execution of portfolio
transactions.
In connection with its purchase or holding interests in Senior Loans, the
Trust may acquire (and subsequently sell) equity securities or warrants it
receives. Brokerage commissions paid by the Trust during the fiscal years ended
February 28, 2006, 2005 and February 29, 2004 were $755, $11,122 and $28,130,
respectively.
None of the total commissions paid during the fiscal years ended February
28, 2006, 2005 and February 29, 2004, were paid by the Trust to firms which
provided research, statistical or other services to the Adviser.
PORTFOLIO TURNOVER RATE
The annual rate of the Trust's total portfolio turnover for the years ended
February 28, 2006, 2005 and February 29, 2004 was 81%, 93% and 87%,
respectively. The annual turnover rate of the Trust is generally expected to be
between 50% and 100%, although as part of its investment policies, the Trust
places no restrictions on portfolio turnover and the Trust may sell any
portfolio security without regard to the period of time it has been held. The
annual turnover rate of the Trust also includes Senior Loans on which the Trust
has received full or partial payment. The Adviser believes that full and partial
payments on loans generally comprise approximately 25% to 75% of the Trust's
total portfolio turnover each year.
NET ASSET VALUE
The NAV per Common Share of the Trust is determined each business day as of
the close of regular trading on the NYSE (usually 4:00 p.m. Eastern time unless
otherwise designated by the NYSE). The Trust is open for business every day the
NYSE is open. As of the date of this SAI, the NYSE is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. The NAV per Common Share is determined by dividing the value of
the Trust's loan assets plus all cash and other assets (including interest
accrued but not collected) less all liabilities (including accrued expenses but
excluding capital and surplus) by the number of Common Shares outstanding. The
NAV per Common Share is made available for publication.
FEDERAL TAXATION
35
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Trust will elect each year to be taxed as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code ("Code"). As a
RIC, the Trust generally will not be subject to federal income tax on the
portion of its investment company taxable income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses, and net short-term
capital gains in excess of long-term capital losses) and net capital gain (i.e.,
the excess of net long-term capital gains over the sum of net short-term capital
losses and capital loss carryovers from prior years) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income for the taxable year ("Distribution Requirement"), and
satisfies certain other requirements of the Code that are described below.
In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a RIC must derive at least 90% of
its gross income for each taxable year from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies, net income derived
from an interst in a qualified publicly traded partnership and other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.
In addition to satisfying the requirements described above, the Trust must
satisfy an asset diversification test in order to qualify as a RIC. Under this
test, at the close of each quarter of the Trust's taxable year, at least 50% of
the value of the Trust's assets must consist of cash and cash items (including
receivables), U.S. government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Trust has
not invested more than 5% of the value of the Trust's total assets in securities
of any such issuer and as to which the Trust does not hold more than 10% of the
outstanding voting securities of any such issuer), and no more than 25% of the
value of its total assets may be invested in the securities of any one issuer
(other than U.S. government securities and securities of other regulated
investment companies), in two or more issuers which the Trust controls and which
are engaged in the same or similar trades or businesses, or of one or more
qualified publicly traded partnerships.
In general, gain or loss recognized by the Trust on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Trust at a market discount
(generally at a price less than its principal amount) other than at the original
issue will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Trust held the debt
obligation.
In general, investments by the Trust in zero coupon or other original issue
discount securities will result in income to the Trust equal to a portion of the
excess of the face value of the securities over their issue price ("original
issue discount") each year that the Trust holds the securities, even though the
Trust receives no cash interest payments. This income is included in determining
the amount of income which the Trust must distribute to maintain its status as a
RIC and to avoid federal income and excise taxes.
If for any taxable year the Trust does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to
36
shareholders, and such distributions will be taxable as ordinary dividends to
the extent of the Trust's current and accumulated earnings and profits. Such
distributions generally would be eligible for the dividends-received deduction
in the case of corporate shareholders.
If the Trust fails to qualify as a RIC in any year, it must pay out its
earnings and profits accumulated in that year in order to qualify again as a
RIC. Moreover, if the Trust failed to qualify as a RIC for a period greater than
one taxable year, the Trust may be required to recognize any net built-in gains
with respect to certain of its assets (the excess of the aggregate gains,
including items of income, over aggregate losses that would have been realized
if the Trust had been liquidated) in order to qualify as a RIC in a subsequent
year.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a RIC that fails to distribute
in each calendar year an amount equal to the sum of (1) 98% of its ordinary
taxable income for the calendar year, (2) 98% of its capital gain net income
(I.E., capital gains in excess of capital losses) for the one-year period ended
on October 31 of such calendar year, and (3) any ordinary taxable income and
capital gain net income for previous years that was not distributed or taxed to
the RIC during those years.
The Trust intends to make sufficient distributions or deemed distributions
(discussed below) of its ordinary taxable income and capital gain net income to
avoid liability for the excise tax.
HEDGING TRANSACTIONS
The Trust has the ability, pursuant to its investment objectives and
policies, to hedge its investments in a variety of transactions, including
interest rate swaps and the purchase or sale of interest rate caps and floors.
The treatment of these transactions for federal income tax purposes may in some
instances be unclear, and the RIC qualification requirements may limit the
extent to which the Trust can engage in hedging transactions.
Under certain circumstances, the Trust may recognize gain from a
constructive sale of an appreciated financial position. If the Trust enters into
certain transactions in property while holding substantially identical property,
the Trust would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Trust's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Trust's holding period and the application of various loss
deferral provisions in the Code. Constructive sale treatment does not apply to
transactions closed in the 90-day period ending with the 30th day after the
close of the taxable year, if certain conditions are met.
DISTRIBUTIONS
The Trust anticipates distributing all or substantially all of its
investment company taxable income for the taxable year. Such distributions will
be taxable to shareholders as ordinary income. If a portion of the Trust's
income consists of dividends paid by U.S. corporations, a portion of the
dividends paid by the Trust may be eligible for the corporate dividends received
deduction.
The Trust may either retain or distribute to shareholders its net capital
gain for each taxable year. The Trust currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will generally be taxable to shareholders at a maximum federal tax
rate of 15%. Distributions are subject to these capital gains rates regardless
of the length of time the
37
shareholder has held his shares. Conversely, if the Trust elects to retain its
net capital gain, the Trust will be taxed thereon (except to the extent of any
available capital loss carryovers) at the applicable corporate tax rate. In such
event, it is expected that the Trust also will elect to treat such gain as
having been distributed to shareholders. As a result, each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will be entitled to claim a tax credit for his pro rata
share of tax paid by the Trust on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.
Recently enacted tax legislation generally provides for a maximum tax rate
for individual taxpayers of 15% on long-term capital gains from sales on certain
qualifying dividend income. The rate reductions do not apply to corporate
taxpayers. The Trust will be able to separately designate distributions of any
qualifying long-term capital gains or qualifying dividends earned by the Trust
that would be eligible for the lower maximum rate, although it does not expect
to distribute a material amount of qualifying dividends. A shareholder would
also have to qualify a 60-day holding period with respect to any distributions
of qualifying dividend in order to obtain the benefit of the lower rate.
Distributions from funds, such as the Trust, investing in debt instruments will
not generally qualify for the lower rate.
Distributions by the Trust in excess of the Trust's earnings and profits
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his shares; any such return of capital
distributions in excess of the shareholder's tax basis will be treated as gain
from the sale of his shares, as discussed below.
Distributions by the Trust will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Trust. If the NAV at the time a shareholder purchases
shares of the Trust reflects undistributed income or gain, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.
A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by the Trust in October, November or December
with a record date in such a month and paid by the Trust during January of the
following calendar year. Such distributions will be taxed to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received.
The Trust will be required in certain cases to withhold and remit to the
U.S. Treasury at the current rate of 28% of all dividends and redemption
proceeds payable to any shareholder (1) who fails to provide the Trust with a
certified, correct identification number or other required certifications, or
(2) if the Internal Revenue Service notifies the Trust that the shareholder is
subject to backup withholding. Corporate shareholders and other shareholders
specified in the Code are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability if the appropriate
information is provided to the IRS.
SALE OF COMMON SHARES
A shareholder will recognize gain or loss on the sale or exchange of shares
of the Trust in an amount generally equal to the difference between the proceeds
of the sale and the shareholder's adjusted tax basis in the shares. In general,
any such gain or loss will be considered capital gain or loss if the shares are
held as capital assets, and gain or loss will be long-term or short-term,
depending upon the shareholder's holding period for the shares. However, any
capital loss arising from the sale of shares held for six months or less will be
treated as a long-term capital loss to the extent of any long-term capital
38
gains distributed (or deemed distributed) with respect to such shares. Also, any
loss realized on a sale or exchange of shares will be disallowed to the extent
the shares disposed of are replaced (including shares acquired through the
Shareholder Investment Program) within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such case, the
tax basis of the acquired shares will be adjusted to reflect the disallowed
loss.
REPURCHASES OF SHARES
As noted above, the Fund may take action to repurchase its shares. If a
shareholder tenders all shares of the Fund that he or she owns or is considered
to own, the shareholder will realize a taxable sale or exchange (see "Sale of
Common Shares" above). If a shareholder tenders less than all of the shares of
the Fund that he or she owns or is considered to own, the repurchase may not
qualify as an exchange, and the proceeds received may be treated as a dividend,
return of capital or capital gain, depending on the Fund's earnings and profits
and the shareholder's basis in the tendered shares. If that occurs, there is a
risk that non-tendering shareholders may be considered to have received a deemed
distribution as a result of the Fund's purchase of tendered shares, and all or a
portion of that deemed distribution may be taxable as a dividend.
FOREIGN SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder") depends, in part, on whether the
shareholder's income from the Trust is effectively connected with a U.S. trade
or business carried on by such shareholder.
If the income from the Trust is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, distributions of investment
company taxable income will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate). Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale or exchange of shares
of the Trust, capital gain dividends, and amounts retained by the Trust that are
designated as undistributed capital gains. However, subject to certain
limitations and the receipt of further guidance form the U.S. Treasury,
dividends paid to certain foreign shareholders may be exempt from U.S. tax
through 2007 to the extent such dividends are attributable to qualified interest
and/or net short-term capital gains, provided that the Trust elects to follow
certain procedures. The Trust may choose to not follow such procedures and there
can be no assurance as to the amount, if any, of dividends that would not be
subject to withholding.
If the income from the Trust is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income, capital gain dividends, amounts retained by the Trust
that are designated as undistributed capital gains and any gains realized upon
the sale or exchange of shares of the Trust will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
Such shareholders that are classified as corporations for U.S. tax purposes also
may be subject to a branch profits tax.
In the case of foreign noncorporate shareholders, the Trust may be required
to withhold U.S. federal income tax at a rate of 30% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Trust with proper notification of their
foreign status. See "Distributions."
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own
39
tax advisers with respect to the particular tax consequences to them of an
investment in the Trust, including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Income received by the Trust from foreign sources may be subject to
withholding and other taxes imposed by such foreign jurisdictions, absent treaty
relief. Distributions to shareholders also may be subject to state, local and
foreign taxes, depending upon each shareholder's particular situation.
Shareholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Trust.
ADVERTISING AND PERFORMANCE DATA
ADVERTISING
From time to time, advertisements and other sales materials for the Trust
may include information concerning the historical performance of the Trust. Any
such information may include trading volume of the Trust's Common Shares, the
number of Senior Loan investments, annual total return, aggregate total return,
distribution rate, average compounded distribution rates and yields of the Trust
for specified periods of time, and diversification statistics. Such information
may also include rankings, ratings and other information from independent
organizations such as Lipper, Morningstar, Value Line, Inc., CDA Technology,
Inc., S&P's, Portfolio Management Data (a division of S&P's), Moody's, Bloomberg
or other industry publications. These rankings will typically compare the Trust
to all closed-end Funds, to other Senior Loan funds, and/or also to taxable
closed-end fixed income funds. Any such use of rankings and ratings in
advertisements and sales literature will conform with the guidelines of the
National Association of Security Dealers ("NASD") approved by the Commission.
Ranking comparisons and ratings should not be considered representative of the
Trust's relative performance for any future period.
Reports and promotional literature may also contain the following
information: (i) number of shareholders; (ii) average account size;
(iii) identification of street and registered account holdings; (iv) lists or
statistics of certain of the Trust's holdings including, but not limited to,
portfolio composition, sector weightings, portfolio turnover rates, number of
holdings, average market capitalization and modern portfolio theory statistics
alone or in comparison with itself (over time) and with its peers and industry
group; (v) public information about the assets class; and (vi) discussions
concerning coverage of the Trust by analysts.
In addition, reports and promotional literature may contain information
concerning the Adviser, the Sub-Adviser, ING Groep, the portfolio managers, the
Administrator or affiliates of the Trust including (i) performance rankings of
other funds managed by the Adviser or Sub-Adviser, or the individuals employed
by the Adviser or Sub-Adviser who exercise responsibility for the day-to-day
management of the Trust, including rankings and ratings of investment companies
published by Lipper, Morningstar, Value Line, Inc., CDA Technologies, Inc., or
other rating services, companies, publications or other persons who rank or rate
investment companies or other investment products on overall performance or
other criteria; (ii) lists of clients, the number of clients, or assets under
management; (iii) information regarding the acquisition of the ING Funds by ING
Capital; (iv) the past performance of ING Capital and
40
ING Funds Services; (v) the past performance of other funds managed by the
Adviser or Sub-Adviser; (vi) quotes from a portfolio manager of the Trust or
industry specialists; and (vii) information regarding rights offerings conducted
by closed-end funds managed by the Adviser or Sub-Adviser.
The Trust may compare the frequency of its reset period to the frequency
which LIBOR changes. Further, the Trust may compare its yield to (i) LIBOR,
(ii) the federal funds rate, (iii) the Prime Rate, quoted daily in the Wall
Street Journal as the base rate on corporate loans at large U.S. money center
commercial banks, (iv) the average yield reported by the Bank Rate Monitor
National Index for money market deposit accounts offered by the 100 leading
banks and thrift institutions in the ten largest standard metropolitan
statistical areas, (v) yield data published by Lipper, Bloomberg or other
industry sources, or (vi) the yield on an investment in 90-day Treasury bills on
a rolling basis, assuming quarterly compounding. Further, the Trust may compare
such other yield data described above to each other. The Trust may also compare
its total return, NAV stability and yield to fixed income investments. As with
yield and total return calculations, yield comparisons should not be considered
representative of the Trust's yield or relative performance for any future
period.
The Trust may provide information designed to help individuals understand
their investment goals and explore various financial strategies. Such
information may include information about current economic, market and political
conditions; materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting; worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return; and action plans offering investment alternatives.
Materials may also include discussion of other investment companies in the ING
Funds, products and services, and descriptions of the benefits of working with
investment professionals in selecting investments.
PERFORMANCE DATA
The Trust may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the value of such investment at the end of
the period. On occasion, the Trust may quote total return calculations published
by Lipper, a widely recognized independent publication that monitors the
performance of both open-end and closed-end investment companies.
The Trust's distribution rate is calculated on a monthly basis by
annualizing the dividend declared in the month and dividing the resulting
annualized dividend amount by the Trust's corresponding month-end NAV (in the
case of NAV) or the last reported market price (in the case of Market). The
distribution rate is based solely on the actual dividends and distributions,
which are made at the discretion of management. The distribution rate may or may
not include all investment income, and ordinarily will not include capital gains
or losses, if any.
Total return and distribution rate and compounded distribution rate figures
utilized by the Trust are based on historical performance and are not intended
to indicate future performance. Distribution rate, compounded distribution rate
and NAV per share can be expected to fluctuate over time. Total return will vary
depending on market conditions, the Senior Loans, and other securities
comprising the Trust's portfolio, the Trust's operating expenses and the amount
of net realized and unrealized capital gains or losses during the period.
GENERAL INFORMATION
41
CUSTODIAN
State Street Bank and Trust Company, 801 Pennsylvania Avenue, Kansas City,
Missouri 64105 has been retained to act as the custodian for the Trust. State
Street Bank and Trust Company does not have any part in determining the
investment policies of the Trust or in determining which portfolio securities
are to be purchased or sold by the Trust or in the declaration of dividends and
distributions.
LEGAL COUNSEL
Legal matters for the Trust are passed upon by Dechert LLP, 1775 I Street,
NW, Washington, DC 20006.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP, 355 South Grand Avenue, Los Angeles, California 90071, currently
serves as the independent registered public accounting firm and has been
selected as independent auditors for the Trust for the fiscal year ending
February 28, 2007.
FINANCIAL STATEMENTS
The Financial Statements and the independent registered public accounting
firms reports thereon, appearing in the Trust's annual shareholder report for
the period ended February 28, 2006 are incorporated by reference in this SAI.
The Trust's annual and semi-annual (unaudited) shareholder reports are available
at 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258, upon request and
without charge by calling (800) 992-0180.
42
APPENDIX A -- PROXY VOTING PROCEDURES AND GUIDELINES
43
APPENDIX A
ING FUNDS
----------
PROXY VOTING PROCEDURES AND GUIDELINES
EFFECTIVE DATE: JULY 10, 2003
REVISION DATE: MARCH 16, 2006
----------
I. INTRODUCTION
The following are the Proxy Voting Procedures and Guidelines (the "Procedures
and Guidelines") of the ING Funds set forth on EXHIBIT 1 attached hereto and
each portfolio or series thereof (each a "Fund" and collectively, the "Funds").
The purpose of these Procedures and Guidelines is to set forth the process by
which each Fund will vote proxies related to the equity assets in its investment
portfolio (the "portfolio securities"). The Procedures and Guidelines have been
approved by the Funds' Boards of Trustees/Directors(1) (each a "Board" and
collectively, the "Boards"), including a majority of the independent
Trustees/Directors(2) of the Board. These Procedures and Guidelines may be
amended only by the Board. The Board shall review these Procedures and
Guidelines at its discretion, and make any revisions thereto as deemed
appropriate by the Board.
II. VALUATION, PROXY AND BROKERAGE COMMITTEE
The Boards hereby delegate to the Valuation, Proxy and Brokerage Committee of
each Board (each a "Committee" and collectively, the "Committees") the authority
and responsibility to oversee the implementation of these Procedures and
Guidelines, and where applicable, to make determinations on behalf of the Board
with respect to the voting of proxies on behalf of each Fund. Furthermore, the
Boards hereby delegate to each Committee the authority to review and approve
material changes to proxy voting procedures of any Fund's investment adviser
(the "Adviser"). The Proxy Voting Procedures of the Adviser (the "Adviser
Procedures") are attached hereto as EXHIBIT 2. Any determination regarding the
voting of proxies of each Fund that is made by a Committee, or any member
thereof, as permitted herein, shall be deemed to be a good faith determination
regarding the voting of proxies by the full Board. Each Committee
----------
(1) Reference in these Procedures to one or more Funds shall, as applicable,
mean those Funds that are under the jurisdiction of the particular Board or
Valuation, Proxy and Brokerage Committee at issue. No provision in these
Procedures is intended to impose any duty upon the particular Board or
Valuation, Proxy and Brokerage Committee with respect to any other Fund.
(2) The independent Trustees/Directors are those Board members who are not
"interested persons" of the Funds within the meaning of Section 2(a)(19) of
the Investment Company Act of 1940.
A-1
may rely on the Adviser through the Agent, Proxy Coordinator and/or Proxy Group
(as such terms are defined for purposes of the Adviser Procedures) to deal in
the first instance with the application of these Procedures and Guidelines. Each
Committee shall conduct itself in accordance with its charter.
III. DELEGATION OF VOTING AUTHORITY
The Board hereby delegates to the Adviser to each Fund the authority and
responsibility to vote all proxies with respect to all portfolio securities of
the Fund in accordance with then current proxy voting procedures and guidelines
that have been approved by the Board. The Board may revoke such delegation with
respect to any proxy or proposal, and assume the responsibility of voting any
Fund proxy or proxies as it deems appropriate. Non-material amendments to the
Procedures and Guidelines may be approved for immediate implementation by the
President or Chief Financial Officer of a Fund, subject to ratification at the
next regularly scheduled meeting of the Valuation, Proxy and Brokerage
Committee.
When a Fund participates in the lending of its securities and the securities are
on loan at record date, proxies related to such securities will not be forwarded
to the Adviser by the Fund's custodian and therefore will not be voted.
Funds that are "funds-of-funds" will "echo" vote their interests in underlying
mutual funds, which may include ING Funds (or portfolios or series thereof)
other than those set forth on EXHIBIT 1 attached hereto. This means that, if the
fund-of-funds must vote on a proposal with respect to an underlying investment
company, the fund-of-funds will vote its interest in that underlying fund in the
same proportion all other shareholders in the investment company voted their
interests.
A fund that is a "feeder" fund in a master-feeder structure does not echo vote.
Rather, it passes votes requested by the underlying master fund to its
shareholders. This means that, if the feeder fund is solicited by the master
fund, it will request instructions from its own shareholders, either directly
or, in the case of an insurance-dedicated Fund, through an insurance product or
retirement plan, as to the manner in which to vote its interest in an underlying
master fund.
When a Fund is a feeder in a master-feeder structure, proxies for the portfolio
securities owned by the master fund will be voted pursuant to the master fund's
proxy voting policies and procedures. As such, and except as otherwise noted
herein with respect to vote reporting requirements, feeder Funds shall not be
subject to these Procedures and Guidelines.
IV. APPROVAL AND REVIEW OF PROCEDURES
Each Fund's Adviser has adopted proxy voting procedures in connection with the
voting of portfolio securities for the Funds as attached hereto in EXHIBIT 2.
The Board hereby approves such procedures. All material changes to the Adviser
Procedures must be approved by the Board or the Valuation, Proxy and Brokerage
Committee prior to implementation; however, the President or Chief Financial
Officer of a Fund may make such non-material changes as they deem appropriate,
subject to ratification by the Board or the Valuation, Proxy and Brokerage
A-2
Committee at its next regularly scheduled meeting.
V. VOTING PROCEDURES AND GUIDELINES
The Guidelines that are set forth in EXHIBIT 3 hereto specify the manner in
which the Funds generally will vote with respect to the proposals discussed
therein.
Unless otherwise noted, the defined terms used hereafter shall have the same
meaning as defined in the Adviser Procedures
A. Routine Matters
The Agent shall be instructed to submit a vote in accordance with the
Guidelines where such Guidelines provide a clear "For," "Against,"
"Withhold" or "Abstain" on a proposal. However, the Agent shall be
directed to refer any proxy proposal to the Proxy Coordinator for
instructions as if it were a matter requiring case-by-case consideration
under circumstances where the application of the Guidelines is unclear,
it appears to involve unusual or controversial issues, or an Investment
Professional (as such term is defined for purposes of the Adviser
Procedures) recommends a vote contrary to the Guidelines.
B. Matters Requiring Case-by-Case Consideration
The Agent shall be directed to refer proxy proposals accompanied by its
written analysis and voting recommendation to the Proxy Coordinator where
the Guidelines have noted "case-by-case" consideration.
Upon receipt of a referral from the Agent, the Proxy Coordinator may
solicit additional research from the Agent, Investment Professional(s),
as well as from any other source or service.
Except in cases in which the Proxy Group has previously provided the
Proxy Coordinator with standing instructions to vote in accordance with
the Agent's recommendation, the Proxy Coordinator will forward the
Agent's analysis and recommendation and/or any research obtained from the
Investment Professional(s), the Agent or any other source to the Proxy
Group. The Proxy Group may consult with the Agent and/or Investment
Professional(s), as it deems necessary.
The Proxy Coordinator shall use best efforts to convene the Proxy Group
with respect to all matters requiring its consideration. In the event
quorum requirements cannot be timely met in connection with a voting
deadline, it shall be the policy of the Funds to vote in accordance with
the Agent's recommendation, unless the Agent's recommendation is deemed
to be conflicted as provided for under the Adviser Procedures, in which
case no action shall be taken on such matter (I.E., a "Non-Vote").
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1. WITHIN-GUIDELINES VOTES: Votes in Accordance with a Fund's
Guidelines and/or, where applicable, Agent Recommendation
In the event the Proxy Group, and where applicable, any Investment
Professional participating in the voting process, recommend a vote
Within Guidelines, the Proxy Group will instruct the Agent, through
the Proxy Coordinator, to vote in this manner. No Conflicts Report
(as such term is defined for purposes of the Adviser Procedures) is
required in connection with Within-Guidelines Votes.
2. NON-VOTES: Votes in Which No Action is Taken
The Proxy Group may recommend that a Fund refrain from voting under
the following circumstances: (1) if the economic effect on
shareholders' interests or the value of the portfolio holding is
indeterminable or insignificant, E.G., proxies in connection with
securities no longer held in the portfolio of an ING Fund or proxies
being considered on behalf of a Fund that is no longer in existence;
or (2) if the cost of voting a proxy outweighs the benefits, E.G.,
certain international proxies, particularly in cases in which share
blocking practices may impose trading restrictions on the relevant
portfolio security. In such instances, the Proxy Group may instruct
the Agent, through the Proxy Coordinator, not to vote such proxy.
The Proxy Group may provide the Proxy Coordinator with standing
instructions on parameters that would dictate a Non-Vote without the
Proxy Group's review of a specific proxy. It is noted a Non-Vote
determination would generally not be made in connection with voting
rights received pursuant to class action participation; while a Fund
may no longer hold the security, a continuing economic effect on
shareholders' interests is likely.
Reasonable efforts shall be made to secure and vote all other
proxies for the Funds, but, particularly in markets in which
shareholders' rights are limited, Non-Votes may also occur in
connection with a Fund's related inability to timely access ballots
or other proxy information in connection with its portfolio
securities.
Non-Votes may also result in certain cases in which the Agent's
recommendation has been deemed to be conflicted, as described in
V.B. above and V.B.4. below.
3. OUT-OF-GUIDELINES VOTES: Votes Contrary to Procedures and
Guidelines, or Agent Recommendation, where applicable, Where No
Recommendation is Provided by Agent, or Where Agent's
Recommendation is Conflicted
If the Proxy Group recommends that a Fund vote contrary to the
Procedures and Guidelines, or the recommendation of the Agent, where
applicable, if the Agent has made no recommendation on a matter
requiring case-by-case consideration and the Procedures and
Guidelines are silent, or the Agent's recommendation on a matter
requiring case-by-case consideration is deemed to be conflicted as
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provided for under the Adviser Procedures, the Proxy Coordinator
will then request that all members of the Proxy Group, including any
members not in attendance at the meeting at which the relevant proxy
is being considered, and each Investment Professional participating
in the voting process complete a Conflicts Report (as such term is
defined for purposes of the Adviser Procedures). As provided for in
the Adviser Procedures, the Proxy Coordinator shall be responsible
for identifying to Counsel potential conflicts of interest with
respect to the Agent.
If Counsel determines that a conflict of interest appears to exist
with respect to the Agent, any member of the Proxy Group or the
participating Investment Professional(s), the Proxy Coordinator will
then contact the Valuation, Proxy and Brokerage Committee(s) and
forward to such Committee(s) all information relevant to their
review, including the following materials or a summary thereof: the
applicable Procedures and Guidelines, the recommendation of the
Agent, where applicable, the recommendation of the Investment
Professional(s), where applicable, any resources used by the Proxy
Group in arriving at its recommendation, the Conflicts Report and
any other written materials establishing whether a conflict of
interest exists, and findings of Counsel (as such term is defined
for purposes of the Adviser Procedures). Upon Counsel's finding that
a conflict of interest exists with respect to one or more members of
the Proxy Group or the Advisers generally, the remaining members of
the Proxy Group shall not be required to complete a Conflicts Report
in connection with the proxy.
If Counsel determines that there does not appear to be a conflict of
interest with respect to the Agent, any member of the Proxy Group or
the participating Investment Professional(s), the Proxy Coordinator
will instruct the Agent to vote the proxy as recommended by the
Proxy Group.
4. Referrals to a Fund's Valuation, Proxy and Brokerage Committee
A Fund's Valuation, Proxy and Brokerage Committee may consider all
recommendations, analysis, research and Conflicts Reports provided
to it by the Agent, Proxy Group and/or Investment Professional(s),
and any other written materials used to establish whether a conflict
of interest exists, in determining how to vote the proxies referred
to the Committee. The Committee will instruct the Agent through the
Proxy Coordinator how to vote such referred proposals.
The Proxy Coordinator shall use best efforts to timely refer matters
to a Fund's Committee for its consideration. In the event any such
matter cannot be timely referred to or considered by the Committee,
it shall be the policy of the Funds to vote in accordance with the
Agent's recommendation, unless the Agent's recommendation is
conflicted on a matter requiring case-by-case consideration, in
which case no action shall be taken on such matter (I.E., a
"Non-Vote").
A-5
The Proxy Coordinator will maintain a record of all proxy questions
that have been referred to a Fund's Committee, all applicable
recommendations, analysis, research and Conflicts Reports.
VI. CONFLICTS OF INTEREST
In all cases in which a vote has not been clearly determined in advance by the
Procedures and Guidelines or for which the Proxy Group recommends an
Out-of-Guidelines Vote, and Counsel has determined that a conflict of interest
appears to exist with respect to the Agent, any member of the Proxy Group, or
any Investment Professional participating in the voting process, the proposal
shall be referred to the Fund's Committee for determination so that the Adviser
shall have no opportunity to vote a Fund's proxy in a situation in which it or
the Agent may be deemed to have a conflict of interest. In the event a member of
a Fund's Committee believes he/she has a conflict of interest that would
preclude him/her from making a voting determination in the best interests of the
beneficial owners of the applicable Fund, such Committee member shall so advise
the Proxy Coordinator and recuse himself/herself with respect to determinations
regarding the relevant proxy.
VII. REPORTING AND RECORD RETENTION
Annually in August, each Fund that is not a feeder in a master/feeder structure
will post its proxy voting record or a link thereto, for the prior one-year
period ending on June 30th on the ING Funds website. No proxy voting record will
be posted on the ING Funds website for any Fund that is a feeder in a
master/feeder structure; however, a cross-reference to that of the master fund's
proxy voting record as filed in the SEC's EDGAR database will be posted on the
ING Funds website. The proxy voting record for each Fund will also be available
in the EDGAR database on the SEC's website.
A-6
EXHIBIT 1
TO THE
ING FUNDS
PROXY VOTING PROCEDURES
ING EQUITY TRUST
ING FUNDS TRUST
ING GLOBAL ADVANTAGE AND PREMIUM OPPORTUNITY FUND
ING GLOBAL EQUITY DIVIDEND AND PREMIUM OPPORTUNITY FUND
ING INVESTMENT FUNDS, INC.
ING INVESTORS TRUST
ING MAYFLOWER TRUST
ING MUTUAL FUNDS
ING PARTNERS, INC.
ING PRIME RATE TRUST
ING SENIOR INCOME FUND
ING VARIABLE INSURANCE TRUST
ING VARIABLE PRODUCTS TRUST
ING VP EMERGING MARKETS FUND, INC.
ING VP NATURAL RESOURCES TRUST
USLICO SERIES FUND
EXHIBIT 2
TO THE
ING FUNDS
PROXY VOTING PROCEDURES
ING INVESTMENTS, LLC,
DIRECTED SERVICES, INC.
AND
ING LIFE INSURANCE AND ANNUITY COMPANY
----------
PROXY VOTING PROCEDURES
----------
I. INTRODUCTION
ING Investments, LLC, Directed Services, Inc. and ING Life Insurance and Annuity
Company (each an "Adviser" and collectively, the "Advisers") are the investment
advisers for the registered investment companies and each series or portfolio
thereof (each a "Fund" and collectively, the "Funds") comprising the ING family
of funds. As such, the Advisers have been delegated the authority to vote
proxies with respect to securities for the Funds over which they have day-to-day
portfolio management responsibility.
The Advisers will abide by the proxy voting guidelines adopted by a Fund's
respective Board of Directors or Trustees (each a "Board" and collectively, the
"Boards") with regard to the voting of proxies unless otherwise provided in the
proxy voting procedures adopted by a Fund's Board.
In voting proxies, the Advisers are guided by general fiduciary principles. Each
must act prudently, solely in the interest of the beneficial owners of the Funds
it manages. The Advisers will not subordinate the interest of beneficial owners
to unrelated objectives. Each Adviser will vote proxies in the manner that it
believes will do the most to maximize shareholder value.
The following are the Proxy Voting Procedures of ING Investments, LLC, Directed
Services, Inc. and ING Life Insurance and Annuity Company (the "Adviser
Procedures") with respect to the voting of proxies on behalf of their client
Funds as approved by the respective Board of each Fund.
Unless otherwise noted, best efforts shall be used to vote proxies in all
instances.
II. ROLES AND RESPONSIBILITIES
A. Proxy Coordinator
The Proxy Coordinator identified in Appendix 1 will assist in the
coordination of the voting of each Fund's proxies in accordance with the
ING Funds Proxy Voting Procedures and Guidelines (the "Procedures" or
"Guidelines" and collectively the "Procedures and Guidelines"). The Proxy
Coordinator is authorized to direct the Agent to vote a Fund's proxy in
accordance with the Procedures and Guidelines unless the Proxy
Coordinator receives a recommendation from an Investment Professional (as
described below) to vote contrary to the Procedures and Guidelines. In
such event, and in connection with proxy proposals requiring case-by-case
consideration (except in cases in which the Proxy Group has previously
provided the Proxy Coordinator with standing instructions to vote in
accordance with the Agent's recommendation), the Proxy Coordinator will
call a meeting of the Proxy Group (as described below).
Responsibilities assigned herein to the Proxy Coordinator, or activities
in support thereof, may be performed by such members of the Proxy Group
or employees of the Advisers' affiliates as are deemed appropriate by the
Proxy Group.
Unless specified otherwise, information provided to the Proxy Coordinator
in connection with duties of the parties described herein shall be deemed
delivered to the Advisers.
B. Agent
An independent proxy voting service (the "Agent"), as approved by the
Board of each Fund, shall be engaged to assist in the voting of Fund
proxies for publicly traded securities through the provision of vote
analysis, implementation, recordkeeping and disclosure services. The
Agent is Institutional Shareholder Services, Inc. The Agent is
responsible for coordinating with the Funds' custodians to ensure that
all proxy materials received by the custodians relating to the portfolio
securities are processed in a timely fashion. To the extent applicable,
the Agent is required to vote and/or refer all proxies in accordance with
these Adviser Procedures. The Agent will retain a record of all proxy
votes handled by the Agent. Such record must reflect all the information
required to be disclosed in a Fund's Form N-PX pursuant to Rule 30b1-4
under the Investment Company Act. In addition, the Agent is responsible
for maintaining copies of all proxy statements received by issuers and to
promptly provide such materials to the Adviser upon request.
The Agent shall be instructed to vote all proxies in accordance with a
Fund's Guidelines, except as otherwise instructed through the Proxy
Coordinator by the Adviser's Proxy Group or a Fund's Valuation, Proxy and
Brokerage Committee ("Committee").
A-9
The Agent shall be instructed to obtain all proxies from the Funds'
custodians and to review each proxy proposal against the Guidelines. The
Agent also shall be requested to call the Proxy Coordinator's attention
to specific proxy proposals that although governed by the Guidelines
appear to involve unusual or controversial issues.
Subject to the oversight of the Advisers, the Agent shall establish and
maintain adequate internal controls and policies in connection with the
provision of proxy voting services voting to the Advisers, including
methods to reasonably ensure that its analysis and recommendations are
not influenced by conflict of interest, and shall disclose such controls
and policies to the Advisers when and as provided for herein. Unless
otherwise specified, references herein to recommendations of the Agent
shall refer to those in which no conflict of interest has been
identified.
C. Proxy Group
The Adviser shall establish a Proxy Group (the "Group" or "Proxy Group")
which shall assist in the review of the Agent's recommendations when a
proxy voting issue is referred to the Group through the Proxy
Coordinator. The members of the Proxy Group, which may include employees
of the Advisers' affiliates, are identified in Appendix 1, as may be
amended from time at the Advisers' discretion.
A minimum of four (4) members of the Proxy Group (or three (3) if one
member of the quorum is either the Fund's Chief Investment Risk Officer
or Chief Financial Officer) shall constitute a quorum for purposes of
taking action at any meeting of the Group. The vote of a simple majority
of the members present and voting shall determine any matter submitted to
a vote. Tie votes shall be broken by securing the vote of members not
present at the meeting; provided, however, that the Proxy Coordinator
shall ensure compliance with all applicable voting and conflict of
interest procedures and shall use best efforts to secure votes from all
or as many absent members as may reasonably be accomplished. The Proxy
Group may meet in person or by telephone. The Proxy Group also may take
action via electronic mail in lieu of a meeting, provided that each Group
member has received a copy of any relevant electronic mail transmissions
circulated by each other participating Group member prior to voting and
provided that the Proxy Coordinator follows the directions of a majority
of a quorum (as defined above) responding via electronic mail. For all
votes taken in person or by telephone or teleconference, the vote shall
be taken outside the presence of any person other than the members of the
Proxy Group and such other persons whose attendance may be deemed
appropriate by the Proxy Group from time to time in furtherance of its
duties or the day-to-day administration of the Funds. In its discretion,
the Proxy Group may provide the Proxy Coordinator with standing
instructions to perform responsibilities assigned herein to the Proxy
Group, or activities in support thereof, on its behalf, provided that
such instructions do not contravene any requirements of these Adviser
Procedures or a Fund's Procedures and Guidelines.
A-10
A meeting of the Proxy Group will be held whenever (1) the Proxy
Coordinator receives a recommendation from an Investment Professional to
vote a Fund's proxy contrary to the Procedures and Guidelines, or the
recommendation of the Agent, where applicable, (2) the Agent has made no
recommendation with respect to a vote on a proposal, or (3) a matter
requires case-by-case consideration, including those in which the Agent's
recommendation is deemed to be conflicted as provided for under these
Adviser Procedures, provided that, if the Proxy Group has previously
provided the Proxy Coordinator with standing instructions to vote in
accordance with the Agent's recommendation and no issue of conflict must
be considered, the Proxy Coordinator may implement the instructions
without calling a meeting of the Proxy Group.
For each proposal referred to the Proxy Group, it will review (1) the
relevant Procedures and Guidelines, (2) the recommendation of the Agent,
if any, (3) the recommendation of the Investment Professional(s), if any,
and (4) any other resources that any member of the Proxy Group deems
appropriate to aid in a determination of a recommendation.
If the Proxy Group recommends that a Fund vote in accordance with the
Procedures and Guidelines, or the recommendation of the Agent, where
applicable, it shall instruct the Proxy Coordinator to so advise the
Agent.
If the Proxy Group recommends that a Fund vote contrary to the Procedures
and Guidelines, or the recommendation of the Agent, where applicable, or
if the Agent's recommendation on a matter requiring case-by-case
consideration is deemed to be conflicted, it shall follow the procedures
for such voting as established by a Fund's Board.
The Proxy Coordinator shall use best efforts to convene the Proxy Group
with respect to all matters requiring its consideration. In the event
quorum requirements cannot be timely met in connection with to a voting
deadline, the Proxy Coordinator shall follow the procedures for such
voting as established by a Fund's Board.
D. Investment Professionals
The Funds' Advisers, sub-advisers and/or portfolio managers (each
referred to herein as an "Investment Professional" and collectively,
"Investment Professionals") may submit, or be asked to submit, a
recommendation to the Proxy Group regarding the voting of proxies related
to the portfolio securities over which they have day-to-day portfolio
management responsibility. The Investment Professionals may accompany
their recommendation with any other research materials that they deem
appropriate or with a request that lending activity with respect to the
relevant security be reviewed, such requests to be timely considered by
the Proxy Group.
A-11
III. VOTING PROCEDURES
A. In all cases, the Adviser shall follow the voting procedures as set
forth in the Procedures and Guidelines of the Fund on whose behalf
the Adviser is exercising delegated authority to vote.
B. Routine Matters
The Agent shall be instructed to submit a vote in accordance with the
Guidelines where such Guidelines provide a clear "For", "Against,"
"Withhold" or "Abstain" on a proposal. However, the Agent shall be
directed to refer any proxy proposal to the Proxy Coordinator for
instructions as if it were a matter requiring case-by-case consideration
under circumstances where the application of the Guidelines is unclear,
it appears to involve unusual or controversial issues, or an Investment
Professional recommends a vote contrary to the Guidelines.
C. Matters Requiring Case-by-Case Consideration
The Agent shall be directed to refer proxy proposals accompanied by its
written analysis and voting recommendation to the Proxy Coordinator where
the Guidelines have noted "case-by-case" consideration.
Upon receipt of a referral from the Agent, the Proxy Coordinator may
solicit additional research from the Agent, Investment Professional(s),
as well as from any other source or service.
Except in cases in which the Proxy Group has previously provided the
Proxy Coordinator with standing instructions to vote in accordance with
the Agent's recommendation, the Proxy Coordinator will forward the
Agent's analysis and recommendation and/or any research obtained from the
Investment Professional(s), the Agent or any other source to the Proxy
Group. The Proxy Group may consult with the Agent and/or Investment
Professional(s), as it deems necessary.
1. WITHIN-GUIDELINES VOTES: Votes in Accordance with a Fund's
Guidelines and/or, where applicable, Agent Recommendation
In the event the Proxy Group, and where applicable, any Investment
Professional participating in the voting process, recommend a vote
Within Guidelines, the Proxy Group will instruct the Agent, through
the Proxy Coordinator, to vote in this manner. No Conflicts Report
(as such term is defined herein) is required in connection with
Within-Guidelines Votes.
A-12
2. NON-VOTES: Votes in Which No Action is Taken
The Proxy Group may recommend that a Fund refrain from voting under
the following circumstances: (1) if the economic effect on
shareholders' interests or the value of the portfolio holding is
indeterminable or insignificant, E.G., proxies in connection with
securities no longer held in the portfolio of an ING Fund or proxies
being considered on behalf of a Fund that is no longer in existence;
or (2) if the cost of voting a proxy outweighs the benefits, E.G.,
certain international proxies, particularly in cases in which share
blocking practices may impose trading restrictions on the relevant
portfolio security. In such instances, the Proxy Group may instruct
the Agent, through the Proxy Coordinator, not to vote such proxy.
The Proxy Group may provide the Proxy Coordinator with standing
instructions on parameters that would dictate a Non-Vote without the
Proxy Group's review of a specific proxy. It is noted a Non-Vote
determination would generally not be made in connection with voting
rights received pursuant to class action participation; while a Fund
may no longer hold the security, a continuing economic effect on
shareholders' interests is likely.
Reasonable efforts shall be made to secure and vote all other
proxies for the Funds, but, particularly in markets in which
shareholders' rights are limited, Non-Votes may also occur in
connection with a Fund's related inability to timely access ballots
or other proxy information in connection with its portfolio
securities.
Non-Votes may also result in certain cases in which the Agent's
recommendation has been deemed to be conflicted, as provided for in
the Funds' Procedures.
3. OUT-OF-GUIDELINES VOTES: Votes Contrary to Procedures and
Guidelines, or Agent Recommendation, where applicable, Where No
Recommendation is Provided by Agent, or Where Agent's
Recommendation is Conflicted
If the Proxy Group recommends that a Fund vote contrary to the
Procedures and Guidelines, or the recommendation of the Agent, where
applicable, if the Agent has made no recommendation on a matter
requiring case-by-case consideration and the Procedures and
Guidelines are silent, or the Agent's recommendation on a matter
requiring case-by-case consideration is deemed to be conflicted as
provided for under these Adviser Procedures, the Proxy Coordinator
will then implement the procedures for handling such votes as
adopted by the Fund's Board.
4. The Proxy Coordinator will maintain a record of all proxy
questions that have been referred to a Fund's Valuation, Proxy
and Brokerage Committee, all applicable recommendations,
analysis, research and Conflicts Reports.
A-13
IV. ASSESSMENT OF THE AGENT AND CONFLICTS OF INTEREST
In furtherance of the Advisers' fiduciary duty to the Funds and their beneficial
owners, the Advisers shall establish the following:
A. Assessment of the Agent
The Advisers shall establish that the Agent (1) is independent from
the Advisers, (2) has resources that indicate it can competently
provide analysis of proxy issues and (3) can make recommendations in
an impartial manner and in the best interests of the Funds and their
beneficial owners. The Advisers shall utilize, and the Agent shall
comply with, such methods for establishing the foregoing as the
Advisers may deem reasonably appropriate and shall do not less than
annually as well as prior to engaging the services of any new proxy
service. The Agent shall also notify the Advisers in writing within
fifteen (15) calendar days of any material change to information
previously provided to an Adviser in connection with establishing
the Agent's independence, competence or impartiality.
Information provided in connection with assessment of the Agent
shall be forwarded to a member of the mutual funds practice group of
ING US Legal Services ("Counsel") for review. Counsel shall review
such information and advise the Proxy Coordinator as to whether a
material concern exists and if so, determine the most appropriate
course of action to eliminate such concern.
B. Conflicts of Interest
The Advisers shall establish and maintain procedures to identify and
address conflicts that may arise from time to time concerning the
Agent. Upon the Advisers' request, which shall be not less than
annually, and within fifteen (15) calendar days of any material
change to such information previously provided to an Adviser, the
Agent shall provide the Advisers with such information as the
Advisers deem reasonable and appropriate for use in determining
material relationships of the Agent that may pose a conflict of
interest with respect to the Agent's proxy analysis or
recommendations. The Proxy Coordinator shall forward all such
information to Counsel for review. Counsel shall review such
information and provide the Proxy Coordinator with a brief statement
regarding whether or not a material conflict of interest is present.
Matters as to which a material conflict of interest is deemed to be
present shall be handled as provided in the Fund's Procedures and
Guidelines.
In connection with their participation in the voting process for
portfolio securities, each member of the Proxy Group, and each
Investment Professional participating in the voting process, must
act solely in the best interests of the beneficial owners of the
applicable Fund. The members of the Proxy Group may not subordinate
A-14
the interests of the Fund's beneficial owners to unrelated
objectives, including taking steps to reasonably insulate the voting
process from any conflict of interest that may exist in connection
with the Agent's services or utilization thereof.
For all matters for which the Proxy Group recommends an
Out-of-Guidelines Vote, the Proxy Coordinator will implement the
procedures for handling such votes as adopted by the Fund's Board,
including completion of such Conflicts Reports as may be required
under the Fund's Procedures. Completed Conflicts Reports shall be
provided to the Proxy Coordinator within two (2) business days. Such
Conflicts Report should describe any known conflicts of either a
business or personal nature, and set forth any contacts with respect
to the referral item with non-investment personnel in its
organization or with outside parties (except for routine
communications from proxy solicitors). The Conflicts Report should
also include written confirmation that any recommendation from an
Investment Professional provided in connection with an
Out-of-Guidelines Vote or under circumstances where a conflict of
interest exists was made solely on the investment merits and without
regard to any other consideration.
The Proxy Coordinator shall forward all Conflicts Reports to Counsel
for review. Counsel shall review each report and provide the Proxy
Coordinator with a brief statement regarding whether or not a
material conflict of interest is present. Matters as to which a
material conflict of interest is deemed to be present shall be
handled as provided in the Fund's Procedures and Guidelines.
V. REPORTING AND RECORD RETENTION
The Adviser shall maintain the records required by Rule 204-2(c)(2), as may be
amended from time to time, including the following: (1) A copy of each proxy
statement received regarding a Fund's portfolio securities. Such proxy
statements received from issuers are available either in the SEC's EDGAR
database or are kept by the Agent and are available upon request. (2) A record
of each vote cast on behalf of a Fund. (3) A copy of any document created by the
Adviser that was material to making a decision how to vote a proxy, or that
memorializes the basis for that decision. (4) A copy of written requests for
Fund proxy voting information and any written response thereto or to any oral
request for information on how the Adviser voted proxies on behalf of a Fund.
All proxy voting materials and supporting documentation will be retained for a
minimum of six (6) years.
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APPENDIX 1
TO THE
ADVISERS' PROXY VOTING PROCEDURES
PROXY GROUP FOR REGISTERED INVESTMENT COMPANY CLIENTS OF ING INVESTMENTS, LLC,
DIRECTED SERVICES, INC. AND ING LIFE INSURANCE AND ANNUITY COMPANY:
NAME TITLE OR AFFILIATION
Stanley D. Vyner Chief Investment Risk Officer and Executive Vice President, ING
Investments, LLC
Todd Modic Senior Vice President, ING Funds Services, LLC and ING Investments, LLC;
and Chief Financial Officer of the ING Funds
Maria Anderson Vice President of Fund Compliance, ING Funds Services, LLC
Karla J. Bos Proxy Coordinator for the ING Funds and Manager - Special Projects, ING
Funds Services, LLC
Julius Drelick Head of Product Strategy, ING Funds Services, LLC
Theresa K. Kelety, Esq. Counsel, ING Americas US Legal Services
Steve Wastek, Esq. Counsel, ING Americas US Legal Services
Effective as of May 27, 2005
A-16
EXHIBIT 3
TO THE
ING FUNDS
PROXY VOTING PROCEDURES
----------
PROXY VOTING GUIDELINES OF THE ING FUNDS
----------
I. INTRODUCTION
The following is a statement of the Proxy Voting Guidelines ("Guidelines") that
have been adopted by the respective Boards of Directors or Trustees of each
Fund. Unless otherwise provided for herein, any defined term used herein shall
have the meaning assigned to it in the Funds' and Advisers' Proxy Voting
Procedures (the "Procedures").
Proxies must be voted in the best interest of the Fund(s). The Guidelines
summarize the Funds' positions on various issues of concern to investors, and
give a general indication of how Fund portfolio securities will be voted on
proposals dealing with particular issues. The Guidelines are not exhaustive and
do not include all potential voting issues.
The Advisers, in exercising their delegated authority, will abide by the
Guidelines as outlined below with regard to the voting of proxies except as
otherwise provided in the Procedures. In voting proxies, the Advisers are guided
by general fiduciary principles. Each must act prudently, solely in the interest
of the beneficial owners of the Funds it manages. The Advisers will not
subordinate the interest of beneficial owners to unrelated objectives. Each
Adviser will vote proxies in the manner that it believes will do the most to
maximize shareholder value.
II. GUIDELINES
The following Guidelines are grouped according to the types of proposals
generally presented to shareholders of U.S. issuers: Board of Directors, Proxy
Contests, Auditors, Proxy Contest Defenses, Tender Offer Defenses,
Miscellaneous, Capital Structure, Executive and Director Compensation, State of
Incorporation, Mergers and Corporate Restructurings, Mutual Fund Proxies and
Social and Environmental Issues. An additional section addresses proposals most
frequently found in global proxies.
GENERAL POLICIES
These Guidelines apply to securities of publicly traded companies and to those
of privately held companies if publicly available disclosure permits such
application. All matters for which such disclosure is not available shall be
considered CASE-BY-CASE.
It shall generally be the policy of the Funds to take no action on a proxy for
which no Fund holds a position or otherwise maintains an economic interest in
the relevant security at the time the vote is to be cast.
In all cases receiving CASE-BY-CASE consideration, including cases not
specifically provided for under these Guidelines, unless otherwise provided for
under these Guidelines, it shall generally be the policy of the Funds to vote in
accordance with the recommendation provided by the Funds' Agent, Institutional
Shareholder Services, Inc.
Unless otherwise provided for herein, it shall generally be the policy of the
Funds to vote in accordance with the Agent's recommendation in cases in which
such recommendation aligns with the recommendation of the relevant issuer's
management. However, this policy shall not apply to CASE-BY-CASE proposals for
which a contrary recommendation from the Investment Professional for the
relevant Fund has been received and is to be utilized, provided that
incorporation of any such recommendation shall be subject to the conflict of
interest review process required under the Procedures.
Recommendations from the Investment Professionals, while not required under the
Procedures, are likely to be considered with respect to proxies for private
equity securities and/or proposals related to merger transactions/corporate
restructurings, proxy contests related to takeover bids/contested business
combinations, or unusual or controversial issues. Such input shall be given
primary consideration with respect to CASE-BY-CASE proposals being considered on
behalf of the relevant Fund.
The foregoing policies may be overridden in any case as provided for in the
Procedures. Similarly, the Procedures provide that proposals whose Guidelines
prescribe a firm voting position may instead be considered on a CASE-BY-CASE
basis in cases in which unusual or controversial circumstances so dictate.
Interpretation and application of these Guidelines is not intended to supersede
any law, regulation, binding agreement or other legal requirement to which an
issuer may be or become subject. No proposal shall be supported whose
implementation would contravene such requirements.
1. THE BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Unless otherwise provided for herein, the Agent's standards with respect to
determining director independence shall apply. These standards generally provide
that, to be considered completely independent, a director shall have no material
connection to the company other than the board seat.
A-18
Agreement with the Agent's independence standards shall not dictate that a
Fund's vote shall be cast according to the Agent's corresponding recommendation.
Votes on director nominees not subject to specific policies described herein
should be made on a CASE-BY-CASE basis.
In any cases in which application of the policies described herein would result
in withholding votes from the majority of independent outside directors sitting
on a board, or removal of such directors would negatively impact majority board
independence, consider such independent outside director nominees on a
CASE-BY-CASE basis.
WITHHOLD votes from a nominee who, during both of the most recent two years,
attended less than 75 percent of the board and committee meetings without a
valid reason for the absences. DO NOT WITHHOLD votes in connection with
attendance issues for nominees who have served on the board for less than the
two most recent years.
WITHHOLD votes from a nominee in connection with poison pill considerations
(E.G., failure to remove restrictive features or ensure expiration or submission
to shareholders for vote) only in cases for which culpability for implementation
or renewal of the pill in such form can be specifically attributed to the
nominee.
Provided that a nominee served on the board during the relevant time period,
WITHHOLD votes from a nominee who has failed to implement a shareholder proposal
that was approved by (1) a majority of the issuer's shares outstanding (most
recent annual meeting) or (2) a majority of the votes cast for two consecutive
years. However, in the case of shareholder proposals seeking shareholder
ratification of a poison pill, generally DO NOT WITHHOLD votes from a nominee in
such cases if the company has already implemented a policy that should
reasonably prevent abusive use of the pill.
If a nominee has not acted upon WITHHOLD votes representing a majority of the
votes cast at the previous annual meeting, consider such nominee on a
CASE-BY-CASE basis.
WITHHOLD votes from inside directors or affiliated outside directors who sit on
the audit committee.
DO NOT WITHHOLD votes from inside directors or affiliated outside directors who
sit on the nominating or compensation committee, provided that such committee
meets the applicable independence requirements of the relevant listing exchange.
However, consider such nominees on a CASE-BY-CASE basis if the committee is
majority insider-controlled.
DO NOT WITHHOLD votes from inside directors or affiliated outside directors if
the full board serves as the compensation or nominating committee OR has not
created one or both committees, provided that the issuer is in compliance with
all provisions of the listing exchange in connection with performance of
relevant functions (E.G., performance of relevant functions by a majority of
independent directors in lieu of the formation of a separate committee).
A-19
In cases in which the Agent has identified a "pay for performance disconnect",
generally DO NOT WITHHOLD support from nominees who sit on the compensation
committee or from the pay package recipient. If the Agent has raised other
considerations regarding compensation practices, consider on a CASE-BY-CASE
basis nominees who sit on the compensation committee and served during the
relevant time period, but DO NOT WITHHOLD votes for this reason from the pay
package recipient if also sitting for election but not a compensation committee
member.
Generally, vote FOR independent outside director nominees serving on the audit
committee, but if total non-audit fees exceed the total of audit fees,
audit-related fees and tax compliance and preparation fees, do vote AGAINST
auditor ratification if concerns exist regarding such fees, E.G., that
remuneration for the non-audit work is so lucrative as to taint the auditor's
independence or is excessive in connection with the level and type of services
provided.
It shall generally be the policy of the Funds that a board should be majority
independent and therefore to consider inside director or affiliated outside
director nominees in cases in which the full board is not majority independent
on a CASE-BY-CASE basis, excluding any non-voting director (E.G., director
emeritus or advisory director) in calculations with respect to majority board
independence. When conditions contributing to a lack of majority independence
remain substantially similar to those in the previous year, it shall generally
be the policy of the Funds to WITHHOLD or vote FOR nominees in a manner
consistent with votes cast by the Fund(s) in the previous year.
Generally vote FOR nominees who sit on up to (and including) seven public
company boards unless (1) other concerns requiring CASE-BY-CASE consideration
have been raised, or (2) the nominee is also CEO of a public company, in which
case the public company board threshold shall be four, above which the nominee
shall be considered on a CASE-BY-CASE basis.
PROPOSALS REGARDING BOARD COMPOSITION OR BOARD SERVICE
Generally, vote AGAINST shareholder proposals to impose new board structures or
policies, including those requiring that the positions of chairman and CEO be
held separately, except consider such proposals on a CASE-BY-CASE basis if the
board is not majority independent or pervasive corporate governance concerns
have been identified. Generally, except as otherwise provided for herein, vote
FOR management proposals to adopt or amend board structures or policies, except
consider such proposals on a CASE-BY-CASE basis if the board is not majority
independent, pervasive corporate governance concerns have been identified, or
the proposal may result in a material reduction in shareholders' rights.
Generally, vote AGAINST shareholder proposals asking that more than a simple
majority of directors be independent.
Generally, vote AGAINST shareholder proposals asking that board compensation
and/or nominating committees be composed exclusively of independent directors.
Generally, vote AGAINST shareholder proposals to limit the number of public
company boards on which a director may serve.
A-20
Generally, vote AGAINST shareholder proposals that seek to redefine director
independence or directors' specific roles (E.G., responsibilities of the lead
director).
Generally, vote AGAINST shareholder proposals requesting creation of additional
board committees or offices, except as otherwise provided for herein.
Generally, vote FOR shareholder proposals that seek creation of an audit,
compensation or nominating committee of the board, unless the committee in
question is already in existence or the issuer has availed itself of an
applicable exemption of the listing exchange (E.G., performance of relevant
functions by a majority of independent directors in lieu of the formation of a
separate committee).
Generally, vote AGAINST shareholder proposals to limit the tenure of outside
directors.
Generally, vote AGAINST shareholder proposals to impose a mandatory retirement
age for outside directors unless the proposal seeks to relax existing standards,
but generally DO NOT VOTE AGAINST management proposals seeking to establish a
retirement age for directors.
STOCK OWNERSHIP REQUIREMENTS
Generally, vote AGAINST shareholder proposals requiring directors to own a
minimum amount of company stock in order to qualify as a director or to remain
on the board.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Proposals on director and officer indemnification and liability protection
should be evaluated on a CASE-BY-CASE basis, using Delaware law as the standard.
Vote AGAINST proposals to limit or eliminate entirely directors' and officers'
liability for monetary damages for violating the duty of care. Vote AGAINST
indemnification proposals that would expand coverage beyond just legal expenses
to acts, such as negligence, that are more serious violations of fiduciary
obligation than mere carelessness. Vote FOR only those proposals providing such
expanded coverage in cases when a director's or officer's legal defense was
unsuccessful if:
(1) The director was found to have acted in good faith and in a manner
that he reasonably believed was in the best interests of the company,
and
(2) Only if the director's legal expenses would be covered.
2. PROXY CONTESTS
These proposals should generally be analyzed on a CASE-BY-CASE basis. Input from
the Investment Professional(s) for a given Fund shall be given primary
consideration with respect to proposals in connection with proxy contests
related to takeover bids or other contested business combinations being
considered on behalf of that Fund.
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis.
REIMBURSE PROXY SOLICITATION EXPENSES
Voting to reimburse proxy solicitation expenses should be analyzed on a
CASE-BY-CASE basis.
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3. AUDITORS
RATIFYING AUDITORS
Generally, except in cases of high non-audit fees, vote FOR management proposals
to ratify auditors. If total non-audit fees exceed the total of audit fees,
audit-related fees and tax compliance and preparation fees, consider on a
CASE-BY-CASE basis, voting AGAINST management proposals to ratify auditors in
cases in which concerns exist that remuneration for the non-audit work is so
lucrative as to taint the auditor's independence. If such concerns exist or an
issuer has a history of questionable accounting practices, also vote FOR
shareholder proposals asking the issuer to present its auditor annually for
ratification, but in other cases generally vote AGAINST.
AUDITOR INDEPENDENCE
Generally, vote AGAINST shareholder proposals asking companies to prohibit their
auditors from engaging in non-audit services (or capping the level of non-audit
services).
AUDIT FIRM ROTATION:
Generally, vote AGAINST shareholder proposals asking for mandatory audit firm
rotation.
4. PROXY CONTEST DEFENSES
BOARD STRUCTURE: STAGGERED VS. ANNUAL ELECTIONS
Generally, vote AGAINST proposals to classify the board.
Generally, vote FOR proposals to repeal classified boards and to elect all
directors annually.
SHAREHOLDER ABILITY TO REMOVE DIRECTORS
Generally, vote AGAINST proposals that provide that directors may be removed
only for cause.
Generally, vote FOR proposals to restore shareholder ability to remove directors
with or without cause.
Generally, vote AGAINST proposals that provide that only continuing directors
may elect replacements to fill board vacancies.
Generally, vote FOR proposals that permit shareholders to elect directors to
fill board vacancies.
CUMULATIVE VOTING
Unless the company maintains a classified board of directors, generally, vote
FOR management proposals to eliminate cumulative voting.
In cases in which the company maintains a classified board of directors,
generally vote FOR shareholder proposals to restore or permit cumulative voting.
TIME-PHASED VOTING
Generally, vote AGAINST proposals to implement, and FOR proposals to eliminate,
time-phased or other forms of voting that do not promote a one share, one vote
standard.
A-22
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Generally, vote AGAINST proposals to restrict or prohibit shareholder ability to
call special meetings.
Generally, vote FOR proposals that remove restrictions on the right of
shareholders to act independently of management.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally, vote AGAINST proposals to restrict or prohibit shareholder ability to
take action by written consent.
Generally, vote FOR proposals to allow or make easier shareholder action by
written consent.
SHAREHOLDER ABILITY TO ALTER THE SIZE OF THE BOARD
Review on a CASE-BY-CASE basis proposals that seek to fix the size of the board.
Review on a CASE-BY-CASE basis proposals that give management the ability to
alter the size of the board without shareholder approval.
5. TENDER OFFER DEFENSES
POISON PILLS
Generally, vote FOR shareholder proposals that ask a company to submit its
poison pill for shareholder ratification, or to redeem its pill in lieu thereof,
unless (1) shareholders have approved adoption of the plan, (2) a policy has
already been implemented by the company that should reasonably prevent abusive
use of the pill, or (3) the board had determined that it was in the best
interest of shareholders to adopt a pill without delay, provided that such plan
would be put to shareholder vote within twelve months of adoption or expire, and
if not approved by a majority of the votes cast, would immediately terminate.
Review on a CASE-BY-CASE basis shareholder proposals to redeem a company's
poison pill.
Review on a CASE-BY-CASE basis management proposals to ratify a poison pill.
FAIR PRICE PROVISIONS
Vote proposals to adopt fair price provisions on a CASE-BY-CASE basis.
Generally, vote AGAINST fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.
GREENMAIL
Generally, vote FOR proposals to adopt antigreenmail charter or bylaw amendments
or otherwise restrict a company's ability to make greenmail payments.
Review on a CASE-BY-CASE basis antigreenmail proposals when they are bundled
with other charter or bylaw amendments.
PALE GREENMAIL
Review on a CASE-BY-CASE basis restructuring plans that involve the payment of
pale greenmail.
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UNEQUAL VOTING RIGHTS
Generally, vote AGAINST dual-class exchange offers.
Generally, vote AGAINST dual-class recapitalizations.
SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO AMEND THE CHARTER OR BYLAWS
Generally, vote AGAINST management proposals to require a supermajority
shareholder vote to approve charter and bylaw amendments.
Generally, vote FOR shareholder proposals to lower supermajority shareholder
vote requirements for charter and bylaw amendments, unless the proposal also
asks the issuer to mount a solicitation campaign or similar form of
comprehensive commitment to obtain passage of the proposal.
SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO APPROVE MERGERS
Generally, vote AGAINST management proposals to require a supermajority
shareholder vote to approve mergers and other significant business combinations.
Generally, vote FOR shareholder proposals to lower supermajority shareholder
vote requirements for mergers and other significant business combinations.
WHITE SQUIRE PLACEMENTS
Generally, vote FOR shareholder proposals to require approval of blank check
preferred stock issues for other than general corporate purposes.
AMENDMENTS TO CORPORATE DOCUMENTS
Unless recommended by the Agent or Investment Professional as a condition to a
major transaction such as a merger, generally, vote AGAINST proposals seeking to
remove shareholder approval requirements by (1) moving article provisions to
portions of the charter not requiring shareholder approval or (2) in corporate
structures such as holding companies, removing provisions in an active
subsidiary's charter that provide voting rights to parent company shareholders.
This policy would also generally apply to proposals seeking approval of
corporate agreements or amendments to such agreements that the Agent recommends
AGAINST because a similar reduction in shareholder rights is requested.
Generally, vote AGAINST proposals for charter amendments that may support board
entrenchment, particularly if the proposal is bundled or the board is
classified.
Generally, vote FOR proposals seeking charter or bylaw amendments to remove
anti-takeover provisions.
6. MISCELLANEOUS
CONFIDENTIAL VOTING
Generally, vote FOR shareholder proposals that request companies to adopt
confidential voting, use independent tabulators, and use independent inspectors
of election as long as the proposals include clauses for proxy contests as
follows:
A-24
- In the case of a contested election, management should be permitted to
request that the dissident group honor its confidential voting policy.
- If the dissidents agree, the policy remains in place.
- If the dissidents do not agree, the confidential voting policy is waived.
Generally, vote FOR management proposals to adopt confidential voting.
OPEN ACCESS
Consider on a CASE-BY-CASE basis shareholder proposals seeking open access to
management's proxy material in order to nominate their own candidates to the
board.
MAJORITY VOTING STANDARD
Generally, vote FOR management proposals and AGAINST shareholder proposals
seeking election of directors by the affirmative vote of the majority of votes
cast in connection with a meeting of shareholders. For issuers with a history of
board malfeasance, consider such shareholder proposals on a CASE-BY-CASE basis.
BUNDLED PROPOSALS
Review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals.
SHAREHOLDER ADVISORY COMMITTEES
Review on a CASE-BY-CASE basis proposals to establish a shareholder advisory
committee.
OTHER BUSINESS
In connection with proxies of U.S. issuers, generally vote FOR management
proposals for Other Business, except in connection with a proxy contest in which
a Fund is not voting in support of management.
QUORUM REQUIREMENTS
Review on a CASE-BY-CASE basis proposals to lower quorum requirements for
shareholder meetings below a majority of the shares outstanding.
7. CAPITAL STRUCTURE
Analyze on a CASE-BY-CASE basis.
COMMON STOCK AUTHORIZATION
Review proposals to increase the number of shares of common stock authorized for
issue on a CASE-BY-CASE basis. Except where otherwise indicated, the Agent's
proprietary approach, utilizing quantitative criteria (E.G., dilution, peer
group comparison, company performance and history) to determine appropriate
thresholds and, for requests marginally above such allowable threshold, a
qualitative review (E.G., rationale and prudent historical usage), will
generally be utilized in evaluating such proposals.
- Generally vote FOR proposals to authorize capital increases within the
Agent's allowable thresholds or those in excess but meeting Agent's
qualitative standards, but consider on a
A-25
CASE-BY-CASE basis those requests failing the Agent's review for
proposals in connection with which a contrary recommendation from the
Investment Professional(s) has been received and is to be utilized.
- Generally vote FOR proposals to authorize capital increases within the
Agent's allowable thresholds or those in excess but meeting Agent's
qualitative standards, unless the company states that the stock may be
used as a takeover defense. In those cases, consider on a CASE-BY-CASE
basis if a contrary recommendation from the Investment Professional(s)
has been received and is to be utilized.
- Generally vote FOR proposals to authorize capital increases exceeding the
Agent's thresholds when a company's shares are in danger of being
delisted or if a company's ability to continue to operate as a going
concern is uncertain.
Generally, vote AGAINST proposals to increase the number of authorized shares of
the class of stock that has superior voting rights in companies that have
dual-class capitalization structures, but consider CASE-BY-CASE if bundled with
favorable proposal(s) or if approval of such proposal(s) is a condition of such
favorable proposal(s).
Generally, vote FOR shareholder proposals to eliminate dual class capital
structures with unequal voting rights in cases in which the relevant Fund owns
the class with inferior voting rights, but generally vote AGAINST such proposals
in cases in which the relevant Fund owns the class with superior voting rights,
and consider CASE-BY-CASE if bundled with favorable proposal(s) or if approval
of such proposal(s) is a condition of such favorable proposal(s).
STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS
Generally, vote FOR management proposals to increase common share authorization
for a stock split, provided that the increase in authorized shares falls within
the Agent's allowable thresholds, but consider on a CASE-BY-CASE basis those
proposals exceeding the Agent's threshold for proposals in connection with which
a contrary recommendation from the Investment Professional(s) has been received
and is to be utilized.
REVERSE STOCK SPLITS
Consider on a CASE-BY-CASE basis management proposals to implement a reverse
stock split.
PREFERRED STOCK
Generally, vote AGAINST proposals authorizing the issuance of preferred stock or
creation of new classes of preferred stock with unspecified voting, conversion,
dividend distribution, and other rights ("blank check" preferred stock), but
vote FOR if the Agent or an Investment Professional so recommends because the
issuance is required to effect a merger or acquisition proposal.
Generally, vote FOR proposals to issue or create blank check preferred stock in
cases when the company expressly states that the stock will not be used as a
takeover defense. Generally vote AGAINST in cases where the company expressly
states that, or fails to disclose whether, the stock may be used as a takeover
defense, but vote FOR if the Agent or an Investment Professional so recommends
because the issuance is required to effect a merger or acquisition proposal.
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Generally, vote FOR proposals to authorize or issue preferred stock in cases
where the company specifies the voting, dividend, conversion, and other rights
of such stock and the terms of the preferred stock appear reasonable.
Vote CASE-BY-CASE on proposals to increase the number of blank check preferred
shares after analyzing the number of preferred shares available for issue given
a company's industry and performance in terms of shareholder returns.
SHAREHOLDER PROPOSALS REGARDING BLANK CHECK PREFERRED STOCK
Generally, vote FOR shareholder proposals to have blank check preferred stock
placements, other than those shares issued for the purpose of raising capital or
making acquisitions in the normal course of business, submitted for shareholder
ratification.
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Generally, vote FOR management proposals to reduce the par value of common
stock.
PREEMPTIVE RIGHTS
Review on a CASE-BY-CASE basis shareholder proposals that seek preemptive rights
or management proposals that seek to eliminate them. In evaluating proposals on
preemptive rights, consider the size of a company and the characteristics of its
shareholder base.
DEBT RESTRUCTURINGS
Review on a CASE-BY-CASE basis proposals to increase common and/or preferred
shares and to issue shares as part of a debt restructuring plan.
SHARE REPURCHASE PROGRAMS
Generally, vote FOR management proposals to institute open-market share
repurchase plans in which all shareholders may participate on equal terms.
Generally, vote FOR management proposals to cancel repurchased shares.
TRACKING STOCK
Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis.
8. EXECUTIVE AND DIRECTOR COMPENSATION
Unless otherwise provided for herein, votes with respect to compensation and
employee benefit plans should be determined on a CASE-BY-CASE basis, with voting
decisions generally based on the Agent's quantitative approach to evaluating
such plans, which includes determination of costs and comparison to an allowable
cap.
- Generally, vote in accordance with the Agent's recommendations FOR
equity-based plans with costs within such cap and AGAINST those with
costs in excess of it.
- Consider plans CASE-BY-CASE if Agent suggests cost assessment may not be
possible due to the issuer's method of disclosing shares allocated to the
plan(s).
- Generally, vote FOR plans with costs within the cap if the considerations
raised by the Agent pertain solely to equity compensation burn rate or
pay for performance.
A-27
- Generally, vote AGAINST plans administered by potential grant recipients.
- Consider plans CASE-BY-CASE if the Agent raises other considerations not
otherwise provided for herein.
RESTRICTED STOCK PLANS
Consider proposals for restricted stock plans, or the issuance of shares in
connection with such plans, on a CASE-BY-CASE basis, considering factors such as
level of disclosure and adequacy of vesting or performance requirements. Plans
that do not meet the Agent's criteria in this regard may be supported, but vote
AGAINST if disclosure is provided regarding neither vesting nor performance
requirements.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Review on a CASE-BY-CASE basis management proposals seeking approval to
reprice/replace options, considering rationale, historic trading patterns,
value-for-value exchange, participation limits, vesting periods and replacement
option terms. Generally, vote FOR proposals that meet the Agent's criteria for
acceptable repricing/replacement transactions, except that burn rate
considerations raised by the Agent shall not be grounds for withholding support.
Vote AGAINST compensation plans that (1) permit or may permit (E.G., history of
repricing and no express prohibition against future repricing) repricing of
stock options, or any form or alternative to repricing, without shareholder
approval, (2) include provisions that permit repricing/replacement transactions
that do not meet the Agent's criteria (except regarding burn rate as noted
above), or (3) give the board sole discretion to approve option
repricing/replacement programs.
DIRECTOR COMPENSATION
Votes on stock-based plans for directors are made on a CASE-BY-CASE basis, with
voting decisions generally based on the Agent's quantitative approach described
above as well as a review of qualitative features of the plan in cases in which
costs exceed the Agent's threshold. DO NOT VOTE AGAINST plans for which burn
rate is the sole consideration raised by the Agent.
EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be made on a CASE-BY-CASE basis.
OBRA-RELATED COMPENSATION PROPOSALS:
AMENDMENTS THAT PLACE A CAP ON ANNUAL GRANTS OR AMEND ADMINISTRATIVE
FEATURES
Generally, vote FOR plans that simply amend shareholder-approved plans to
include administrative features or place a cap on the annual grants any one
participant may receive to comply with the provisions of Section 162(m) of
OBRA.
AMENDMENTS TO ADD PERFORMANCE-BASED GOALS
Generally, vote FOR amendments to add performance goals to existing
compensation plans to comply with the provisions of Section 162(m) of OBRA.
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AMENDMENTS TO INCREASE SHARES AND RETAIN TAX DEDUCTIONS UNDER OBRA
Votes on amendments to existing plans to increase shares reserved and to
qualify the plan for favorable tax treatment under the provisions of Section
162(m) should be evaluated on a CASE-BY-CASE basis.
APPROVAL OF CASH OR CASH-AND-STOCK BONUS PLANS
Generally, vote FOR cash or cash-and-stock bonus plans to exempt the
compensation from taxes under the provisions of Section 162(m) of OBRA.
SHAREHOLDER PROPOSALS REGARDING EXECUTIVE AND DIRECTOR PAY
Generally, vote AGAINST shareholder proposals that seek disclosure beyond
regulatory requirements of the remuneration of individuals other than senior
executives and directors. However, vote AGAINST shareholder proposals that seek
such disclosure if providing it would be out of step with market practice and
potentially disruptive to the business.
Unless evidence exists of abuse in historical compensation practices, and except
as otherwise provided for herein, generally vote AGAINST shareholder proposals
that seek to impose new compensation structures or policies, including "claw
back" recoupments.
GOLDEN AND TIN PARACHUTES
Generally, vote FOR shareholder proposals to have golden and tin parachutes
submitted for shareholder ratification, provided that such "parachutes" specify
change-in-control events and that the proposal does not include unduly
restrictive or arbitrary provisions such as advance approval requirements.
Generally vote AGAINST shareholder proposals to submit executive severance
agreements that do not specify change-in-control events, Supplemental Executive
Retirement Plans or deferred executive compensation plans for shareholder
ratification, unless such ratification is required by the listing exchange.
Review on a CASE-BY-CASE basis all proposals to ratify or cancel golden or tin
parachutes.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
Generally, vote FOR proposals that request shareholder approval in order to
implement an ESOP or to increase authorized shares for existing ESOPs, except in
cases when the number of shares allocated to the ESOP is "excessive" (I.E.,
generally greater than five percent of outstanding shares).
401(k) EMPLOYEE BENEFIT PLANS
Generally, vote FOR proposals to implement a 401(k) savings plan for employees.
EXPENSING OF STOCK OPTIONS
Generally, vote AGAINST shareholder proposals to expense stock options before
such treatment is required by the Federal Accounting Standards Board.
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HOLDING PERIODS
Generally, vote AGAINST proposals requiring mandatory periods for officers and
directors to hold company stock.
9. STATE OF INCORPORATION
VOTING ON STATE TAKEOVER STATUTES
Review on a CASE-BY-CASE basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, antigreenmail
provisions, and disgorgement provisions).
VOTING ON REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be examined on a
CASE-BY-CASE basis. Generally, vote FOR management reincorporation proposals
upon which another key proposal, such as a merger transaction, is contingent if
the other key proposal is also supported. Generally, vote AGAINST shareholder
reincorporation proposals not also supported by the company.
10. MERGERS AND CORPORATE RESTRUCTURINGS
Input from the Investment Professional(s) for a given Fund shall be given
primary consideration with respect to proposals regarding business combinations,
particularly those between otherwise unaffiliated parties, or other corporate
restructurings being considered on behalf of that Fund.
MERGERS AND ACQUISITIONS
Votes on mergers and acquisitions should be considered on a CASE-BY-CASE basis.
CORPORATE RESTRUCTURING
Votes on corporate restructuring proposals, including demergers, minority
squeezeouts, leveraged buyouts, spinoffs, liquidations, dispositions,
divestitures and asset sales, should be considered on a CASE-BY-CASE basis, with
voting decisions generally based on the Agent's approach to evaluating such
proposals.
ADJOURNMENT
Generally, vote FOR proposals to adjourn a meeting to provide additional time
for vote solicitation when the primary proposal is also voted FOR.
APPRAISAL RIGHTS
Generally, vote FOR proposals to restore, or provide shareholders with, rights
of appraisal.
CHANGING CORPORATE NAME
Generally, vote FOR changing the corporate name.
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11. MUTUAL FUND PROXIES
ELECTION OF DIRECTORS
Vote the election of directors on a CASE-BY-CASE basis.
CONVERTING CLOSED-END FUND TO OPEN-END FUND
Vote conversion proposals on a CASE-BY-CASE basis.
PROXY CONTESTS
Vote proxy contests on a CASE-BY-CASE basis.
INVESTMENT ADVISORY AGREEMENTS
Vote the investment advisory agreements on a CASE-BY-CASE basis.
APPROVING NEW CLASSES OR SERIES OF SHARES
Generally, vote FOR the establishment of new classes or series of shares.
PREFERRED STOCK PROPOSALS
Vote the authorization for or increase in preferred shares on a CASE-BY-CASE
basis.
1940 ACT POLICIES
Vote these proposals on a CASE-BY-CASE basis.
CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION
Vote these proposals on a CASE-BY-CASE basis.
CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL
Generally, vote AGAINST proposals to change a fund's fundamental investment
objective to nonfundamental.
NAME RULE PROPOSALS
Vote these proposals on a CASE-BY-CASE basis.
DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION
Vote these proposals on a CASE-BY-CASE basis.
CHANGES TO THE CHARTER DOCUMENT
Vote changes to the charter document on a CASE-BY-CASE basis.
CHANGING THE DOMICILE OF A FUND
Vote reincorporations on a CASE-BY-CASE basis.
CHANGE IN FUND'S SUBCLASSIFICATION
Vote these proposals on a CASE-BY-CASE basis.
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AUTHORIZING THE BOARD TO HIRE AND TERMINATE SUBADVISORS WITHOUT SHAREHOLDER
APPROVAL
Generally, vote FOR these proposals.
DISTRIBUTION AGREEMENTS
Vote these proposals on a CASE-BY-CASE basis.
MASTER-FEEDER STRUCTURE
Generally, vote FOR the establishment of a master-feeder structure.
MERGERS
Vote merger proposals on a CASE-BY-CASE basis.
ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT
Generally, vote AGAINST shareholder proposals for the establishment of a
director ownership requirement.
REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED
Voting to reimburse proxy solicitation expenses should be analyzed on a
CASE-BY-CASE basis.
TERMINATE THE INVESTMENT ADVISOR
Vote to terminate the investment advisor on a CASE-BY-CASE basis.
12. SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics. In general, unless otherwise
specified herein, vote CASE-BY-CASE. While a wide variety of factors may go into
each analysis, the overall principle guiding all vote recommendations focuses on
how or whether the proposal will enhance the economic value of the company.
Because a company's board is likely to have access to relevant, non-public
information regarding a company's business, such proposals will generally be
voted in a manner intended to give the board (rather than shareholders) latitude
to set corporate policy and oversee management.
Absent concurring support from the issuer, compelling evidence of abuse,
significant public controversy or litigation, the issuer's significant history
of relevant violations; or activities not in step with market practice or
regulatory requirements, or unless provided for otherwise herein, generally vote
AGAINST shareholder proposals seeking to dictate corporate conduct, apply
existing law, duplicate policies already substantially in place and/or addressed
by the issuer, or release information that would not help a shareholder evaluate
an investment in the corporation as an economic matter. Such proposals would
generally include those seeking preparation of reports and/or implementation or
additional disclosure of corporate policies related to issues such as consumer
and public safety, environment and energy, labor standards and human rights,
military business and political concerns, workplace diversity and
non-discrimination, sustainability, social issues, vendor activities, economic
risk or matters of science and
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engineering.
13. GLOBAL PROXIES
The foregoing Guidelines provided in connection with proxies of U.S. issuers
shall also be applied to global proxies where applicable and not provided for
otherwise herein. The following provide for differing regulatory and legal
requirements, market practices and political and economic systems existing in
various global markets.
Unless otherwise provided for herein, it shall generally be the policy of the
Funds to vote AGAINST global proxy proposals in cases in which the Agent
recommends voting AGAINST such proposal because relevant disclosure by the
issuer, or the time provided for consideration of such disclosure, is
inadequate. For purposes of these global Guidelines, "AGAINST" shall mean
withholding of support for a proposal, resulting in submission of a vote of
AGAINST or ABSTAIN, as appropriate for the given market and level of concern
raised by the Agent regarding the issue or lack of disclosure or time provided.
In connection with practices described herein that are associated with a firm
AGAINST vote, it shall generally be the policy of the Funds to consider them on
a CASE-BY-CASE basis if the Agent recommends their support (1) as the issuer or
market transitions to better practices (E.G., having committed to new
regulations or governance codes) or (2) as the more favorable choice in cases in
which shareholders must choose between alternate proposals.
ROUTINE MANAGEMENT PROPOSALS
Generally, vote FOR the following and other similar routine management
proposals:
- the opening of the shareholder meeting
- that the meeting has been convened under local regulatory requirements
- the presence of quorum
- the agenda for the shareholder meeting
- the election of the chair of the meeting
- the appointment of shareholders to co-sign the minutes of the meeting
- regulatory filings (E.G., to effect approved share issuances)
- the designation of inspector or shareholder representative(s) of minutes
of meeting
- the designation of two shareholders to approve and sign minutes of
meeting
- the allowance of questions
- the publication of minutes
- the closing of the shareholder meeting
DISCHARGE OF MANAGEMENT/SUPERVISORY BOARD MEMBERS
Generally, vote FOR management proposals seeking the discharge of management and
supervisory board members, unless there is concern about the past actions of the
company's auditors or directors or legal action is being taken against the board
by other shareholders.
DIRECTOR ELECTIONS
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Unless otherwise provided for herein, the Agent's standards with respect to
determining director independence shall apply. These standards generally provide
that, to be considered completely independent, a director shall have no material
connection to the company other than the board seat.
Agreement with the Agent's independence standards shall not dictate that a
Fund's vote shall be cast according to the Agent's corresponding recommendation.
Further, the application of Guidelines in connection with such standards shall
apply only in cases in which the nominee's level of independence can be
ascertained based on available disclosure. These policies generally apply to
director nominees in uncontested elections; votes in contested elections, and
votes on director nominees not subject to policies described herein, should be
made on a CASE-BY-CASE basis.
For issuers domiciled in Canada, Finland, France, Ireland, the Netherlands,
Sweden or tax haven markets, generally vote AGAINST non-independent directors in
cases in which the full board serves as the audit committee, or the company does
not have an audit committee.
For issuers in all markets, including those in tax haven markets and those in
Japan that have adopted the U.S.-style board-with-committees structure, vote
AGAINST non-independent directors who sit on the audit committee, or, if the
slate of nominees is bundled, vote AGAINST the slate.
In tax haven markets, DO NOT VOTE AGAINST non-independent directors in cases in
which the full board serves as the compensation committee, or the company does
not have a compensation committee.
DO NOT VOTE AGAINST non-independent directors who sit on the compensation or
nominating committees, provided that such committees meet the applicable
independence requirements of the relevant listing exchange.
In cases in which committee membership is unclear, consider non-independent
director nominees on a CASE-BY-CASE basis if no other issues have been raised in
connection with his/her nomination.
Generally follow Agent's recommendations to vote AGAINST individuals nominated
as outside/non-executive directors who do not meet the Agent's standard for
independence, unless the slate of nominees is bundled, in which case the
proposal(s) to elect board members shall be considered on a CASE-BY-CASE basis.
For issuers in Canada and tax haven markets, generally withhold support (AGAINST
or ABSTAIN, as appropriate) from bundled slates of nominees if the board is
non-majority independent. For issuers in other global markets, generally follow
Agent's standards for withholding support from non-independent directors
excluding the CEO if the board is non-majority independent.
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Generally, withhold support (AGAINST or ABSTAIN, as appropriate) from nominees
or slates of nominees presented in a manner not aligned with market practice
and/or legislation, including:
- bundled slates of nominees in (Hong Kong or France);
- simultaneous reappointment of retiring directors (South Africa);
- in markets with term lengths capped by legislation, nominees whose terms
exceed the caps or are not disclosed (except that bundled slates with
such lack of disclosure shall be considered on a CASE-BY-CASE basis); or
- nominees whose names are not disclosed in advance of the meeting (Hong
Kong or South Africa).
Consider nominees for which the Agent has raised concerns regarding scandals or
internal controls on a CASE-BY-CASE basis.
For markets such as the tax havens, Canada, Australia, South Africa and Malaysia
(and for outside directors in South Korea) in which nominees' attendance records
are adequately disclosed, the Funds' U.S. Guidelines with respect to director
attendance shall apply.
For companies incorporated in tax haven markets but which trade exclusively in
the U.S., the Funds' U.S. Guidelines with respect to director elections shall
apply.
BOARD STRUCTURE
Generally, vote FOR proposals to fix board size, but also support proposals
seeking a board range if the range is reasonable in the context of market
practice and anti-takeover considerations.
INDEPENDENT STATUTORY AUDITORS
With respect to Japanese companies that have not adopted the U.S.-style
board-with-committees structure, vote AGAINST any nominee to the position of
"independent statutory auditor" whom the Agent considers affiliated, E.G., if
the nominee has worked a significant portion of his career for the company, its
main bank or one of its top shareholders. Where shareholders are forced to vote
on multiple nominees in a single resolution, vote AGAINST all nominees.
Generally, vote AGAINST incumbent nominees at companies implicated in scandals
or exhibiting poor internal controls.
NOMINATING COMMITTEE
Generally, vote AGAINST proposals that permit non-board members to serve on the
nominating committee.
DIRECTOR REMUNERATION
Consider director compensation plans on a CASE-BY-CASE basis. Generally, vote
FOR proposals to approve the remuneration of directors as long as the amount is
not excessive and there is no evidence of abuse.
A-35
RETIREMENT BONUSES
With respect to Japanese companies, generally vote FOR such proposals if all
payments are for directors and auditors who have served as executives of the
company. Generally vote AGAINST such proposals if one or more payments are for
non-executive, affiliated directors or statutory auditors; when one or more of
the individuals to whom the grants are being proposed (1) has not served in an
executive capacity for the company for at least three years or (2) has been
designated by the company as an independent statutory auditor, regardless of the
length of time he/she has served. If Agent raises scandal or internal control
considerations, generally vote AGAINST bonus proposals only for nominees whom a
Fund is also voting AGAINST for that reason.
STOCK OPTION PLANS FOR INDEPENDENT INTERNAL STATUTORY AUDITORS
With respect to Japanese companies, follow the Agent's guidelines with respect
to proposals regarding option grants to independent internal statutory auditors,
generally voting AGAINST such plans.
EQUITY COMPENSATION PLANS
Unless otherwise provided for herein, votes with respect to compensation plans
should be determined on a CASE-BY-CASE basis, with voting decisions generally
based on the Agent's approach to evaluating such plans, which in the United
Kingdom involves use of a compensation valuation model to evaluate the cost of
stock-based compensation plans, and in other markets, the calculation of
dilution under a company's share plans and analysis of plan features.
SHARES RESERVED FOR EQUITY COMPENSATION PLANS
Unless otherwise provided for herein, voting decisions shall generally be based
on the Agent's methodology, including classification of a company's stage of
development as growth or mature and the corresponding determination as to
reasonability of the share requests. Generally, vote AGAINST equity compensation
plans (E.G., option, warrant, restricted stock or employee share purchase
plans), the issuance of shares in connection with such plans, or related
management proposals that:
- exceed Agent's recommended dilution limits;
- provide deep or near-term discounts to executives or directors, unless
discounts to executives are adequately mitigated by long-term vesting
requirements (E.G., Japan);
- are administered by potential grant recipients;
- permit financial assistance in the form of interest-free, non-recourse
loans in connection with executive's participation;
- for restricted stock plans, provide no disclosure regarding vesting or
performance criteria (provided that plans with disclosure in one or both
areas, without regard to Agent's criteria for such disclosure, shall be
supported provided they otherwise satisfy these Guidelines);
- allow plan administrators to make material amendments without shareholder
approval unless adequate prior disclosure has been provided, with such
voting decisions generally based on the Agent's approach to evaluating
such plans;
- provide for terms or participation that is markedly out of line with
market practice;
A-36
- provide for retesting in connection with achievement of performance
hurdles unless the Agent's analysis indicates that (1) performance
targets are adequately increased in proportion to the additional time
available, (2) the amount of compensation subject to retesting is DE
MINIMIS as a percentage of overall compensation or relative to market
practice, or (3) the issuer has committed to cease retesting within a
reasonable period of time.
Generally, vote FOR such plans or the related issuance of shares that (1) do not
suffer from the defects noted above or (2) otherwise meet the Agent's tests if
the considerations raised by the Agent pertain solely to performance hurdles or
the company's rationale in support of the plan or its participants.
Consider proposals in connection with such plans or the related issuance of
shares in other instances on a CASE-BY-CASE basis.
REMUNERATION REPORTS
Generally, withhold support (AGAINST or ABSTAIN as appropriate for specific
market and level of concerns identified by the Agent) from remuneration reports
that include compensation plans permitting (1) practices or features not
supported under these Guidelines (2) financial assistance or retesting under the
conditions described above, or (3) provisions for retirement benefits to outside
directors, except that reports will generally be voted FOR if contractual
components are reasonably aligned with market practices on a going-forward basis
(E.G., existing obligations related to retirement benefits or terms contrary to
evolving standards would not preclude support for the report).
Except as described above, consider provisions Agent raises with concern
regarding severance/termination payments, contract or notice periods, "leaver"
status and vesting or performance criteria on a CASE-BY-CASE basis.
SHAREHOLDER PROPOSALS REGARDING EXECUTIVE AND DIRECTOR PAY
The Funds' U.S. Guidelines with respect to such shareholder proposals shall
apply.
GENERAL SHARE ISSUANCES
Unless otherwise provided for herein, voting decisions shall generally be based
on the Agent's practice to vote FOR general issuance requests with preemptive
rights to a maximum of 100 percent over currently issued capital and those
without preemptive rights to a maximum of 20 percent of currently issued
capital.
Consider specific issuance requests on a CASE-BY-CASE basis based on the
proposed use and the company's rationale.
Generally, vote AGAINST proposals to issue shares (with or without preemptive
rights), or to grant rights to acquire shares, in cases in which concerns have
been identified by the Agent with respect to inadequate disclosure, inadequate
restrictions on discounts, or authority to refresh share issuance amounts
without prior shareholder approval.
A-37
INCREASES IN AUTHORIZED CAPITAL
Unless otherwise provided for herein, voting decisions should generally be based
on the Agent's approach, as follows:
Generally, vote FOR nonspecific proposals to increase authorized capital up to
100 percent over the current authorization unless the increase would leave the
company with less than 30 percent of its new authorization outstanding.
Vote FOR specific proposals to increase authorized capital, unless:
- the specific purpose of the increase (such as a share-based acquisition
or merger) does not meet these Guidelines for the purpose being proposed;
or
- the increase would leave the company with less than 30 percent of its new
authorization outstanding after adjusting for all proposed issuances.
Vote AGAINST proposals to adopt unlimited capital authorizations.
PREFERRED STOCK
Unless otherwise provided for herein, voting decisions should generally be based
on the Agent's approach, including:
- Vote FOR the creation of a new class of preferred stock or issuances of
preferred stock up to 50 percent of issued capital unless the terms of
the preferred stock would adversely affect the rights of existing
shareholders.
- Vote FOR the creation/issuance of convertible preferred stock as long as
the maximum number of common shares that could be issued upon conversion
meets the Agent's guidelines on equity issuance requests.
- Vote AGAINST the creation of (1) a new class of preference shares that
would carry superior voting rights to the common shares or (2) blank
check preferred stock unless the board states that the authorization will
not be used to thwart a takeover bid.
POISON PILLS/PROTECTIVE PREFERENCE SHARES
Generally, vote AGAINST management proposals in connection with poison pills or
anti-takeover issuances that do not meet the Agent's standards, but generally DO
NOT VOTE AGAINST director nominees or remuneration in connection with poison
pill considerations raised by the Agent.
APPROVAL OF FINANCIAL STATEMENTS AND DIRECTOR AND AUDITOR REPORTS
Generally, vote FOR management proposals seeking approval of financial accounts
and reports, unless there is concern about the company's financial accounts and
reporting.
REMUNERATION OF AUDITORS
Generally, vote FOR proposals to authorize the board to determine the
remuneration of auditors, unless there is evidence of excessive compensation
relative to the size and nature of the company.
INDEMNIFICATION OF AUDITORS
Generally, vote AGAINST proposals to indemnify auditors.
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ALLOCATION OF INCOME AND DIVIDENDS
Generally, vote FOR management proposals concerning allocation of income and the
distribution of dividends, except with respect to securities held by
dividend-oriented Funds, which should generally follow Agent's recommendations
AGAINST payouts deemed too low according to Agent's methodology.
STOCK (SCRIP) DIVIDEND ALTERNATIVES
Generally, vote FOR most stock (scrip) dividend proposals, but vote AGAINST
proposals that do not allow for a cash option unless management demonstrates
that the cash option is harmful to shareholder value.
DEBT ISSUANCE REQUESTS
When evaluating a debt issuance request, the issuing company's present financial
situation is examined. The main factor for analysis is the company's current
debt-to-equity ratio, or gearing level. A high gearing level may incline markets
and financial analysts to downgrade the company's bond rating, increasing its
investment risk factor in the process. A gearing level up to 100 percent is
considered acceptable.
Generally, vote FOR debt issuances for companies when the gearing level is
between zero and 100 percent. Review on a CASE-BY-CASE basis proposals where the
issuance of debt will result in the gearing level being greater than 100
percent, comparing any such proposed debt issuance to industry and market
standards.
FINANCING PLANS
Generally, vote FOR the adoption of financing plans if they are in the best
economic interests of shareholders.
RELATED PARTY TRANSACTIONS
Consider related party transactions on a CASE-BY-CASE basis. Generally, vote FOR
approval of such transactions unless the agreement requests a strategic move
outside the company's charter or contains unfavorable terms.
APPROVAL OF DONATIONS
Generally, vote AGAINST such proposals unless adequate, prior disclosure of
amounts is provided.
CAPITALIZATION OF RESERVES
Generally, vote FOR proposals to capitalize the company's reserves for bonus
issues of shares or to increase the par value of shares.
ARTICLE AMENDMENTS
Review on a CASE-BY-CASE basis all proposals seeking amendments to the articles
of association.
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Generally, vote FOR an article amendment if:
- it is editorial in nature;
- shareholder rights are protected;
- there is negligible or positive impact on shareholder value;
- management provides adequate reasons for the amendments or the Agent
otherwise supports management's position; or
- the company is required to do so by law (if applicable).
With respect to article amendments for Japanese companies:
- Generally vote FOR management proposals to amend a company's articles to
expand its business lines.
- Generally vote FOR management proposals to amend a company's articles to
provide for an expansion or reduction in the size of the board, unless
the expansion/reduction is clearly disproportionate to the
growth/decrease in the scale of the business or raises anti-takeover
concerns.
- If anti-takeover concerns exist, generally vote AGAINST management
proposals, including bundled proposals, to amend a company's articles to
authorize the Board to vary the annual meeting record date.
- Generally follow the Agent's guidelines with respect to management
proposals regarding amendments to authorize share repurchases at the
board's discretion, voting AGAINST proposals unless there is little to no
likelihood of a "creeping takeover" (major shareholder owns nearly enough
shares to reach a critical control threshold) or constraints on liquidity
(free float of shares is low), and where the company is trading at below
book value or is facing a real likelihood of substantial share sales; or
where this amendment is bundled with other amendments which are clearly
in shareholders' interest.
OTHER BUSINESS
In connection with global proxies, vote in accordance with the Agent's
market-specific recommendations on management proposals for Other Business,
generally AGAINST.
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PART C
OTHER INFORMATION
ING PRIME RATE TRUST
(25,000,000 COMMON SHARES)
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
Contained in Part A:
Financial Highlights for the years ended February 28, 2006 and 2005,
February 29, 2004, February 28, 2003, 2002 and 2001; February 29,
2000.
Financial Statements are incorporated in Part B by reference to
Registrant's February 28, 2006 annual shareholder report (audited).
2. Exhibits
(a) (i) Agreement and Declaration of Trust.(1)
(ii) Amendment to the Agreement and Declaration of Trust dated
March 26, 1996 and effective April 12, 1996.(1)
(iii) Amendment to the Agreement and Declaration of Trust dated
October 23, 1998 and effective November 16, 1998.(7)
(iv) Amendment to the Agreement and Declaration of Trust dated
October 20, 2000 and effective October 20, 2000.(9)
(v) Amendment to the Agreement and Declaration of Trust dated
February 20, 2002 and effective March 1, 2002.(10)
(b) (i) By-Laws.(2)
(ii) Amendment to By-Laws.(2)
(iii) Amendment to By-Laws.(8)
(iv) Amendment to By-Laws.(9)
(c) Not Applicable
(d) (i) Certificate of Designation for Preferred Shares.(9)
(ii) Form of Share Certificate.(9)
(e) Shareholder Investment Program.(12)
(f) Not Applicable
(g) (i) Investment Management Agreement between ING Investment
Management, LLC and ING Prime Rate Trust.(9)
1. Amended Schedule of Approvals with respect to the
Investment Management Agreement between ING
Investments, LLC and ING Prime Rate Trust.(12)
2. First Amendment dated September 2, 2004 to the
Investment Management Agreement between ING Investment
Management, LLC and ING Prime Rate Trust.(13)
(ii) Sub-Advisory Agreement between ING Investments, LLC and
Aeltus Investment Management, Inc.(11)
1. First Amendment to Sub-Advisory Agreement, effective
as of September 1, 2003, between ING Investments, LLC
and Aeltus Investment Management, Inc. with regards to
ING Prime Rate Trust.(12)
(h) (i) Amended and Restated Distribution Agreement, dated June
15, 2004, between ING Prime Rate Trust and ING Funds
Distributor, LLC (25 Million).(13)
(ii) Underwriting Agreement for the Preferred Shares, dated
November 13, 2000.(12)
1. Underwriting Agreement for the Preferred Shares, dated
October 30, 2000.(12)
(i) Not Applicable
(j) (i) Custodian and Investment Accounting Agreement between
Registrant and State Street Bank and Trust Company,
effective November 1, 2001.(12)
1. First Amendment to the Custodian and Investment
Accounting Agreement dated March 1, 2002.(12)
2. Amended and Restated Exhibit A with respect to the
Custodian and Investment Accounting Agreement.(12)
C-2
(ii) Fee Allocation Agreement, dated August 21, 2003.(12)
1. Amended Schedule A to the Fee Allocation
Agreement.(12)
(iii) Proxy Agent Fee Allocation Agreement, dated August 21,
2003.(12)
1. Amended Schedule A to the Proxy Agent Fee Allocation
Agreement.(12)
(iv) Allocation Agreement Fidelity Bond, made May 24, 2002.(12)
1. Amended Schedule A to the Allocation Agreement.(12)
(v) Allocation Agreement Directors & Officers, made May 24,
2002.(12)
1. Amended Schedule A to the Allocation Agreement
Directors & Officers.(12)
(vi) Agency Agreement, made November 30, 2000 by and between
Registrant and DST Systems, Inc.(12)
1. Amended and Restated Exhibit A dated April 28, 2006
with respect to the Agency Agreement between The
Registrant and DST Systems, Inc. - filed herein.
(k) (i) Amended and Restated Administration Agreement, amended and
restated on April 27, 2000.(12)
(ii) Amendment to the Amended and Restated Administration
Agreement.(10)
(iii) Revolving Credit and Security Agreement between ING Prime
Rate Trust and Citibank, dated as of July 16, 2003.(12)
1. Amendment No. 1 to the Revolving Credit and Security
Agreement, dated February 3, 2004.(12)
2. Amendment No. 2 dated July 13, 2004 to the Revolving
Credit and Security Agreement.(13)
3. Amendment No. 3 dated October 15, 2004 to the
Revolving Credit and Security Agreement.(13)
C-3
(iv) Second Amended and Restated Credit Agreement with Bank
of America.(12)
(v) Auction Agency Agreement, dated as of November 16,
2000.(12)
1. Auction Agency Agreement, dated as of November 2,
2000.(12)
(vi) Broker-Dealer Agreement, dated as of November 16, 2000
(UBS).(12)
1. Broker-Dealer Agreement, dated as of November 16,
2000 (Salomon Smith Barney).(12)
2. Broker-Dealer Agreement, dated as of November 16,
2000 (Lehman Brothers).(12)
3. Broker-Dealer Agreement, dated as of November 16,
2000 (Gruntal & Co.).(12)
4. Broker-Dealer Agreement, dated as of November 2,
2000 (PaineWebber).(12)
5. Broker-Dealer Agreement, dated as of November 2,
2000 (Gruntal & Co.).(12)
6. Broker-Dealer Agreement, dated as of November 2,
2000 (Salomon Smith Barney).(12)
7. Broker-Dealer Agreement, dated as of October 31,
2000 (Lehman Brothers).(12)
(vii) DTC Letter of Representations as to Preferred Shares,
dated November 15, 2000.(12)
1. DTC Letter of Representation as to Preferred Shares,
dated November 1, 2000.(12)
(l) Opinion of Dechert Price & Rhoads.(7)
(m) Not Applicable
(n) (i) Consent of Dechert LLP - filed herein.
(ii) Consent of KPMG LLP - filed herein.
(o) Not Applicable
(p) Certificate of Initial Capital.(4)
(q) Not Applicable
C-4
(r) (i) ING Funds Code of Ethics, effective June 1, 2004 as amended
on October 1, 2004, February 1, 2005 and January 3, 2006 -
filed herein.
(ii) Aeltus Investment Management, Inc. Code of Ethics.(11)
---------------------------------------------
(1) Incorporated herein by reference to Amendment No. 20 to Registrant's
Registration Statement under the Investment Company Act of 1940 (the "1940
Act") on Form N-2 (File No. 811-5410), filed on September 16, 1996.
(2) Incorporated herein by reference to Amendment No. 24 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on November 7, 1997.
(3) Incorporated herein by reference to Amendment No. 22 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on June 23, 1997.
(4) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's initial registration statement on form N-2 (File No.
33-18886), filed on January 22, 1988.
(5) Incorporated herein by reference to Amendment No. 27 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on May 15, 1998.
(6) Incorporated herein by reference to Amendment No. 28 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on August 19, 1998.
(7) Incorporated herein by reference to Amendment No. 29 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on December 2, 1998.
(8) Incorporated herein by reference to Amendment No. 33 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on May 9, 2000.
(9) Incorporated herein by reference to Amendment No. 38 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on October 23, 2000.
(10) Incorporated herein by reference to Amendment No. 45 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on April 30, 2002.
(11) Incorporated herein by reference to Amendment No. 53 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on June 26, 2003.
C-5
(12) Incorporated herein by reference to Amendment No. 58 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on June 28, 2004.
(13) Incorporated herein by reference to Amendment No. 61 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on June 30, 2005.
ITEM 25. MARKETING AGREEMENTS
Not Applicable.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth expenses incurred or estimated to be
incurred in connection with the offering described in the Registration
Statement.
Registration Fees $
Trustee Fees $
Rating Agency Fees $
Printing Expenses $32,500
Legal Fees $30,000
Accounting Fees and Expenses $ 5,500
Miscellaneous Expenses $
Total $68,000
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
(1) TITLE OF CLASS (2) NUMBER OF RECORD HOLDERS
Common Shares of beneficial interest, par 145,033,235
value $0.01 per share.
Auction Rate Cumulative Preferred Shares of
beneficial interest, par value $0.01 per share:
Series M 3,600 as of June 18, 2004
Series T 3,600 as of June 18, 2004
Series W 3,600 as of June 18, 2004
Series Th 3,600 as of June 18, 2004
Series F 3,600 as of June 18, 2004
C-6
ITEM 29. INDEMNIFICATION
Registrant's Agreement and Declaration of Trust generally provides that
the Trust shall indemnify each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or trustees
of another organization in which the Trust has any interest as a shareholder,
creditor or otherwise) ("Covered Persons") against all liabilities and
expenses, including amounts paid in satisfaction of judgments, in compromise
or as fines and penalties, and counsel fees reasonably incurred in connection
with the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, by reason of being or having been such a Covered
Person except with respect to any matter as to which such Covered Person
shall have been finally adjudicated (a) not to have acted in good faith in
the reasonable belief that such Covered Person's action was in the best
interest of the Trust or (b) to be liable to the Trust or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of duties involved in the conduct of such Covered Person's office.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission, such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment of the Registrant of
expenses incurred or paid by a Trustee, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in connection with
the securities being registered, the Registrant will submit, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information as to the Trustees and officers of the Adviser, together
with information as to any other business, profession, vocation or employment
of a substantial nature engaged in by the directors and officers of the
Adviser in the last two years, is included in its application for
registration as an investment adviser on Form ADV (File No. 801-48282) filed
under the Investment Advisers Act of 1940, as amended ("Advisers Act"), and
is incorporated herein by reference thereto.
Information as to the directors and officers of the sub-adviser,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers
of the sub-adviser in the last two years, is included in its application for
registration as an investment adviser on Form ADV for ING Investment
Management Co. (File No. 801-9046) filed under the Investment Adviser Act of
1940, as amended, and is incorporated by reference thereto.
C-7
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The amounts and records of the Registrant will be maintained at its
office at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258, at the
office of its sub-adviser, ING Investment Management Co., 230 Park Avenue,
New York, NY 10169 and at the office of its custodian, State Street Bank &
Trust - Kansas City, 801 Pennsylvania, Kansas City, Missouri 64105.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the Offer until the prospectus
is amended if (1) subsequent to the effective date of this registration
statement, the net asset value declines more than ten percent from its net
asset value as of the effective date of this registration statement or (2)
the net asset value increases to an amount greater than the net proceeds as
stated in the prospectus included in this registration statement.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5.
a. The Registrant undertakes that for the purpose of determining
any liability under the 1933 Act, the information omitted from the
form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant under Rule 497(h) under the 1933 Act [17
CFR 230.497(h)] shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
b. that for the purpose of determining any liability under the 1933
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
the securities at that time shall be deemed to be the initial bona
fide offering thereof.
C-8
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.
C-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Scottsdale
in the State of Arizona this 30th day of June, 2006.
ING PRIME RATE TRUST
By: /s/ Huey P. Falgout, Jr.
------------------------
Huey P. Falgout, Jr.
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the date indicated:
SIGNATURE TITLE DATE
--------- ----- ----
-------------------------------------- Trustee June 30, 2006
John V. Boyer*
-------------------------------------- Trustee June 30, 2006
John G. Turner*
-------------------------------------- President and Chief Executive Officer June 30, 2006
James M. Hennessy*
-------------------------------------- Senior Vice President, Chief/Principal Financial Officer June 30, 2006
Todd Modic+
-------------------------------------- Trustee June 30, 2006
Patricia W. Chadwick+
-------------------------------------- Trustee June 30, 2006
J. Michael Earley*
SIGNATURE TITLE DATE
--------- ----- ----
-------------------------------------- Trustee June 30, 2006
R. Barbara Gitenstein*
-------------------------------------- Trustee June 30, 2006
Patrick W. Kenny*
-------------------------------------- Trustee June 30, 2006
Walter H. May, Jr.*
-------------------------------------- Trustee June 30, 2006
Jock Patton*
-------------------------------------- Trustee June 30, 2006
Sheryl K. Pressler+
-------------------------------------- Trustee June 30, 2006
David W.C. Putnam*
-------------------------------------- Trustee June 30, 2006
Roger B. Vincent*
-------------------------------------- Trustee June 30, 2006
Shaun P. Matthews !
+ * ! By: /s/ Huey P. Falgout, Jr.
------------------------
Huey P. Falgout, Jr.
Attorney-in-Fact**
--------------------
* Powers of Attorney for each Trustee and James M. Hennessy are incorporated
herein by reference to Amendment No. 59 to Registrant's Registration
Statement under the 1940 Act on Form N-2 (File No. 811-5410), filed on April
22, 2005.
+ Powers of Attorney for Todd Modic, Patricia W. Chadwick and Sheryl K.
Pressler are incorporated herein by reference to Amendment No. 63 to
Registrant's Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on April 26, 2006.
! Power of Attorney for Shaun P. Matthews - filed herein.
POWER OF ATTORNEY
I, the undersigned Trustee, constitute and appoint Huey P. Falgout, Jr.,
Theresa K. Kelety, Jeffrey S. Puretz, James M. Hennessy and Todd Modic, and
each of them individually, my true and lawful attorneys-in-fact and agents,
with full power to them and each of them to sign for me, and in my name and
in the capacity indicated below, as the case may be, any and all
Post-Effective Amendments to Registration Statements filed with the
Securities and Exchange Commission under the Securities Act of 1933 and under
the Investment Company Act of 1940 for the following Registered Investment
Companies:
REGISTRANT 1933 ACT SEC FILING # 1940 ACT SEC FILING #
ING Global Advantage and Premium
Opportunity Fund 333-126570 811-21786
ING Global Equity Dividend and
Premium Opportunity Fund 333-114333 811-21553
ING Prime Rate Trust 333-68239 (5 mil) 811-5410
333-61831 (25 mil) 811-5410
I hereby ratify and confirm on the date set forth below, my signature as it
may be signed by my said attorney-in-fact and agent to any and all amendments
to such Registration Statements.
This Power of Attorney, which shall not be affected by the disability of the
undersigned, is executed and effective as of June 29, 2006.
/s/ Shaun P. Matthews
---------------------
Shaun P. Matthews, Trustee
EXHIBIT INDEX
ING PRIME RATE TRUST
(25,000,000 COMMON SHARES)
EXHIBIT NUMBER EXHIBIT NAME
(j)(vi)(1) Amended and Restated Exhibit A dated April 28, 2006 with respect
to the Agency Agreement between The Registrant and DST Systems, Inc
(n)(i) Consent of Dechert LLP.
(n)(ii) Consent of KPMG LLP.
(r)(i) ING Funds Code of Ethics, effective June 1, 2004 as amended on
October 1, 2004, February 1, 2005 and January 3, 2006.