Prospectus
March 24, 2011
This prospectus contains important information about
the shares of Common Stock of the Fund. Please read it
before investing and keep it for future reference.
FIRST PUERTO RICO DAILY LIQUIDITY FUND
Daily Liquidity Fund
Supplement Dated September 25, 2013
to the Prospectuses Listed Below
________________
This information supplements the information contained in the prospectus for each of the Funds
listed below. This Supplement and each prospectus (as may have been previously supplemented, as
indicated below) constitute a current prospectus. This Supplement should be read together with the
prospectus. Terms used in this Supplement which are not otherwise defined have the meanings given in
each prospectus.
________________
Banco Santander, S.A. the ultimate parent company of the Fund’s investment adviser, Santander
Asset Management, LLC, has entered into an Investment Agreement (the “Investment Agreement”) that
provides that, subject to a number of conditions including the obtaining of certain regulatory approvals,
Banco Santander, S.A. and its affiliates (collectively, the “Santander Group”) will carry out a
restructuring of its global asset management business under a single holding company, SAM Investment
Holdings Limited, a private company limited by shares registered under the laws of Jersey, United
Kingdom (the “Restructuring”). Following the proposed Restructuring, 50% of the shares of SAM
Investment Holdings Limited will be acquired by Sherbrooke Acquisition Corp SPC (“Sherbrooke”), a
segregated portfolio company incorporated in the Cayman Islands to be controlled jointly by Warburg
Pincus LLC and General Atlantic LLC (the “Investment” and, together with the Restructuring, the
“Transaction”), while Banco Santander, S.A. shall continue to indirectly hold 50% of the shares of SAM
Investment Holdings Limited.
Pursuant to the Investment Agreement, and, as part of the Transaction, Santander Securities LLC,
an indirect subsidiary of Banco Santander, S.A. and the distributor of the Funds, will sell its subsidiary,
Santander Asset Management, LLC to a newly formed, wholly owned subsidiary of SAM Investment
Holdings Limited. The Transaction will cause the Fund’s current investment advisory agreement to
terminate. The Transaction is subject to a number of closing conditions, one of which is that assets under
management by the companies that comprise the Santander Group asset manager business represent at
least a certain amount. In addition, the acquisition of Santander Asset Management, LLC by the newly
formed, wholly owned subsidiary of SAM Investment Holdings Limited is conditioned upon the approval
by the shareholders of each of the First Puerto Rico Funds of their respective new investment advisory
agreement; provided, that this condition may be waived at Sherbrooke’s sole discretion. Although there
is no assurance that the Transaction will be completed, if each of the terms and conditions is satisfied or
waived, the closing of the Transaction is expected by the Santander Group, Warburg Pincus LLC and
General Atlantic LLC to take place during the fourth quarter of 2013. Proxy materials describing the
Transaction are expected to be mailed in September 2013 to shareholders of record as of September 12,
2013 of each of the First Puerto Rico Funds.
Please retain this Supplement for future reference.
________________
First Puerto Rico AAA Fixed-Income Fund, Inc.
June 27, 2011, as supplemented on
December 13, 2011
First Puerto Rico AAA Target Maturity Fund I, Inc.
June 30, 2004, as supplemented on
June 6, 2006 and February 16, 2007
2
First Puerto Rico AAA Target Maturity Fund II, Inc.
January 31, 2005, as supplemented on
on June 6, 2006 and February 16, 2007
First Puerto Rico Daily Liquidity Fund, Inc.
March 24, 2011
First Puerto Rico Equity Opportunities Fund, Inc.
March 29, 2011
First Puerto Rico Intermediate Fixed-Income Fund, Inc.
August 22, 2013
First Puerto Rico Target Maturity Income
Opportunities Fund I, Inc.
September 29, 2004, as supplemented
on June 6, 2006 and February 16, 2007
First Puerto Rico Target Maturity Income
Opportunities Fund II, Inc.
August 31, 2005, as supplemented on
November 3, 2005, June 6, 2006 and
February 16, 2007
First Puerto Rico Tax-Advantaged Target Maturity
Fund I, Inc.
September 3, 2003, as supplemented on
October 21, 2003, June 6, 2006 and
February 16, 2007
First Puerto Rico Tax-Advantaged Target Maturity
Fund II, Inc.
February 27, 2004, as supplemented on
June 6, 2006 and February 16, 2007
First Puerto Rico Tax-Exempt Fund, Inc.
April 2, 2013, as supplemented on
August 15, 2013
First Puerto Rico Tax-Exempt Fund II, Inc.
February 25, 2013
First Puerto Rico Tax- Exempt Target Maturity
Fund II, Inc.
September 28, 2001, as supplemented
on November 1, 2001, June 6, 2006 and
February 16, 2007
First Puerto Rico Tax- Exempt Target Maturity
Fund III, Inc.
February 25, 2002, as supplemented on
April 30, 2002, June 6, 2006 and
February 16, 2007
First Puerto Rico Tax- Exempt Target Maturity
Fund IV, Inc.
October 31, 2002, as supplemented on
June 6, 2006 and February 16, 2007
First Puerto Rico Tax- Exempt Target Maturity
Fund V, Inc.
March 27, 2003, as supplemented on
June 6, 2006 and February 16, 2007
First Puerto Rico Tax- Exempt Target Maturity
Fund VII, Inc.
October 31, 2012
Santander Securities
PROSPECTUS
First Puerto Rico Daily Liquidity Fund, Inc.
Common Stock
The Fund is a continuously offered, non-diversified, no-load, open-end management investment company registered under the Puerto Rico
Investment Companies Act. The Fund commenced operations on July 10, 1997.
Investment objective:
$
$
To provide to its shareholders preservation of capital and current
income that is exempt from U.S. federal income taxes and taxed
in Puerto Rico, in the case of Qualifying Individuals (as defined No sales load:
herein), at the special tax rate of 10% imposed on Ordinary
Dividends (as defined herein). See “Tax Matters—Puerto Rico $ Purchases of Shares of the Fund are not subject to any initial sales
charges (or loads), deferred sales charges or redemption fees.
Taxation of Fund Shareholders” on page 24 for additional income
tax considerations applicable to Qualifying Individuals subject to
Daily dividend declarations and automatic reinvestment:
alternative minimum tax.
Principal investment policies:
$
$
$
$
The shares are being offered only to individuals who have their
principal residence in Puerto Rico and to entities whose principal
office and principal place of business are located in Puerto Rico.
$
The Fund declares a dividend of substantially all of its net
investment income on each day the New York Stock Exchange is
open for trading.
The Fund will pursue its investment objective by investing, under
normal market conditions, at least 67% of its total assets in
overnight repurchase agreements exclusively with entities $ The Fund intends to distribute dividends monthly and reinvest
such dividends automatically in additional Shares of the Fund.
organized under the laws of Puerto Rico, including, but not
limited to, Banco Santander Puerto Rico, Santander Securities
Corporation, the First Puerto Rico Funds or any other Affiliated Investment considerations:
Person of the Fund.
$ The Fund is a “non-diversified” investment company, and is
subject to risks that may result in a loss of your investment. See
The Fund may invest up to 33% of its total assets directly in high
“Risk Factors and Special Considerations” on page 6.
quality, short-term, money market instruments with maturities of
13 months or less.
$ The Fund is not a money market fund as defined in the U.S.
Investment Company Act of 1940 and presents significantly
The Fund will seek to maintain a dollar-weighted average
higher risks to investors than such a fund. See “Risk Factors and
maturity of 90 days or less.
Special Considerations” on page 6.
Under normal market conditions, at least 67% of the Fund’s
Tax benefits:
assets must be invested in Puerto Rico securities.
Common stock offered:
$
$
The Fund offers to the public, on a continuous basis, its shares of
Class A Common Stock (the “Shares”).
$
Purchases and redemptions of Shares of the Fund may be made
on any day that the New York Stock Exchange is open for $
trading.
$
The Fund may be available as a cash sweep option for
participants in resource management programs of Santander
Securities Corporation or a selected dealer.
Ordinary dividends received by Qualifying Individuals, estates
and trusts will be subject to a 10% preferential tax to be withheld
at source rather than to the regular tax on ordinary income. See
“Tax Matters—Puerto Rico Taxation of Fund Shareholders” on
page 24.
Investments in the Fund by Puerto Rico residents who acquired
their U.S. citizenship by reason of their birth or residence in
Puerto Rico and who reside in Puerto Rico at the time of death are
not subject to Puerto Rico or U.S. estate taxes.
(continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF THE COMMISSIONER OF
FINANCIAL INSTITUTIONS OF PUERTO RICO. THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS
HAS NOT MADE ANY DETERMINATION REGARDING THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Santander Securities
- Distributor
March 24, 2011
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION UNDER THE SECURITIES ACT OF 1933, OR WITH ANY STATE SECURITIES
COMMISSION OTHER THAN THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS
OF PUERTO RICO.
THE SECURITIES DESCRIBED IN THIS PROSPECTUS ARE OFFERED FOR SALE ONLY IN THE
COMMONWEALTH OF PUERTO RICO PURSUANT TO REGISTRATION OF THE FUND WITH THE
OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF PUERTO RICO AS AN
INVESTMENT COMPANY UNDER THE PUERTO RICO INVESTMENT COMPANIES ACT, AS
AMENDED. THE FUND HAS NOT BEEN REGISTERED UNDER THE U.S. INVESTMENT COMPANY ACT
OF 1940.
THESE SECURITIES ARE BEING OFFERED EXCLUSIVELY TO INDIVIDUALS HAVING THEIR
PRINCIPAL RESIDENCE WITHIN THE COMMONWEALTH OF PUERTO RICO AND TO PERSONS,
OTHER THAN INDIVIDUALS, WHOSE PRINCIPAL OFFICE AND PRINCIPAL PLACE OF BUSINESS
ARE LOCATED WITHIN THE COMMONWEALTH OF PUERTO RICO.
___________________
(continued from previous page)
Other Fund characteristics:
$
The yield on the Shares will vary from period to period, and generally fluctuate in accordance with short-term
interest rates, as well as with changes in the purchase yield of the Fund’s portfolio securities. The Fund cannot
guarantee any particular yield on the Shares, and the yield for any period is not an indication or representation of
future yields on the Shares.
$
While the Fund seeks to maintain a stable net asset value of $1.00 per Share, there can be no assurance that it will be
able to do so.
$
As a non-diversified investment company, the Fund may invest a greater portion of its assets in a single issuer than
could a diversified investment company, thereby exposing the Fund’s net asset value and yield to greater volatility.
$
An investment in the Fund is subject to taxation as described under “Tax Matters” beginning on page 23.
$
The Fund may enter into various types of transactions with affiliated parties as described in this prospectus. All
transactions with affiliates will be subject to procedures adopted by the Board of Directors and, particularly, the
independent Directors of the Board, in an effort to address potential conflicts of interest. There is no assurance that
the procedures will be effective.
$
Santander Asset Management Corporation, as investment adviser to the Fund, manages the overall investment
policy, strategic asset allocation, portfolio rebalancing and risk management of the Fund’s assets. The principal
offices of Santander Asset Management Corporation are located at Santander Tower Building, Suite 1800, Tabonuco
Street B-7, Guaynabo, Puerto Rico 00968-3028, and its main telephone number is (787) 759-5340.
No dealer, salesperson or any other person has been authorized to give any information or to make any representations
in connection with this offering other than those contained in this prospectus and you should not rely on such other
information and representations. This prospectus does not constitute an offer by the Fund or Santander Securities to sell
or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction other than the Commonwealth
of Puerto Rico.
TABLE OF CONTENTS
Page
Page
PROSPECTUS SUMMARY ........................................1
FEES AND EXPENSES...............................................5
RISK FACTORS AND SPECIAL
CONSIDERATIONS ................................................6
Yield Risk..............................................................6
Principal Risk ........................................................6
Manager Risk ........................................................6
Special Considerations Regarding
Transactions Involving Affiliates;
Conflicts of Interest ........................................6
Special Considerations Regarding Repurchase
Agreements.....................................................7
Special Considerations Regarding Puerto Rico
Securities ........................................................7
Special Considerations Regarding MortgageBacked Securities ...........................................8
Special Considerations Regarding Puerto Rico
Municipal Obligations ....................................9
Special Considerations Regarding FixedIncome Securities ...........................................9
Special Considerations Regarding CMOs .............9
Special Considerations Regarding AssetBacked Securities .........................................10
Political Risk .......................................................10
Credit Risk...........................................................10
Special Considerations Regarding the Fund's
Non-Diversified Status .................................10
Lower-Rated and Below Investment Grade
Securities ......................................................10
Special Considerations Regarding Illiquid
Securities ......................................................11
Special Considerations Regarding the
Limitation on the Offering and Transfer of
Shares ...........................................................11
Special Considerations Regarding IssuerSpecific Changes and Other Risks................11
Special Considerations Regarding Individual
Retirement Accounts ....................................11
Change of Law Risk ............................................11
Special Considerations Regarding Geographic
Location........................................................12
FINANCIAL HIGHLIGHTS......................................13
THE FUND ................................................................13
LIMITATIONS ON THE OFFERING AND
TRANSFER OF SHARES ......................................13
INVESTMENT OBJECTIVE AND POLICIES.........14
PURCHASE OF SHARES......................................... 16
Distribution Agreement for Shares...................... 16
REDEMPTION OF SHARES .................................... 17
Redemption Procedure ........................................ 17
FUND MANAGEMENT ........................................... 18
Directors and Officers ......................................... 18
Compensation of Directors.................................. 20
Indemnification of Directors ............................... 20
INVESTMENT ADVISORY AND
ADMINISTRATIVE ARRANGEMENTS............. 20
Investment Adviser.............................................. 20
Administrator ...................................................... 21
Transfer Agent and Sub-Transfer Agent ............. 21
Custodian............................................................. 22
Banking Relationship .......................................... 22
PORTFOLIO TRANSACTIONS ............................... 22
Transactions Involving Affiliates ........................ 22
DIVIDENDS AND AUTOMATIC
REINVESTMENT.................................................. 23
TAX MATTERS ....................................................... 23
Puerto Rico Taxation of the Fund........................ 24
Puerto Rico Taxation of Fund Shareholders........ 24
United States Taxation of the Fund ..................... 26
United States Taxation of Qualifying
Investors ....................................................... 26
NET ASSET VALUE................................................. 27
DESCRIPTION OF CAPITAL STOCK .................... 28
Common Stock .................................................... 28
PERFORMANCE INFORMATION.......................... 29
EXCHANGING SHARES ......................................... 29
PRIVACY POLICY ................................................... 30
LEGAL MATTERS AND AUDITORS..................... 30
GENERAL INFORMATION..................................... 30
Reports to Shareholders....................................... 30
Additional Information........................................ 30
APPENDIX A
APPENDIX B
APPENDIX C
APPENDIX D
i
SECURITIES IN WHICH THE
FUND MAY INVEST ................A-1
RATINGS OF MUNICIPAL
OBLIGATIONS AND DEBT
SECURITIES.............................. B-1
PRIVACY POLICY..................... C-1
PUERTO RICO RESIDENCY
REPRESENTATION LETTER ..D-1
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to more detailed information included elsewhere in this prospectus and
to the Certificate of Incorporation and By-Laws of the Fund, all other relevant documents referred to herein, and all applicable
statutory and regulatory provisions. A copy of the Certificate of Incorporation and By-Laws of the Fund may be examined at the
offices of Santander Asset Management Corporation located at Santander Tower Building, Suite 1800, Tabonuco Street B-7,
Guaynabo, Puerto Rico 00968-3028.
The Fund ................................................
First Puerto Rico Daily Liquidity Fund, Inc. (the “Fund”) is a continuously
offered, non-diversified, no-load, open-end management investment company.
The Fund is incorporated under the laws of the Commonwealth of Puerto Rico
and is registered as an investment company under the Investment Companies Act
of Puerto Rico (the “Puerto Rico Investment Companies Act”). See “The Fund.”
The Offering...........................................
The Fund engages in a continuous offering of its shares of Class A Common
Stock (the “Shares”) to the public at a price equal to the net asset value (“NAV”)
per share next determined after a purchase order is received and becomes
effective. See “Net Asset Value.”
Purchase of Shares ................................
Shares may be purchased on any day that the New York Stock Exchange
(“NYSE”) is open for trading (a “Business Day”) through the Fund’s distributor,
Santander Securities Corporation, a securities broker-dealer registered in Puerto
Rico (“Santander Securities” or the “Distributor”), or other securities dealers
which have entered into selected dealer agreements with Santander Securities.
The Fund’s Shares may also be purchased in a daily cash sweep option for
participants in resource management programs of Santander Securities or Selected
Dealers. Please note that each dealer may have its own procedures to determine
when an order becomes effective via such dealer’s cash sweep mechanism.
Please contact your financial adviser for more information.
Purchases of Shares are not subject to any initial sales charges (or loads), deferred
sales charges or redemption fees. See “Purchase of Shares.”
The minimum initial investment in Shares is $1.00, and the minimum subsequent
investment in Shares is $1.00. The Fund reserves the right to waive or change
minimums, to decline any order to purchase its Shares and to suspend the offering
of Shares from time to time. See “Fees and Expenses” and “Purchase of Shares.”
Offering and Transfer
Restrictions .........................................
The Shares are being offered for sale exclusively to individuals who maintain
their principal residence in Puerto Rico and to entities that have their principal
office and principal place of business in Puerto Rico, including, but not limited to,
trusts created under the Commonwealth of Puerto Rico that are individual
retirement accounts described under Section 1081.02(a)(3) of the New Puerto
Rico Code (“IRAs”). The trustee of an IRA that makes an election to invest in
Shares of the Fund will, with regards to such investment, be deemed to have
complied with the IRA investment requirements of Section 1081.02(a)(3) of the
New Puerto Rico Code. For purposes of this prospectus, entities having their
principal office and principal place of business in Puerto Rico are considered to
be residents of Puerto Rico.
Investors will be required to deliver a Puerto Rico residency representation letter
in the form of Appendix D to this prospectus. The shares may be sold, pledged,
hypothecated or otherwise transferred exclusively to residents of Puerto Rico.
Shareholders who cease to be Puerto Rico residents will not have available the tax
benefits that make the Fund an attractive investment, and such shareholders have
an obligation to notify Santander Securities or a dealer within 30 days of ceasing
to be Puerto Rico residents, to redeem their shares as soon as it becomes
economically feasible to do so, and to agree not to purchase any more shares
(otherwise their shares may be redeemed automatically by the Fund). See “Risk
FactorsCLimitations on the Offering and Transfer of Shares,” “Limitations on the
Offering and Transfer of Shares” and Appendix DC“Puerto Rico Residency
Representation Letter.”
Investment objective..............................
The Fund’s investment objective is to provide to its shareholders preservation of
capital and current income that is exempt from U.S. federal income taxes and
taxed in Puerto Rico, in the case of Qualifying Individuals, at the special tax rate
of 10% imposed on Ordinary Dividends. See “Investment Objective and
Policies.” See “Tax Matters—Puerto Rico Taxation of Fund Shareholders” for
additional income tax considerations applicable to Qualifying Individuals subject
to alternative minimum tax.
The Fund’s investment objective and certain investment policies are fundamental
policies that may not be changed unless authorized by a majority of the
outstanding Shares of the Fund and by the Office of the Commissioner of
Financial Institutions of Puerto Rico (the “Office of the Commissioner”). All
other investment policies and limitations, however, subject to applicable Puerto
Rico law, may be changed by the Fund’s Board of Directors without the approval
of either the Fund’s shareholders or the Office of the Commissioner.
Investment policies ................................
The Fund pursues its investment objective by investing, under normal market
conditions, at least 67% of its total assets in overnight repurchase agreements with
entities organized under the laws of Puerto Rico, including, but not limited to,
Banco Santander, Santander Securities, the First Puerto Rico Funds and other
Affiliated Persons of the Fund. The Fund is also permitted to invest up to 33% of
its total assets directly in high-quality, short-term, money-market instruments with
maturities of 13 months or less. In furtherance of the foregoing, the Fund will
seek to maintain a dollar-weighted average maturity of 90 days or less. See
“Investment Objective and Policies.”
In addition, the Fund has a regulatory requirement to maintain at least 67% of its
daily assets invested (either directly or through repurchase agreements) in Puerto
Rico Securities.
Redemptions ..........................................
No market presently exists for the Shares and it is not currently anticipated that a
secondary market will develop. The Fund’s Certificate of Incorporation, however,
provides that the Board of Directors of the Fund, not less frequently than once
each year, shall permit shareholders to redeem their Shares at periodic intervals.
The Board of Directors of the Fund has adopted a policy that allows shareholders
to redeem their Shares on each Business Day, at a price per share equal to their
respective NAV per share determined as of the close of trading on the NYSE
based on prices at the time of closing (generally, the NYSE closes at 4:00 p.m.,
prevailing Eastern Time). See “Net Asset Value” and “Redemption of Shares.”
Shares that are redeemed will not be subject to a redemption fee or a contingent
deferred sales charge.
Investment Adviser................................
Santander Asset Management Corporation (“SAM” or the “Investment Adviser”)
is the Fund’s investment adviser responsible for the management of the assets of
the Fund, subject to the discretion of the Fund’s Board of Directors. SAM is a
wholly owned subsidiary of Santander Securities, the Fund’s distributor. See
“Investment Advisory and Administrative ArrangementsCInvestment Adviser.”
Administrator ........................................
SAM is the Fund’s administrator. See “Investment Advisory and Administrative
ArrangementsCAdministrator.”
2
Transfer Agent.......................................
Banco Santander Puerto Rico (“Banco Santander”) is the Fund’s transfer agent.
Banco Santander and the Fund have engaged BNY Mellon Asset Servicing to act
as sub-transfer agent. See “Investment Advisory and Administrative
ArrangementsCTransfer Agent and Sub-Transfer Agent.”
Custodian ...............................................
Citibank, N.A. is the Fund’s custodian. See “Investment Advisory and
Administrative ArrangementsCCustodian.”
Distribution Agreement ........................
Under the Fund’s Distribution Agreement with Santander Securities, the Fund
pays Santander Securities an account maintenance and distribution fee, accrued
daily and paid monthly, at the annual rate of 0.25% of the average daily net assets
of the Fund (as defined under “Investment Advisory and Administration
Arrangements CInvestment Adviser”). See “Purchase of SharesCDistribution
Agreement for Shares.”
Dividends and Automatic
Reinvestment.......................................
The Fund declares a dividend of substantially all of its net investment income on
each Business Day. This determination is made once during each such day. Only
shareholders of record at the time of such determination will be entitled to such
dividend. Net investment income consists of the daily accrued interest on
repurchase agreements and other investments of the Fund, less accrued expenses.
Such dividends are distributed monthly on the second Friday of the following
calendar month (or, if such day is not a Business Day, on the next succeeding
Business Day) and will automatically be reinvested in Fund shares at NAV, less
any applicable withholding tax. If a shareholder redeems his shares in full
between monthly dividend payment dates, all dividends accrued up to and
including the date of liquidation will be paid with the proceeds of the redemption
of shares. See “Redemption of Shares.” Dividends to Qualifying Individuals,
estates and trust consisting of Ordinary Dividends (as defined under “Tax
Matters”) will be distributed net of a 10% Puerto Rico income tax withholding,
which will be automatically withheld at source by the Fund or its paying agent
(including the Distributor or a selected dealer).
The automatic reinvestment of dividends and distributions will not relieve
participants of any Puerto Rico income tax that may be payable (or required to be
withheld) on such dividends or distributions. See “Tax Matters.”
Taxation..................................................
In the opinion of Pietrantoni Méndez & Alvarez LLP, counsel to the Fund,
(i)
amounts distributed as Ordinary Dividends (see “Tax Matters”) on the
Fund’s Shares will be subject to regular Puerto Rico income tax at a 10%
preferential rate in the case of individuals, estates or trusts;
(ii) individual shareholders should take into consideration Ordinary Dividends
for computing their net income subject to alternative minimum tax;
(iii) Qualifying Corporations (see “Tax Matters”) will be subject to regular
income tax and alternative minimum tax on Ordinary Dividends and will qualify
for an 85% dividends received deduction for Ordinary Dividends received;
(iv) amounts distributed as Exempt Dividends (see “Tax Matters”) on the
Fund’s Shares will be exempt from (a) from Puerto Rico regular income tax and
alternative minimum tax, provided that such amounts are distributed from the
income earned by the Fund from its investments in Puerto Rico or U.S.
obligations; and (b) municipal license taxes in the case of investors that are
individuals, estates or trusts;
3
(v)
by purchasing shares of the Fund, investors will be irrevocably agreeing to
be subject to a 10% Puerto Rico income tax withholding that will be automatically
withheld at source by the Fund or its paying agent (including the Distributor or a
selected dealer) on amounts distributed as Ordinary Dividends;
(vi) the Shares will be exempt from Puerto Rico personal property taxes and
will not be subject to U.S. federal and Puerto Rico estate taxes in the hands of
certain investors who are residents of Puerto Rico;
(vii) the Fund will not be engaged in a U.S. trade or business and will not be
subject to U.S. federal income tax on portfolio interest; and
(viii) the dividends paid by the Fund will constitute income from sources within
Puerto Rico and as such will not be subject to U.S. federal income tax when
received by (a) individuals who are bona fide residents of Puerto Rico during the
entire taxable year of receipt, (b) by Puerto Rico corporations that are not engaged
in a U.S. trade or business to which the dividends are effectively connected, or (c)
Puerto Rico corporations that are engaged in a U.S. trade or business, but for
which its investment in the Fund is not effectively connected to its U.S. trade or
business.
Transactions Involving
Affiliates ..............................................
The Fund may enter into various types of transactions with affiliated parties as
described in this prospectus. All transactions with affiliates will be subject to
procedures adopted by the Board of Directors and, particularly, the independent
Directors of the Board, in an effort to address potential conflicts of interest. There
is no assurance that the procedures will be effective. See “Portfolio
TransactionsCTransactions Involving Affiliates.”
4
FEES AND EXPENSES
The following table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund. Annual Fund
operating expenses are paid out of the Fund’s assets and include fees for portfolio management, maintenance of shareholder
accounts, shareholder servicing, accounting and other expenses. You do not pay these fees directly but, as the example below
shows, these costs are borne indirectly by all Fund shareholders.
Shareholder Fees (paid directly from your investment)
Maximum Initial Sales Charge or Load (as a percentage of offering price) ..........
Maximum Deferred Sales Charge (as a percentage of offering price)...................
Maximum Redemption Fee (as a percentage of offering price).............................
Annual Fund Operating Expenses (as a percentage of average daily net assets)
Investment Advisory Fees(1) ..................................................................................
Account Maintenance and Distribution Fee(1) .......................................................
Maximum Administration Fee(1)(2) .........................................................................
Other Expenses(3) ...................................................................................................
Total Annual Fund Operating Expenses(4) .............................................................
_______________________
None
None
None
0.40%
0.25%
0.13%
0.12%
0.90%
(1)
Investment advisory fees, which are indirectly paid by shareholders, and administrative fees, will be charged as a percentage of average
daily net assets. Account maintenance and distribution fees to support the sale and distribution of Shares and services provided to
investors by Santander Securities or other brokers or financial institutions, which also are indirectly paid by shareholders, will be charged
as a percentage of average daily net assets.
(2)
Administration fees are reduced gradually for average daily net assets of the Fund above $250,000,000, down to a minimum of 0.07% for
average daily net assets above $500,000,000. See “Investment Advisory and Administrative AgreementCAdministrator.”
(3)
These expenses do not include interest payments on borrowed funds, taxes, brokerage commissions or extraordinary expenses paid or
payable by the Fund.
(4)
There is no guarantee that actual expenses will be the same as those shown on the table. Until at least May 31, 2011, SAM has agreed to
reimburse the Fund to the extent that total annual operating expenses (including the investment advisory fees but excluding interest,
taxes, brokerage commissions and extraordinary expenses) exceed 0.90% of average daily net assets. Under the Investment Advisory
Agreement between SAM and the Fund, any reduction in SAM’s management fees as a result of SAM’s fee waivers may be recovered
by SAM within the first two fiscal years following such fee waiver if overall Fund expenses fall below these percentage limitations.
Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual
funds. This example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. This example also assumes: (i) a 1% return each year, (ii) the deduction of the total annual
operating expenses described above, and (iii) the reinvestment of all dividends and other distributions at net asset value
(“NAV”).
Total Operating Expenses
_______________________
1 year
$90
3 years
$270
5 years
$451
10 years
$905
This example should not be considered a representation of future expenses or annual rates of return. Actual expenses or
annual rates of return may be more or less than those assumed for purposes of the example.
5
RISK FACTORS AND SPECIAL CONSIDERATIONS
There is a risk that you could lose all or a portion of your investment in the Fund, and that the income you receive from your
investment may vary.
The Fund expects there will be no secondary market for its Shares, although the Board of Directors of the Fund has adopted
a policy whereby Shares are redeemable on a daily basis. The Fund should not be considered a vehicle for trading purposes.
The Fund is not a money market fund as defined in the rules under the U.S. Investment Company Act of 1940, as amended
(the “1940 Act”), and presents significantly greater risks to investors than such a fund. The Fund will not be subject to the
requirements of Section 2(a)(7) of the 1940 Act, which contains, among other things, strict issuer diversification, maturity, and
credit-quality requirements applicable to a money market fund registered under the 1940 Act. Furthermore, the Fund was not
eligible to participate in the U.S. Treasury Department’s Temporary Guarantee Program for Money Market Funds, which
program guaranteed, through September 18, 2009, the share price of eligible money market funds registered under the 1940 Act
that applied for and paid a fee to participate in the program, and would probably not be eligible to participate in any similar
program that may be established by the U.S. Treasury Department in the future. You have a greater risk of losing money than if
you invested in a U.S. registered money market fund.
Yield Risk
The yield on the Shares will vary from period to period depending on facts including, but not limited to, market conditions,
the time of the Fund’s investment in portfolio securities, the securities comprising the Fund’s portfolio, changes in interest rates,
and changes in the Fund’s net assets and its operating expenses. Consequently, the Fund cannot guarantee any particular yield
on the Shares, and the yield for any given period is not an indication or representation of future yields on the Shares.
Principal Risk
In addition to the risks identified above and below, the Fund’s investments may be negatively affected by the broad
investment environment in the U.S., Puerto Rico and international securities markets, which may be influenced by, among other
things, interest rates, inflation, politics, fiscal policy and current events. Therefore, as with any fund that invests in securities,
the Fund’s net asset value may fluctuate. You may experience a decline in the value of your investment and could lose money.
While the Fund intends to maintain a stable net asset value of $1.00 per Share, there can be no assurance that it will be able
to do so.
The Shares of the Fund are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank or any
corporation, and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Manager Risk
The Fund is subject to manager risk, which is the chance that poor security selection by the investment adviser will cause
the Fund to underperform other funds with a similar investment objective.
Special Considerations Regarding Transactions Involving Affiliates; Conflicts of Interest
The Fund will not be registered under the 1940 Act, and, therefore, will not be subject to the restrictions contained therein
regarding, among other things, transactions between the Fund on the one hand and SAM and its affiliates, including, the
Distributor, on the other hand. Furthermore, certain directors and officers of the Fund are also employees, officers or directors of
SAM, Santander Securities and/or their respective affiliates, including Banco Santander Puerto Rico, the transfer agent of the
Fund.
The Fund anticipates that overnight repurchase agreements between the Fund and other funds in the First Puerto Rico
Family of Funds or other affiliates of SAM will be the primary means by which the Fund will comply with its requirement to
maintain at least 67% of its total assets invested in “Overnight Repurchase Agreements” with “Overnight Repo Counterparties”
(as such terms are defined in “Investment Objective and Policies”). As a result, the Fund may systematically invest over 67% of
its assets, and may invest up to 100% of its assets, in repurchase transactions with affiliates. Furthermore, it is anticipated that
secondary-market transactions will take place in which affiliates of the Fund (including the Distributor) may be the primary or
only dealer in a particular portfolio security being purchased or sold by the Fund or obtained as collateral for repurchase
6
agreements. In that event, independent sources for valuation or liquidity of the security may be limited or nonexistent. The
Fund may invest a substantial portion of its assets in those securities. The Fund may also make investments in securities issued
by, or make deposits with, an affiliated party. In addition, the Fund may also purchase obligations issued by other investment
companies advised by Santander Asset Management, which are affiliates of the Fund. As a result of such affiliated transactions
and other dealings, the interests of the affiliated party may conflict with those of the Fund as to the price and other terms of the
transaction in which they engage. Such portfolio transactions will be carried out on an arm’s length basis and will be subject to
procedures adopted by the Board of Directors of the Fund and particularly, by the Independent Directors, in an effort to address
potential conflicts of interest that may arise from such transactions. There is no assurance that the procedures will be effective.
The procedures also may be amended from time to time in the sole discretion of the Board of Directors, including the
Independent Directors.
Affiliated parties may also engage, at the present or in the future, in business transactions with or related to any one of the
issuers of the Fund’s investment assets, or with the competitors of such issuers, as well as provide them with investment
banking, asset management, trust, or advisory services, including merger and acquisition advisory services. Certain affiliated
parties may also consider acquiring certain issuers of the Fund’s investment assets, or compete with them directly. These
activities, both known and unknown, may present a conflict or various conflicts between an affiliated party and the interests of
the Fund. Affiliated parties may also publish or have published research reports on one or more of such issuers, and may have
expressed opinions or provided recommendations inconsistent with the purchasing or holding of the securities of such issuers.
Any of these activities, both known and unknown, may affect the market value of the securities issued by them, and therefore
may affect Fund’s ability to maintain a stable net asset value of $1.00 per Share.
Santander Asset Management and its affiliates may have interests that compete with those of the Fund because, among other
things, Santander Asset Management and its affiliates will act in numerous capacities in connection with the Fund and the other
funds in the First Puerto Rico Family of Funds in which the Fund invests and will engage in transactions directly with the Fund.
Special Considerations Regarding Repurchase Agreements
In the event of default by a repurchase agreement counterparty under any repurchase agreement, including by an Overnight
Repo Counterparty under an Overnight Repurchase Agreement, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the securities underlying such repurchase agreements. In the event of a default,
instead of the contractual fixed rate of return, the rate of return to the Fund shall be dependent upon intervening fluctuations of
the market values of such underlying securities and the accrued interest on the underlying securities. In such event, the Fund
would have rights against the respective counterparty for breach of contract with respect to any losses resulting from market
fluctuations following the failure of such counterparty to perform.
In general, for tax purposes, repurchase agreements are treated as collateralized loans secured by the securities “sold.”
Therefore, amounts earned under such agreements will be considered taxable income.
The yield on repurchase agreements depends on a variety of factors, including, but not limited to, general municipal and
fixed-income security market conditions, the amount being invested, the financial condition of the respective counterparty, and
the maturity and credit quality of the securities involved in each transaction.
The Fund will enter into Overnight Repurchase Agreements exclusively with entities organized under the laws of Puerto
Rico, including, but not limited to, Banco Santander, Santander Securities, the First Puerto Rico Funds and other Affiliated
Persons of the Fund. The Fund anticipates that overnight repurchase agreements between the Fund and other funds in the First
Puerto Rico Family of Funds or other affiliates of SAM will be the primary means by which the Fund will comply with its
requirement to maintain at least 67% of its total assets invested in Overnight Repurchase Agreements with Overnight Repo
Counterparties. As a result, the Fund may systematically invest over 67% of its assets, and may invest up to 100% of its assets,
in repurchase transactions with affiliates.
Special Considerations Regarding Puerto Rico Securities
Under normal market conditions, the Fund intends to invest at least 67% of its total assets in Puerto Rico Securities, either
directly or through repurchase agreements. As a result, the Fund will be less diversified geographically than a fund investing
across many states and therefore has greater exposure to adverse economic and political changes in Puerto Rico.
Certain Puerto Rico Securities held by the Fund may permit the issuer to call or redeem the obligations, in whole or in part,
at the issuer’s option. If an issuer were to redeem Puerto Rico Securities held by the Fund during a time of declining interest
7
rates, the Fund might realize capital gains or losses at a time when it would not otherwise do so and the Fund might not be able
to reinvest the proceeds of the redemption in Puerto Rico Securities providing as high a level of income as the obligations that
were redeemed. The Fund, however, may purchase an issuer’s right to call all or a portion of such Puerto Rico Securities for
mandatory tender for purchase. See “Investment Objective and PoliciesCOther Investment Policies and Practices.”
Pursuant to a ruling letter (the “Commissioner’s Ruling”) issued to the Fund by the Office of the Commissioner of Financial
Institutions of Puerto Rico (the “Office of the Commissioner”), the Fund may invest more than 25% of its assets in Puerto Rico
Municipal Obligations, Puerto Rico Mortgage-Backed Obligations and obligations issued by the U.S. Government or any of its
political subdivisions, agencies or instrumentalities and by any state of the United States of America, or the political
subdivisions, agencies or instrumentalities of any such state. Since the Fund may invest a relatively high percentage of its assets
in the obligations of a limited number of issuers, the Fund may be more susceptible, if it decided to exercise this option, than a
more widely diversified fund to any single economic, political or regulatory occurrence.
The obligations of the counterparty under repurchase agreements and of certain issuers of Puerto Rico Securities are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, which may result in
delays and costs to the Fund if a party becomes insolvent. Furthermore, U.S. federal and Puerto Rico laws may be enacted that
adversely affect the tax-exempt status of interest on Puerto Rico Securities or of exempt-interest dividends received by the
Fund’s shareholders or that impose other constraints upon the enforcement of such obligations. It is also possible that, as a result
of litigation or other conditions, the power or ability of the counterparty to meet its obligations under repurchase agreements and
of issuers of Puerto Rico Securities to meet their obligations for the repayment of principal and payment of interest on their
Puerto Rico Securities, respectively, may be materially and adversely affected.
There presently are a limited number of participants in the market for certain Puerto Rico Securities. In addition, certain
Puerto Rico Securities may have periods of illiquidity. These factors may affect the Fund’s ability to acquire or dispose of such
Puerto Rico Securities, as well as the price paid or received upon such acquisition or disposition. In addition, investment by the
Fund in Puerto Rico Securities is subject to their availability in the open market.
The yield on a Puerto Rico Obligation, including the Overnight Repurchase Agreements, depends on a variety of factors,
including general municipal and fixed-income security market conditions, the financial condition of the issuer (or Overnight
Repo Counterparty, as appropriate), the size of the particular offering, the maturity, credit quality and rating of the issue and
expectations regarding changes in income tax rates. Generally, the longer the maturity of a Puerto Rico Obligation, the higher
the yield and the greater the volatility. The market value of Puerto Rico Securities and, accordingly, the Fund’s net asset value
per share, normally will vary inversely with changes in interest rates. Such changes in the values of Puerto Rico Securities held
by the Fund will not affect the interest income derived from them but will affect the net asset value of the Shares.
Special Considerations Regarding Mortgage-Backed Securities
The Fund intends to enter into repurchase agreements backed by mortgage-backed securities, and may also invest directly in
mortgage-backed securities. Mortgage-backed securities, in general, differ from investments in traditional debt securities in
that, among other things, principal may be prepaid at any time due to prepayments by the obligors on the underlying obligations.
Since a portion of the assets of the Fund is expected to be invested in mortgage-backed securities (either directly or through
repurchase agreements), the potential for increasing the Fund’s exposure to these and other risks related to such securities might
cause the market value of either the Fund’s direct investments or the collateral provided under the Fund’s repurchase agreements
to fluctuate more than otherwise would be the case.
Prepayments are influenced by a variety of economic, geographic, demographic and other factors, including, among others,
prevailing mortgage market interest rates, local and regional economic conditions and home owner mobility. Generally,
however, prepayments will increase during periods of declining interest rates and decrease during periods of rising interest rates.
The types of mortgaged-backed securities in which the Fund may invest are described in Appendix AC “Securities in Which
the Fund May Invest.” One such type of security are “PAC Bonds.” PAC Bonds are a particular type of mortgage-backed
security designed to provide relatively predictable payments of principal provided that, among other things, the actual
prepayment experience on the underlying mortgage loans falls within a contemplated range. If the actual prepayment experience
on the underlying mortgage loans is at a rate faster or slower than the contemplated range, or if deviations from other
assumptions occur, principal payments on a PAC Bond may be greater or smaller than predicted. The magnitude of the
contemplated range varies from one PAC Bond to another. A narrower range increases the risk that prepayments will be greater
or smaller than contemplated.
8
Special Considerations Regarding Puerto Rico Municipal Obligations
The Fund may invest in securities issued by the Commonwealth of Puerto Rico and its political subdivisions, agencies,
public corporations and instrumentalities, as well as securities guaranteed by the Commonwealth of Puerto Rico or any of its
instrumentalities (“Puerto Rico Municipal Obligations”), either directly or through repurchase agreements. Certain of the Puerto
Rico Municipal Obligations in which the Fund may invest, whether directly or through repurchase agreements, present their own
risks. The value of Puerto Rico Municipal Obligations may be subject to greater volatility than other municipal securities. In
addition, while the Fund does not currently intend to concentrate its investments in any particular industry, it may in the future
determine to so concentrate upon approval of the Board of Directors. There are various types of industries that may be
represented by investments in municipal securities, the principal categories of which are described herein. See Appendix A
C“Securities in Which the Fund May Invest” for a more complete discussion of the types of Puerto Rico Municipal Obligations
and their related risks.
Certain of the Puerto Rico Municipal Obligations in which the Fund may invest (either directly or through repurchase
agreements) are currently rated in the lowest investment grade category by Moody’s Investors Service, Inc. (“Moody’s”) and
Standard & Poor’s Ratings Services, a Division of The McGraw Hill Companies (“S&P”). A further ratings downgrade by
Moody’s or S&P affecting the Puerto Rico Municipal Obligations held by the Fund that are currently rated in the lowest
investment grade category would result in a decrease in the value of such securities and in a corresponding decrease in the net
asset value of the Fund. Furthermore, such downgrade in would also reduce the market for such securities, which could
negatively impact the Fund’s ability to dispose of such securities or the price the Fund may receive in any such sale. For further
information regarding factors affecting the Fund’s investments in below investment grade securities, see “Risk FactorsCLowerRated and Below Investment Grade Securities.”
Opinions relating to the validity of Puerto Rico Municipal Obligations and to the exemption of interest thereon from Puerto
Rico income tax are rendered by bond counsel to the issuer at the time of issuance. Neither the Fund nor the Investment Adviser
will review the proceedings relating to the issuance of Puerto Rico Municipal Obligations or the bases for such opinions.
Further, Puerto Rico laws may be enacted that adversely affect the tax-exempt status of interest on Puerto Rico Municipal
Obligations or of the exempt-interest dividends received by the Fund’s shareholders or that impose other constraints upon
enforcement of such obligations. It is also possible that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the repayment of principal and payment of interest on their Puerto Rico Municipal
Obligations may be materially and adversely affected.
Special Considerations Regarding Fixed-Income Securities
The Fund intends to invest in Puerto Rico fixed-income securities and in U.S. fixed-income securities, either directly or
through repurchase agreements. Investments in fixed-income securities may subject the Fund to risks, including the following:
Interest-Rate Risk: When interest rates decline, the market value of fixed-income securities tends to increase. A fundamental
risk of these securities, however, is that their market value will fall if interest rates rise. The volatility of a security’s market
value will differ depending upon the security’s duration, the issuer and the type of instrument. Since the value of a fixed-income
portfolio will generally decrease when interest rates rise, the Fund’s net asset value may likewise decrease.
Default Risk/Credit Risk: Investments in fixed-income securities are subject to the risk that the issuer of the security could
fail to make principal and interest payments when due, causing the Fund to sustain losses on such investments.
Call Risk and Extension Risk: Fixed-income securities may be subject to both call risk and extension risk. Call risk exists
when the issuer may exercise its right to pay principal on an obligation earlier than scheduled, which would cause cash flows to
be returned earlier than expected. This typically results when interest rates have declined and the Fund will suffer from having to
reinvest in lower-yielding securities. Extension risk exists when the issuer may exercise its right to pay principal on an obligation
later than scheduled, which would cause cash flows to be returned later than expected. This typically results when interest rates
have increased, and the Fund will suffer from the inability to invest in higher yield securities.
Special Considerations Regarding CMOs
The Fund intends to invest in collateralized mortgage obligations (“CMOs”), either directly or through repurchase
agreements. CMOs exhibit similar risks to those of mortgage-backed securities but also present certain special risks. CMO
classes may be specially structured in a manner that provides a variety of investment characteristics, such as yield, effective
maturity and interest-rate sensitivity. As market conditions change, however, particularly during periods of rapid or
9
unanticipated changes in interest rates, the ability of a CMO class to provide the anticipated investment characteristics and
performance may be significantly reduced. These changes may result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
Special Considerations Regarding Asset-Backed Securities
The Fund intends to invest in asset-backed securities, either directly or through repurchase agreements. Asset-backed
securities present risks similar to those of mortgage-backed securities. However, in the case of many asset-backed securities, the
prepayment rates on underlying assets have historically been less influenced by market rate fluctuations and therefore, have been
more stable. The frequent absence of a government guarantee creates greater exposure to the credit risk on underlying
obligations and depending on the structure, the credit risk of the sponsor of such obligations.
Political Risk
Political developments in Puerto Rico and in the United States could adversely affect the tax status of dividends and the
interest paid on the Fund’s securities. These developments could also cause the value of the Fund’s investments to fall.
Credit Risk
Credit risk is the risk that the issuer will be unable to pay the interest or principal when due. The degree of credit risk
depends on both the financial condition of the issuer and the terms of the obligation.
Special Considerations Regarding the Fund’s Non-Diversified Status
The Fund is classified as a “non-diversified” management investment company. This means that the Fund may invest a
greater portion of its assets in a single issuer than would be the case if the Fund were classified as a “diversified” management
investment company. As a non-diversified management investment company, the Fund may invest up to 25% of its total assets
in the securities of a single issuer; provided that this limitation does not apply to securities issued or guaranteed by the
Commonwealth of Puerto Rico, the U.S. Government, a state of the United States, or any of their respective political
subdivisions, agencies or instrumentalities (including Fannie Mae, Freddie Mac and GNMA mortgage-backed securities) under
the Commissioner’s Ruling. Accordingly, the Fund may be subject to greater risk with respect to its portfolio securities than a
“diversified” fund because changes in the financial condition or market assessment of a single issuer may cause greater
fluctuation in the net asset value of the Fund’s shares. In addition, the Fund may be more exposed to any single economic,
political or regulatory occurrence than a more widely diversified fund.
Lower-Rated and Below Investment Grade Securities
The Fund may invest, either directly or through repurchase agreements, in obligations rated in the lowest investment-grade
category (i.e., rated BBB by S&P, Baa by Moody’s or BBB by Fitch Ratings (“Fitch”) without regard to any gradations within
such categories) or in obligations rated below investment grade (i.e., below BBB− by S&P, Baa3 by Moody’s or BBB− by
Fitch). Obligations rated in the lowest investment grade category are generally regarded as having adequate capacity to pay
interest and repay principal, but may have some speculative characteristics. Obligations rated below investment grade may have
speculative characteristics, including the possibility of default or bankruptcy of the issuers of such securities, market price
volatility based upon interest rate sensitivity, questionable creditworthiness and relative liquidity of the secondary trading
market. Because lower-rated bonds have been found to be more sensitive to adverse economic changes or individual corporate
developments and less sensitive to interest rate changes than higher-rated investments, an economic downturn could disrupt the
market for lower-rated bonds and adversely affect the value of outstanding bonds and the ability of issuers to repay principal and
interest. In addition, in a declining interest rate market, issuers of lower-rated bonds may exercise redemption or call provisions,
which may force the Fund, to the extent it owns such securities, to replace those securities with lower-yielding securities. This
could result in a decreased return. The Investment Adviser is under no obligation to sell portfolio securities that are downgraded
below investment grade after these securities are purchased by the Fund. If a portfolio security is downgraded, the Investment
Adviser will consider factors such as price, credit, risk, market conditions, the financial condition of the issuer and prevailing
and anticipated interest rates in determining whether to sell or hold the security as a portfolio investment.
Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. In addition, it is possible that S&P, Moody’s, Fitch and other ratings agencies
might not change in a timely manner their ratings of a particular issue to reflect subsequent events. The Investment Adviser is
not obligated to sell portfolio securities that are downgraded below investment grade.
10
Special Considerations Regarding Illiquid Securities
There presently are a limited number of participants in the market for certain Puerto Rico securities or other securities that
may be acquired by the Fund the disposition of which may be limited by Puerto Rico or federal securities laws. In addition,
certain Puerto Rico securities may have periods of illiquidity. The term “illiquid securities” for this purpose means securities
that cannot be disposed of within a reasonable period of time in the ordinary course of business at approximately the amount at
which the Fund has valued the securities and includes, among other things, securities subject to contractual restrictions on resale
that hinder the marketability of the securities. Illiquid securities also may include certain of the derivative instruments in which
the Fund may invest. To the extent the Fund invests in illiquid securities, the Fund may not be able to liquidate readily such
investments, particularly at a time when it is advisable to do so to minimize losses to the Fund, and would have to sell other
investments if necessary to raise cash to meet its obligations. The Fund will seek to maintain a dollar-weighted average maturity
of 90 days or less in its investment portfolio in order to limit the effect of owning illiquid securities
Special Considerations Regarding the Limitation on the Offering and Transfer of Shares
The Shares of the Fund are being offered and only may be sold, pledged, hypothecated or otherwise transferred to
individuals whose principal residence is in Puerto Rico, or to corporations and other business organizations whose principal
place of business and principal office are in Puerto Rico. Prior to the initial sale and any subsequent transfer of Shares of the
Fund, each offeree and transferee will be required to represent in writing to the Fund, Santander Securities or any other brokerdealer participating in the distribution of the shares, that these conditions to transfer are satisfied. Appendix D to this prospectus
contains the form of representation letter which must be delivered by each purchaser of the Shares prior to the purchase and
delivery of such Shares. Any transfer of the Shares to a transferee who has not so provided a letter of representation will be null
and void.
Shareholders of the Fund who cease to be residents of Puerto Rico will no longer have available to them the tax benefits that
make the Fund an attractive investment, and within 30 days from ceasing to be residents of Puerto Rico, such shareholders have
an obligation to notify Santander Securities or a dealer of such change of residency, to liquidate their investment in the Shares as
soon as it becomes economically feasible to do so, and to agree not to purchase any more Shares. The Fund reserves the right to
redeem any Shares owned by a shareholder who ceases to be a resident of Puerto Rico.
Special Considerations Regarding Issuer-Specific Changes and Other Risks
The value of an individual security or particular type of security can be more volatile than the markets as a whole and can
perform differently than the value of the market as a whole. Bonds of certain sectors have special risks. For example, the
healthcare industry can be affected by federal or Puerto Rico legislation, electric utilities are subject to governmental regulation
and private activity bonds are not government backed.
Special Considerations Regarding Individual Retirement Accounts
The Shares of the Fund constitute “general assets in Puerto Rico” eligible for investment by IRA trusts. As a general matter,
IRA trusts may achieve a higher rate of return by investing in investments with longer maturities rather than investing in Shares
of the Fund.
Change of Law Risk
Legislation affecting Puerto Rico securities, Puerto Rico and U.S. investment companies, taxes and other matters related to
the business of the Fund is constantly being considered by the Legislature of Puerto Rico and the U.S. Congress. In addition, the
Office of the Commissioner has granted certain waivers and rulings to the Fund that do not constitute a precedent binding
thereon. There can be no assurance that legislation enacted or regulations promulgated after the date of this prospectus will not
have an adverse effect on the operations of the Fund, the economic value of the Shares of the Fund, or the tax consequences of
the acquisition or redemption of Shares in the Fund.
11
Special Considerations Regarding Geographic Location
Puerto Rico’s geographic location makes it susceptible to the effects of tropical storms, hurricanes, tsunamis and
earthquakes. In the event that Puerto Rico were to suffer the effects of a tropical storm, hurricane, tsunami or earthquake,
electric power and other infrastructure on the island may be adversely affected, which could, in turn, negatively affect the
Investment Adviser’s ability to provide various investment services, including, but not limited to, carrying out portfolio
transactions, providing investment research and/or supervising the Fund’s assets and the Administrator’s ability to provide
various administrative services, including, but not limited to, accounting services and computing the Fund’s net asset value on a
particular date.
12
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund’s financial performance. The following per-share
data and ratios have been derived from information provided in the Fund’s audited financial statements for the fiscal years ended
December 31, 2010, 2009, 2008, 2007 and 2006. The Fund’s past performance is not necessarily an indication of its future
performance. Further information about the performance of the Fund is contained in the Fund’s most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing the Fund at the telephone number or address
provided in the inside front cover of this prospectus.
2010
Net asset value, beginning of the year................. $ 1.00
Income from investment operations:
Net investment income..................................... 0.000
Total income from investment operations ........... 0.000
Less distributions from:
Net investment income..................................... (0.000)
Net asset value, end of year.............................. $ 1.00
Total return(1).......................................................
(1)
(2)
(3)
(4)
0.00%
2009
$ 1.00
0.001
0.001
2008
$ 1.00
0.034
0.034
2007
$ 1.00
0.034
0.034
2006
$ 1.00
0.041
0.041
(0.001) (0.034) (0.034) (0.041)
$ 1.00
$ 1.00
$ 1.00
$ 1.00
0.05%
0.99%
3.46%
4.13%
Ratios/Supplemental Data:
Total expense ratio(2) (4) .................................... 0.74%
0.90%
0.90%
0.90% 0.81%(3)
(4)
Net investment income ratio .......................... 0.01%
0.08%
1.47%
4.11%
4.09%
Net assets, end of year (in thousands) .............. $76,011 $94,138 $93,468 $106,107 $90,022
___________________
Total return assumes reinvestment of all dividends at net asset value. Total return would have been lower in the absence of
a waiver.
The total expense ratio includes the fees waived by the Investment Adviser for the years ended December 31, 2010, 2009,
2008, 2007 and 2006. The total expense ratio, excluding fees waived by the Investment Adviser, would have been 0.94%,
0.94%, 0.96%, 0.95% and 0.82% for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
The total expense ratio includes fees voluntary reimbursed by Smith Barney Fund Management, the Fund’s former
investment adviser, regarding the transfer agency fees paid by the Fund for the period from July 10, 1997 to September 30,
2005. The total expense, excluding reimbursed fees, would have been 0.89%.
Based on average net assets of $110,911,631, $101,747,795, $121,102,871, 168,524,323 and $87,142,570 for the years
ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
THE FUND
The Fund is a continuously offered, non-diversified, no-load, open-end management investment company. The Fund was
incorporated under the name “Puerto Rico Daily Liquidity Fund Inc.” under the laws of the Commonwealth of Puerto Rico on
April 18, 1997, and changed its name to “Smith Barney Puerto Rico Daily Liquidity Fund Inc.” on April 30, 2002. On
December 1, 2006, the Fund changed its name to “First Puerto Rico Daily Liquidity Fund, Inc.” The Fund is registered under
the Puerto Rico Investment Companies Act. The Fund’s principal office is located at Santander Tower Building, Suite 1800,
Tabonuco Street B-7, Guaynabo, Puerto Rico 00968-3028, and its telephone number is (787) 759-5340.
LIMITATIONS ON THE OFFERING AND TRANSFER OF SHARES
The Shares of the Fund offered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the
“1933 Act”), or the securities laws of any state of the United States of America and the Fund has not been registered under the
U.S. Investment Company Act of 1940, as amended (the “1940 Act”). Consequently, the shares may be offered, sold, pledged,
hypothecated or otherwise transferred exclusively to Puerto Rico residents. Transferees of the shares are required to deliver to or
to the Distributor or a selected dealer, and to the Fund, a Puerto Rico residency representation letter in the form of Appendix D
to this prospectus. Santander Securities and the selected dealers will be contractually obligated to the Fund to obtain such letter
of representation in proper form. Any transfer of the shares to a transferee who has not so provided such a letter will be null and
void. Shareholders who cease to be Puerto Rico residents will not longer have available the tax benefits that make the Fund an
attractive investment, and such shareholders have an obligation to notify Santander Securities or a dealer within 30 days of
ceasing to be Puerto Rico residents, to redeem their shares as soon as it becomes economically feasible to do so, and to agree not
13
to purchase any more shares. The Fund reserves the right to redeem shares of any shareholder that ceases to meet these
residency requirements.
INVESTMENT OBJECTIVE AND POLICIES
The Fund’s investment objective is to provide to its shareholders preservation of capital and current income that is exempt
from U.S. federal income taxes and taxed in Puerto Rico, in the case of Qualifying Individuals, at the special tax rate of 10%
imposed on Ordinary Dividends. See “Tax Matters—Puerto Rico Taxation of Fund Shareholders” for additional income tax
considerations applicable to Qualifying Individuals subject to alternative minimum tax.
The Fund’s investment objective and certain investment policies are fundamental policies that may not be changed unless
authorized by a majority of the outstanding Shares of the Fund and by the Office of the Commissioner of Financial Institutions
of Puerto Rico (the “Office of the Commissioner”). All other investment policies and limitations, however, subject to applicable
Puerto Rico law, may be changed by the Fund’s Board of Directors without the approval of either the Fund’s shareholders or the
Office of the Commissioner.
The Fund will pursue its objective by investing, under normal market conditions, at least 67% of its total assets in overnight
repurchase agreements (the “Overnight Repurchase Agreements”) exclusively with entities organized under the laws of Puerto
Rico, including, but not limited to, Banco Santander, Santander Securities, the First Puerto Rico Funds or any other Affiliated
Person of the Fund (an “Overnight Repo Counterparty”). As a result, the Fund may systematically invest over 67% of its assets
in repurchase transactions with affiliates. The Fund is also permitted to invest up to 33% of its total assets directly in high
quality, short-term, money market instruments with maturities of 13 months or less. In furtherance of the foregoing, the Fund
will seek to maintain a dollar-weighted average maturity of 90 days or less. The securities to be acquired by the Fund directly or
under Overnight Repurchase Agreements shall consist exclusively of securities that SAM, determines, in accordance with the
guidelines established by the Fund’s Board of Directors, to be Permissible Securities (as defined below).
Overnight Repurchase Agreements are transactions in which an Overnight Repo Counterparty will agree, upon entering into
the contract with the Fund, to repurchase on the next business day the securities sold to the Fund at a mutually agreed upon time
and price, thereby determining on a daily basis the yield to the Fund on each such investment. The rate at which the securities
underlying the Overnight Repurchase Agreements (the “Underlying Securities”) will be repurchased by an Overnight Repo
Counterparty will be determined on a daily basis pursuant to a formula approved by the Fund’s Board of Directors, which
formula will provide a minimum price equal to the simple average of the overnight repurchase transaction rates (bid side) for
U.S. Treasuries, mortgage backed securities and real estate mortgage investment conduits (REMICs) as posted daily on page 15
of the Reuters (formerly Telerate) information systems at 10:00 a.m. (prevailing Eastern Time), reduced by 25 basis points
(0.25%). An Overnight Repo Counterparty, at its discretion, may offer a higher rate.
The securities to be acquired directly by the Investment Adviser on behalf of the Fund will consist only of obligations with
maturities of 13 months or less that, at the time of investment, the Investment Adviser determines present minimal credit risk and
are either (i) rated, or otherwise shall have been issued by entities that have received ratings with respect to other short-term debt
securities, in one of the two highest short-term rating categories of Moody’s Investors Service, Inc. or Standard & Poor’s, a
division of The McGraw Hill Companies (the “Rating Agencies”), without regard to any subcategory, or in the alternative, have
received an equivalent rating from another nationally recognized statistical rating organization, or (ii) unrated but deemed to be
of comparable quality by the Investment Adviser (“Short-Term Permissible Securities”).
The securities that may be acquired by the Fund through repurchase agreements will consist predominantly of obligations
that, at the time of investment, the Investment Adviser determines present minimal credit risk and are either (i) Short-Term
Permissible Securities, or (ii) long-term securities that are rated, or otherwise shall have been issued by entities that have
received ratings with respect to other long-term debt securities, within the four highest rating categories of any of the Rating
Agencies, without regard to any subcategory, or in the alternative, have received an equivalent rating from another nationally
recognized statistical rating organization, or (iii) long-term securities that are unrated but deemed to be of comparable quality by
the Investment Adviser (“Long-Term Permissible Securities”; and with the Short-Term Permissible Securities, collectively, the
“Permissible Securities”).
The Permissible Securities in which the Fund may invest directly or through repurchase agreements will consist only of
Puerto Rico Securities and Non-PR Eligible Securities (each as defined below) (or participation interests or repurchase
agreements involving any of the foregoing) and short-term deposits in banks located in the United States and its territories
(certificates of deposit, bankers’ acceptances and time deposits) or in U.S. branches and agencies of foreign banks (dollardenominated certificates of deposit, bankers’ acceptances and time deposits) whose obligations with respect to deposits are not
14
rated, provided that such banks must have at least $50 billion in total assets. See Appendix A for an explanation of Permissible
Securities and Appendix B for an explanation of the ratings of Permissible Securities.
Except for temporary defensive purposes upon the proven scarcity of Puerto Rico Securities (as defined below) (i.e., the
unavailability of Puerto Rico Securities or their availability at a price unreasonably above their fair market value or at interest
rates inconsistent with the Fund’s investment objective, as determined by the Fund’s Investment Adviser with the approval of the
Office of the Commissioner), after the first full year after the registration of the Fund and as required by the Puerto Rico
Investment Companies Act, at least 67% of the market value at the time of purchase of the Permissible Securities to be acquired
(either directly or through repurchase agreements) by the Fund (the “67% Investment Requirement”) will be (i) securities of, or
guaranteed by, the government of Puerto Rico or any instrumentality, political subdivision, agency or public corporation thereof,
(ii) Puerto Rico mortgage-backed or asset-backed securities (including certificates issued by the Government National Mortgage
Association backed by Puerto Rico mortgages), (iii) corporate obligations of entities organized under the laws of Puerto Rico,
and/or (iv) corporate obligations of entities organized under the laws of jurisdictions other than Puerto Rico at least 80% of
whose gross income constitutes gross income from sources within Puerto Rico (collectively, “Puerto Rico Securities”). Up to
33% of the market value at the time of purchase of the Permissible Securities to be acquired (either directly or through
repurchase agreements) by the Fund will be securities (including, but not limited to, mortgage-backed securities, asset-backed
securities, corporate obligations and commercial paper) of, or guaranteed by, the United States of America, or any political
subdivision, agency, public corporation or instrumentality thereof, or of any State of the United States or any political
subdivisions of any such State, or any private entity that satisfies the rating requirements discussed above (“Non-PR Eligible
Securities”).
In order for the Fund’s Administrator (as defined herein under “Management of the Fund”) to determine the Fund’s
compliance with the 67% Investment Requirement, the value of the Fund’s net assets (i.e., the value of its assets less liabilities)
will be determined on a daily basis as of the close of regular trading of each day that the New York Stock Exchange (“NYSE”) is
open for trading. Only for such purpose, the value of the Fund’s assets shall be equal to the sum of the aggregate value of the
securities in which the Fund invested directly and the aggregate contract value of repurchase agreements, unless a default occurs
thereunder, in which case the value of the Fund’s assets acquired under repurchase agreements shall be equal to the lesser of (i)
the aggregate value of the Underlying Securities or (ii) the contract value of the repurchase agreements. For this purpose, the
value of securities in which the Fund invested directly and Underlying Securities shall be determined by the Administrator as
follows: (i) in the case of securities traded on a national exchange, the last available bid price on the particular exchange on the
applicable date; (ii) in the case of U.S. government obligations, the market value reported by Bloomberg, Reuters, Interactive
Data Corporation or any other nationally recognized pricing service entity approved by the Board of Directors of the Fund; and
(iii) in the case of all other assets, the market value as determined by the Fund’s Administrator with the assistance of the
Investment Adviser and the supervision of the Fund’s Board of Directors, in good faith, or based upon market quotations when
such quotations are available. Primarily because it may be an administrative inconvenience for dealers or advisers other than the
Fund’s Investment Adviser to provide the Administrator with market quotations, independent sources of valuation may be
unavailable for a substantial portion of the Fund’s assets. When market quotations for assets held by the Fund are not readily
available from any such independent sources, the Administrator will attempt to obtain quotations from the Investment Adviser.
When market quotations for assets held by the Fund are not available from any sources, such assets will be valued at fair value
by, or under the direction of, the Fund’s Board of Directors, utilizing quotations and other information concerning similar
securities derived from recognized dealers in those assets or information regarding the trading spreads quoted by recognized
dealers between such assets and U.S. Treasury obligations whose maturities are determined to be most closely matched to the
average life of the Fund’s assets. Notwithstanding the foregoing, assets with maturities of 60 days or less generally will be
valued at amortized cost if their original term to maturity was 60 days or less, or by amortizing the difference between their fair
value as of the 61st day prior to maturity and their maturity value if their original term to maturity exceeded 60 days, unless in
either case the Fund’s Board of Directors or an authorized committee thereof determines that this does not represent fair value.
The Administrator will also oversee the daily calculation of the net asset value per share of the Fund, which is made by dividing
the Fund’s net assets, determined as set forth above, by the total number of Shares of the Fund issued and outstanding on the
applicable date, in order to compare such valuation with the calculation of net asset value per share made daily on the basis of
the “amortized cost method” of valuing portfolio securities in its efforts to maintain the net asset value per share of Common
Stock at $1.00. If a deviation of one-half of one percent (0.50%) or more were to occur between the net asset value per share of
the Fund calculated by reference to market values and the $1.00 per share amortized cost value of the Fund, or if there were any
other deviation which the Board of Directors of the Fund believes would result in a material dilution to shareholders or
purchasers, the Board of Directors would promptly consider what action, if any, should be initiated. See “Net Asset Value.”
All of the net proceeds derived from the sale of Shares to IRAs (IRA contributions) will be invested as required by Section
1081.02(a)(3) of the Puerto Rico Code. Consequently, a trustee of an IRA that invests in Shares will, in connection with such
investment, be treated as meeting the requirements of Section 1081.02(a)(3) of the Puerto Rico Code. Under Section
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1081.02(a)(3) of the Puerto Rico Code, the Fund will be required to invest the proceeds received from the issuance of Shares to
IRAs in accordance with the following guidelines and requirements: (i) at least 34% of such proceeds are required to be invested
in securities of, or guaranteed by, the Government of Puerto Rico or any instrumentality, political subdivision, agency or public
corporation thereof or in mortgage loans constituted for the financing of the construction or acquisition of residential property
located in Puerto Rico, (ii) no more than 66% of the total proceeds may be invested in “general assets” in Puerto Rico, which
includes the foregoing, and (iii) no more than 33% of the proceeds may be invested in “United States assets.” Section 1081.02
of the Puerto Rico Code also requires that the income from the investments made with the proceeds received from the issuance
of Shares to IRAs be reinvested in the same type of investment which generated such income. The composition of the Fund’s
assets, based on current market values, may not reflect the initial allocation of the proceeds from the sale of Shares to IRAs in
compliance with the IRA investment requirements.
The Investment Adviser may determine, at any time, that market conditions warrant the Fund adopting a temporary
defensive investment posture. To the extent the Fund’s assets are invested for temporary defensive purposes, such assets will not
be invested in a manner designed to achieve the Fund’s investment objective.
PURCHASE OF SHARES
The Fund engages in a continuous offering of its Shares through Santander Securities and through securities dealers that
have entered into selected dealer agreements with Santander Securities (the “Selected Dealers”) on each day the NYSE is open
for trading (a “Business Day”). The minimum initial investment in Shares is $1.00, and the minimum subsequent investment in
Shares is $1.00. The Fund reserves the right to waive or modify the initial and subsequent investment requirements at any time.
To permit the Fund to invest the net proceeds from the sale of its Shares in an orderly manner, the Fund may, from time to
time, suspend the sale of its Shares.
The Fund’s shares are sold continuously at their net asset value next determined after a purchase order is received and
becomes effective. See “Net Asset Value.” All Shares purchased begin to accrue income as of the first Business Day following
the date the order becomes effective.
When orders for the purchase of Shares are paid for other than in federal funds (i.e., monies of member banks within the
Federal Reserve System held on deposit at a Federal Reserve Bank), such as a personal check, the Distributor or Selected Dealer,
acting on behalf of the investor, will complete the conversion into federal funds. The order can only become effective following
the successful completion of such conversion, and each dealer may take variable periods of time to complete such conversions.
Please contact your financial adviser for more information. Because purchases for which payment is made with U.S. dollar
checks and negotiable bank drafts may take up to ten days or more to become effective, it is strongly recommended that payment
be effected by bank wire.
The Fund’s Shares may also be purchased as a daily cash sweep option for participants in resource management programs of
Santander Securities or Selected Dealers. Please note that each dealer may have its own procedures to determine when an order
becomes effective via such dealer’s cash sweep mechanism. Please contact your financial adviser for more information.
Due to the administrative complexities associated with the offering, administrative errors may result in Santander Securities
inadvertently acquiring nominal numbers (in no event in excess of 5%) of Shares that it may wish to resell. Such Shares will not
be subject to any restriction and may be resold pursuant to this prospectus, as amended from time to time.
Distribution Agreement for Shares
Under the Fund’s Distribution Agreement with Santander Securities dated as of December 1, 2006, the Fund pays Santander
Securities an account maintenance and distribution fee, accrued daily and paid monthly, at the annual rate of 0.25% of the
average daily net assets of the Fund (as defined under “Investment Advisory and Administration ArrangementsCInvestment
Adviser”) in order to compensate Santander Securities and selected dealers (pursuant to sub-agreements) for providing certain
account maintenance and distribution activities in connection with the Shares.
The Fund has no obligation with respect to account maintenance-related expenses incurred by Santander Securities and
selected dealers in connection with the Shares of the Fund, and there is no assurance that the Board of Directors of the Fund will
approve the continuance of the Distribution Agreement from year to year. However, Santander Securities intends to seek annual
continuation of the Distribution Agreement.
16
REDEMPTION OF SHARES
Shareholders may redeem any number of shares from their Fund accounts without charge on any day the Fund calculates its
net asset value. See “Net Asset Value.”
The Fund normally transmits redemption proceeds on the Business Day following receipt of a redemption request but, in
any event, payment will be made within three days thereafter, except on days on which the NYSE is closed and settlement of
securities does not otherwise occur. Generally, if the redemption proceeds are remitted to a brokerage account, these funds will
not be invested for the shareholder’s benefit without specific instruction and the brokerage firm will benefit from the use of
temporarily uninvested funds. A shareholder that pays for Fund shares by personal check will be credited with the proceeds of a
redemption of those shares only after the purchase check has been collected, which may take up to ten days or more. A
shareholder who anticipates the need for more immediate access to his or her investment should purchase shares with federal
funds, by bank wire or with a certified or cashier’s check.
The Fund expects that ordinarily there will be no secondary market for the Fund’s Shares and that the daily redemptions will
be the only source of liquidity for Fund shareholders. Nevertheless, if a secondary market develops for the Shares of the Fund,
the market price of the shares may vary from net asset value per share from time to time. Such variance may be affected by,
among other factors, relative demand and supply of shares and the performance of the Fund, especially as it affects the yield on
and net asset value of the Shares of the Fund. Daily redemptions of shares of Shares of the Fund at net asset value per share are
expected to reduce any spread between net asset value and market price per share that otherwise may develop. However, there
can be no assurance that such action would result in the Fund’s Shares trading at a price which equals or approximates net asset
value per share.
In order to satisfy redemption requests, the Fund may be required to liquidate portfolio securities, and realize gains or losses,
at a time when the Investment Adviser would otherwise consider it disadvantageous to do so. This may adversely affect the
Fund’s yield.
Redemption of shares by the Fund is a taxable event. See “Tax Matters.”
The right to redeem shares on a daily basis may be suspended for periods during which trading on the NYSE is restricted or
the NYSE is closed or banks in the Commonwealth of Puerto Rico are closed for business (other than weekend and holiday
closings), for any period during which an emergency exists as a result of which disposal of portfolio securities or determination
of the net asset value per share of the Fund is not reasonably practicable, and for such other periods as the Board of Directors
determines that such a suspension of daily redemptions is, in its discretion, appropriate. The Board of Directors of the Fund also
reserves the right to alter its policy of redeeming shares on a daily basis.
Redemption Procedure
Shareholders that purchase securities through the Distributor or a Selected Dealer may take advantage of special redemption
procedures for cash sweep options under which Shares of the Fund will be redeemed automatically to the extent necessary to
satisfy debit balances arising in the shareholder’s account with the Distributor or the Selected Dealer. One example of how an
automatic redemption may occur involves the purchase of securities. If a shareholder purchases securities but does not pay for
them by settlement date, the number of Fund Shares necessary to cover the debit will be redeemed automatically as of the
settlement date, which usually occurs three Business Days after the trade date. No fee is currently charged with respect to these
automatic transactions. Shareholders not wishing to participate in these arrangements should notify their financial adviser.
In addition, a shareholder wishing to redeem Shares may do so by telephone through a registered representative of the
Distributor or a Selected Dealer or by submitting a written request for redemption to the Distributor or Selected Dealer. The
Distributor or Selected Dealer may have certain procedures and requirements guiding the time of the redemption request and the
documentation required for the request to be deemed in proper form. The Distributor reserves the right to require that any
redemption request be made in writing. A written redemption request must (a) state the number or dollar amount of Shares to be
redeemed, (b) identify the shareholder’s account number, and (c) be signed by the account holder exactly as the account is
registered. Please contact your financial adviser to obtain more information regarding your dealer’s specific redemption
procedures and requirements for redemption requests.
In the event of a redemption of Shares with an aggregate net asset value in excess of $10,000 or in the event of more than
one redemption request in any ten-day period, the Fund reserves the right to require that the signature(s) on the redemption
request be guaranteed by an “eligible guarantor institution” (including, for example, certain financial institutions) as such is
17
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Distributor through the use of industry publications. Notarized signatures are not sufficient. Unless otherwise
directed, payment will be made in accordance with the existing instructions in the account held with the Distributor or a Selected
Dealer through which the investor holds his or her Shares, which may include mailing a check to the investor’s address of record
within three Business Days of receipt of a proper notice of redemption as set forth above. Redemption proceeds for Shares
purchased by check, other than a certified or official bank check, will be remitted upon clearance of the check, which may take
up to ten days or more.
Generally, a properly completed redemption form with the corresponding signature guarantee is all that is required for a
redemption. In some cases, however, other documents may be necessary. For example, in the case of shareholders holding
certificates, the certificates for the shares being redeemed must accompany the redemption request. The transfer agent, the
Distributor and the other brokers in the selling group may also require documentary evidence of authority for redemptions made
by corporations, executors, administrators, trustees or guardians. A redemption request will not be deemed properly received
until the Distributor or a broker-dealer or financial institution in the selling group, as applicable, receives all required documents
in a timely manner and in proper form.
At various times, the Fund may be requested to redeem shares for which it has not yet received good payment. The Fund
may delay or cause to be delayed the mailing of a redemption check until such time as “good payment” (e.g., cash or certified
check drawn on a U.S. bank) has been collected for the purchase of such shares. Normally, this delay will not exceed 10 days.
FUND MANAGEMENT
The overall management of the business and the affairs of the Fund are vested in the Board of Directors. The Board selects
and oversees SAM as investment adviser. The Board also approves all significant agreements of the Fund, including the Fund’s
investment advisory, administration, custodial, transfer agency and sub-transfer agency agreements, if any. The day-to-day
operations of the Fund are delegated to its officers and to SAM, in its capacity as administrator, subject to the Fund’s investment
objective and policies, and under the general supervision of the Board of Directors.
Directors and Officers
The Board of Directors has a standing Audit Committee, which consists of the Directors that are not affiliated persons of
SAM (the “Independent Directors”). The principal purpose of the Audit Committee is to review the scope of the annual audit
conducted by the Fund’s independent auditors and the evaluation by such auditors of the accounting procedures followed by the
Fund. The Board of Directors also has a standing Dividend Committee composed of all of the Directors of the Fund.
Biographical and Other Information. Certain biographical and other information relating to the Independent Directors of
the Fund is set forth below, including their principal occupations for at least the last five years and other public directorships.
The Independent Directors of the Fund also serve in the same capacity for First Puerto Rico Tax-Exempt Fund, Inc., First Puerto
Rico Equity Opportunities Fund, Inc., First Puerto Rico Strategic Growth Fund, First Puerto Rico AAA Fixed-Income Fund,
Inc., and First Puerto Rico Fixed-Income IRA Fund, Inc., each an open-end management investment company, and First Puerto
Rico Tax-Exempt Target Maturity Fund I, Inc., First Puerto Rico Tax-Exempt Target Maturity Fund II, Inc., First Puerto Rico
Tax-Exempt Target Maturity Fund III, Inc., First Puerto Rico Tax-Exempt Target Maturity Fund IV, Inc., First Puerto Rico TaxExempt Target Maturity Fund V, Inc., First Puerto Rico Tax-Advantaged Target Maturity Fund I, Inc., First Puerto Rico TaxAdvantaged Target Maturity Fund II, Inc., First Puerto Rico Target Maturity Income Opportunities Fund I, Inc., First Puerto
Rico Target Maturity Income Opportunities Fund II, Inc., First Puerto Rico AAA Target Maturity Fund I, Inc., and First Puerto
Rico AAA Target Maturity Fund II, Inc., each a closed-end management investment company (together with the Fund, the “First
Puerto Rico Funds”).
Antonio Arias III - Director - Chief Financial Officer of Grupo Ferré Rangel since 2000; Member of the Board of
Trustees of Saint John’s School since 2003 and Treasurer thereof from 2003 to 2008.
Mario F. Gaztambide - Director - Attorney-at-law in private practice since 1970; Member of the Board of Trustees of
the Ana G. Méndez Foundation since 2000; Secretary of the Board of Trustees of the Puerto Rico Museum of Art since 2001.
Francisco Marrero-Meléndez - Director - Vice President and General Manager of V. Suárez Real Estate Group since
2005; Director of Venture Capital Fund, Inc. and Metro Office Park Owners Association.
18
Dr. José E. Vázquez-Barquet - Director - President of Caribbean Franchise, Inc. and of Andremar Co., Inc. since
1997; Associate Professor at Polytechnic University of Puerto Rico since 2005.
Certain biographical and other information relating to the Directors who are officers and “affiliated persons” of SAM
(each an “Affiliated Director”) is set forth below, including their principal occupations for at least the last five years, the length
of time served and public directorships held. Each of the Affiliated Directors also serves in the same capacity for the other First
Puerto Rico Funds.
Francisco Javier Hidalgo* - Chairman of the Board, President and Director - President and Chief Executive Officer
of Santander BanCorp and Banco Santander Puerto Rico since 2010; Director of Business Development for Banco Santander
S.A., America Division, from 2009 to 2010; Global Head of Santander Global Connect at Banco Santander S.A. from 2007 to
2009; Head of Corporate Banking at the Commercial Banking Division of Banco Santander S.A. from 2002 to 2007; Director of
SAM since 2010.
Luis Roig* - Senior Vice President and Director - President and Chief Executive Officer of Santander Securities since
2010, and Chief Financial Officer of Santander Securities since 2002; Managing Director of Santander Securities from 2002 to
2010; Director of Santander Securities since 2002; Director of SAM since 2010.
Certain biographical and other information relating to the other officers of the Fund is set forth below, including their
principal occupations for at least the last five years, the length of time served and public directorships held. Each of the other
officers of the Fund also serves in the same capacity for the other First Puerto Rico Funds.
Frank J. Serra* - Senior Vice President and Treasurer – President and Chief Executive Officer of SAM since 2008
and Treasurer of SAM since 2004; Senior Vice President and Trust Director of Banco Santander Puerto Rico since 2008; Senior
Vice President and Chief Operating Officer of SAM from 2005 to 2008; Director of SAM since 2009.
Dennis Williams* - Senior Vice President and Assistant Treasurer - Senior Vice President of SAM since 2007; Chief
Investment Officer of SAM from 2004 to 2007; Senior Vice President, Portfolio Management of SAM from 2003 to 2007;
Director of SAM since 2002.
Ana Suárez* - Vice President and Anti-Money Laundering Compliance Officer - Senior Vice President-Compliance of
Santander Securities since 2004 and Assistant Secretary of the Board of Directors of Santander Securities since 2003; Senior
Vice President, Director of Compliance of SAM since 2007 and Secretary of the Board of Directors of SAM since 2003; Vice
President-Director of Compliance of SAM from 1999 to 2007.
Jessica Colón* - Vice President and Assistant Treasurer - Vice President, Control Manager of SAM since 2006;
Assistant Vice President, Quality Control Manager of SAM from 2004 to 2006.
Paul Hopgood* - Vice President - Senior Vice President and Chief Investment Officer of SAM since 2008; Vice
President and Portfolio Manager of SAM from 2006 to 2008; Assistant Vice President of SAM from 2004 to 2006.
José González-Pagán* - Vice President – Vice President and Administration Manager of SAM since 2010; Operations
Manager of SAM from 2009 to 2010; Vice President and Trust Officer of Banco Santander Puerto Rico from 2007 to 2010;
Trust Manager at Banco Santander Puerto Rico from 2004 to 2007.
Javier D. Ferrer - Secretary - Partner of Pietrantoni Méndez & Alvarez LLP, legal counsel to the Fund, since 1992.
Jorge E. Souss - Assistant Secretary - Partner of Pietrantoni Méndez & Alvarez LLP, legal counsel to the Fund, since
2003.
_______________
*
Denotes an “affiliated person” of the Fund.
As of March 14, 2011, the Directors and officers of the Fund as a group owned an aggregate of less than 1% of the
outstanding Shares of the Fund. As of March 14, 2011, none of the Independent Directors of the Fund nor any of their
immediate family members owned beneficially or of record any securities in Santander Bancorp, the parent company of
Santander Securities.
19
All transactions and agreements between the Fund and its affiliates are subject to the approval of the Independent Directors.
Compensation of Directors
No officer, director or employee of Santander Securities or of any affiliate thereof receives any compensation from the Fund
for serving as an officer or director of the Fund. The Fund pays each Director who is not an officer, director or employee of
Santander Securities an annual fee of $350 payable quarterly and a per-meeting stipend of $400 for each quarterly meeting of the
Board of Directors attended, $175 for each special meeting of the Board of Directors attended, $500 for each quarterly Audit
Committee meeting of the Board of Directors attended, and $175 for each special Audit Committee meeting of the Board of
Directors attended, together with such Director’s actual travel and out-of-pocket expenses relating to attendance at meetings.
Officers of the Fund are compensated by their respective employers and not by the Fund.
Indemnification of Directors
The Fund has obtained directors and officer’s liability insurance for its directors and officers. The Fund’s Certificate of
Incorporation contains a provision that exempts directors from personal liability for monetary damages to the Fund or its
shareholders for violations of the duty of care, to the fullest extent permitted by the Puerto Rico General Corporation Law. The
Fund has also agreed to indemnify its directors and officers for certain liabilities to the fullest extent permitted by Puerto Rico
law.
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
Investment Adviser
SAM, a corporation organized under the laws of the Commonwealth of Puerto Rico, is an investment advisory firm that is
wholly owned by Santander Securities. SAM is registered as an investment adviser under the U.S. Investment Advisers Act of
1940, as amended. SAM is also regulated by the Commissioner, and the conduct of its investment business is regulated by the
Commissioner. SAM became the Fund’s investment adviser on December 1, 2006. Prior to that date, Smith Barney Fund
Management LLC served as the Fund’s investment adviser.
SAM provides the Fund with investment advisory and management services, subject to the control of the Board of Directors
and the officers of the Fund. As the investment adviser, SAM is responsible for choosing the Fund’s investments and handling
its business affairs. SAM offers a wide range of money management and investment services to individuals and institutional
clients in Puerto Rico. SAM also serves as investment adviser to the other First Puerto Rico Funds, all of which operate in
Puerto Rico. The principal address of SAM is Santander Tower Building, Suite 1800, Tabonuco Street B-7, Guaynabo, Puerto
Rico 00968-3028.
The Fund pays SAM a monthly fee at an annual rate of 0.40% of the average daily net assets of the Fund. “Average daily
net assets” means the average daily value of the total assets of the Fund minus the sum of accrued liabilities of the Fund. The fee
is computed daily and paid monthly.
The Investment Adviser provides the portfolio management for the Fund. Such portfolio management will consider
analyses from various sources (including brokerage firms with which the Fund does business), make the necessary investment
decisions, and place orders for transactions accordingly. The Investment Adviser also will be responsible for the performance of
certain administrative and management services for the Fund, including paying all compensation of and furnishing office space
for officers and employees of the Fund connected with investment and economic research, trading and investment management
of the Fund. SAM or its affiliates are responsible for the compensation of all Directors of the Fund who are affiliated persons of
SAM or any of its affiliates. The Fund pays all other expenses incurred in the operation of the Fund, including, among other
things, expenses for legal and auditing services, taxes, costs of printing proxies, listing fees, if any, stock certificates and
shareholders reports, charges of the administrator, the custodian and the transfer agent and any sub-transfer agent appointed with
the consent of the Fund, expenses of registering the Fund, expenses that may be charged by the Office of the Commissioner for
auditing the Fund, fees and expenses of the Independent Directors, accounting and pricing costs, insurance, interest, brokerage
costs, litigation, mailing and other extraordinary or non-recurring expenses properly payable by the Fund.
Unless earlier terminated as described below, the investment advisory agreement will continue in effect for a period of two
years from the date of execution and will remain in effect from year to year thereafter, if approved annually (a) by the Board of
Directors of the Fund or by a majority of the outstanding shares of the Fund and (b) by a majority of the Independent Directors.
The investment advisory agreement is not assignable and may be terminated without penalty (i) on 60 days’ written notice at the
20
option of either party thereto or by the vote of a majority of the outstanding Shares of the Fund or (ii) at any time by a unanimous
vote of the Independent Directors.
The Investment Adviser, its affiliates performing services for the Fund under the investment advisory agreement between
the Investment Adviser and the Fund, and the directors, officers and employees of the Investment Adviser and such affiliates,
shall not be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad faith, gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties under the investment advisory agreement.
Securities held by the Fund also may be held by, or be appropriate investments for, other funds or investment advisory
clients for which the Investment Adviser or any of its affiliates acts as an adviser. Because of different objectives or other
factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or other funds for which it acts as investment adviser or
for advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or any of its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be an adverse effect on price.
Administrator
SAM has served as the Fund’s administrator since December 1, 2006. Banco Popular de Puerto Rico served as the Fund’s
administrator prior to such date.
Under the terms of an administration agreement with the Fund, SAM (in such capacity, the “Administrator”) performs, or
arranges for the performance of, certain administrative services (i.e., services other than investment advice or related portfolio
activities) necessary for the operation of the Fund. These administrative services include, among other things, providing
facilities and personnel to the Fund in the performance of certain services, including the daily determination of the NAV per
share of common stock of the Fund, based upon, among other things, the pricing of the Fund’s portfolio securities, maintaining
and preserving the books and records of the Fund, assisting in the preparation, printing and dissemination of reports and other
communications to shareholders, coordinating the audit of the Fund, and providing regulatory compliance services.
For the administrative services rendered by the Administrator to the Fund, the Fund pays the Administrator an annual fee
based on the average daily net assets of the Fund, computed daily and paid monthly, plus out-of-pocket costs for services such as
custody services and fund accounting services. The administration fee will be at the following rates for the following ranges of
average daily net assets:
Annual Rate
Average Daily Net Assets of the Fund
0.13%
$0.00 - $249,999,999.99
0.10%
$250,000,000.00 - $499,999,999.99
0.07%
$500,000,000.00 and over
Transfer Agent and Sub-Transfer Agent
Banco Santander has served as the Fund’s transfer agent since December 1, 2006. Banco Popular de Puerto Rico served as
the Fund’s transfer agent prior to such date.
Pursuant to a transfer agency agreement with the Fund, Banco Santander, as transfer agent, is responsible for the issuance
and transfer of Shares, the opening and maintenance of shareholder accounts and the payment of the Fund’s expenses. For the
services rendered by the transfer agent to the Fund, the Fund pays the transfer agent a monthly fee at an annual rate of 0.03% of
the average daily net assets of the Fund, plus out-of-pocket costs for services rendered to the Fund.
The transfer agent and the Fund have engaged BNY Mellon Asset Servicing to act as sub transfer agent for the Fund. BNY
Mellon Asset Servicing is the successor to PNC Global Investment Servicing Inc., which was formerly known as PFPC Inc.
BNY Mellon Asset Servicing assists Banco Santander in administering the dividend reinvestment plan of the Fund. The Fund,
in consideration for the services to be provided by BNY Mellon Asset Servicing, will pay BNY Mellon Asset Servicing certain
21
fees and reimburse the sub transfer agent for its out of pocket expenses incurred on behalf of the Fund. BNY Mellon Asset
Servicing, located at 400 Bellevue Parkway, Wilmington, Delaware 19809, is a leading provider of global fund services and a
unit of The Bank of New York Mellon Corporation.
Custodian
Citibank, N.A. (“Citibank”) has served as the Fund’s custodian since 1999. Citibank, as custodian, is responsible for the
custody of the securities and cash of the Fund. The Fund pays fees to the custodian and reimburses its expenses. Citibank is a
national banking association with principal offices located at 111 Wall Street, New York, New York 10005.
Pursuant to its custodial services agreement, Citibank may appoint a sub-custodian for the performance of certain custodial
obligations.
Banking Relationship
The Investment Adviser and its affiliates may have deposits, loans, and other relationships with the issuers of securities
purchased on behalf of the Fund, including outstanding loans to such issuers which may be repaid in whole or in part with the
proceeds of securities so purchased. The Investment Adviser has informed the Fund that, in making its investment decisions, it
does not obtain or use material inside information in the possession of the Investment Adviser or in the possession of any
affiliate of the Investment Adviser.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the Investment Adviser is primarily responsible for the
execution of the Fund’s portfolio transactions. In executing such transactions, the Investment Adviser seeks to obtain the best
results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread),
size of order, difficulty of execution and operational facilities of the firm involved and the firm’s risk in positioning a block of
securities. While the Investment Adviser generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the execution of transactions in portfolio securities. The
Investment Adviser intends to execute portfolio transactions in (i) Puerto Rico Securities through brokers or dealers in Puerto
Rico, and (ii) U.S. Government Obligations, Municipal Obligations and short-term investments through brokers or dealers either
within or without Puerto Rico, in either case including Santander Securities or one of its affiliates as discussed below. Subject to
obtaining the best price and execution, securities firms which provide supplemental investment research to the Investment
Adviser, including Santander Securities, may receive orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the Investment Adviser under the Investment Advisory
Agreement, and the expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The securities in which the Fund primarily will invest are traded in the over-the-counter markets, and the Fund intends to
deal directly with the dealers, including Santander Securities or one of its affiliates as discussed below, who make markets in the
securities involved, except in those circumstances where better prices and execution are available elsewhere.
Transactions Involving Affiliates
It is anticipated that certain transactions (including repurchase agreements and dollar rolls) will take place in which
Santander Securities or one of its affiliates (including the other First Puerto Rico Funds) may be the primary or only dealer in a
particular portfolio security being purchased or sold by the Fund. In that event, independent sources for valuation or liquidity of
the security may be limited or nonexistent. Such portfolio transactions are subject to procedures adopted by the Board of
Directors of the Fund and particularly, by the Independent Directors, in an effort to address potential conflicts of interest that
may arise from such transactions. There is no assurance that the procedures will be effective. The procedures also may be
amended from time to time in the sole discretion of the Board of Directors, including the Independent Directors. The Fund also
may purchase securities that are offered in underwritings in which one or more of such entities is a member of the underwriting
or selling group. Such transactions also are subject to procedures adopted by the Fund’s Board of Directors, including the
Independent Directors. The procedures vary depending on whether the affiliated transaction is a secondary market transaction,
repurchase agreement, or a purchase by the Fund during the existence of an underwriting syndicate in which one of such entities
participates. The procedures generally require that the Investment Adviser use its reasonable best efforts to obtain quotations
22
from at least one other non-affiliated dealer and that the overall cost to the Fund in connection with affiliated transactions must
be at least as favorable for the Fund as that charged by other sources. Also, any commission, spread or profit received by
Santander Securities or its affiliates must be reasonable and fair as compared to the commission, spread or profit on comparable
transactions involving similar securities. There also are various internal procedural requirements involving such matters as
records maintenance and reports to and oversight by the Board of Directors. It is anticipated that transactions involving affiliates
will continue to take place in accordance with the procedures adopted by the Board of Directors.
DIVIDENDS AND AUTOMATIC REINVESTMENT
The Fund declares a dividend of substantially all of its net investment income on each day the NYSE is open for trading.
This determination is made once during each such day. Only shareholders of record at the time of such determination will be
entitled to such dividend. Net investment income consists of the daily accrued interest on repurchase agreements and other
investments of the Fund, less accrued expenses. Such dividends are distributed monthly on the second Friday of the following
calendar month (or, if such day is not a Business Day, on the next succeeding Business Day) and will automatically be
reinvested in Fund shares at net asset value. If a shareholder redeems his shares in full between monthly dividend payment
dates, all dividends accrued up to and including the date of liquidation will be paid with the proceeds of the redemption of
shares. See “Redemption of Shares.” Dividends to Qualifying Individuals, estates and trust consisting of Ordinary Dividends
(as defined under “Tax Matters”) will be distributed net of a 10% Puerto Rico income tax withholding, which will be
automatically withheld at source by the Fund or its paying agent (including the Distributor or a selected dealer) .
The automatic reinvestment of dividends and distributions will not relieve participants of any Puerto Rico income tax that
may be payable (or required to be withheld) on such dividends or distributions. See “Tax Matters.”
TAX MATTERS
This section is not to be construed as a substitute for careful tax planning. Prospective investors are urged to consult their
own tax advisers with specific reference to their own tax situations, including the application and effect of other tax laws and
any possible changes in the tax law after the date of this prospectus.
In the opinion of Pietrantoni Méndez & Alvarez LLP, counsel to the Fund, the following discussion summarizes the material
Puerto Rico and United States federal tax considerations that may be relevant to prospective investors in the Fund. The
discussion of Puerto Rico tax matters is based on the current provisions of the Internal Revenue Code for a New Puerto Rico (the
“Puerto Rico Code”) and the regulations promulgated or applicable thereunder, the administrative pronouncements issued by the
Puerto Rico Treasury Department (“PRTD”), the Puerto Rico Municipal Property Tax Act of 1991, as amended (the “MPTA”),
and the regulations promulgated thereunder, the Puerto Rico Municipal License Tax Act of 1974, as amended (the “MLTA”),
and the regulations promulgated thereunder, the Puerto Rico Investment Companies Act, as amended (the “PRICA”), the Federal
Relations Act and Public Law 97-258, 96 Stat. 945 (31 U.S.C. § 3124(a)). The discussion of United States federal income,
estate and gift taxes is based on the current provisions of the U.S. Internal Revenue Code of 1986, as amended (the “U.S. Code”)
and the regulations promulgated and administrative pronouncements issued thereunder. No attempt has been made, however, to
discuss all Puerto Rico and United States income or other tax matters that may affect the Fund or the investors.
This discussion assumes that the investors will be individuals who are bona fide residents of Puerto Rico for the entire
taxable year within the meaning of Sections 933 and 937 of the U.S. Code (“Qualifying Individuals”), corporations or other
business organizations whose principal office and place of business are in Puerto Rico (“Qualifying Corporations”) or trusts
organized under the laws of Puerto Rico (“Qualifying Trusts”), including trusts funding employee retirement plans described in
Section 1081.01(a) of the Puerto Rico Code (“Qualifying Retirement Trusts”), or where applicable individual IRA Accounts for
purposes of the Puerto Rico Code (“IRA Accounts,” and together with Qualifying Individuals, Qualifying Corporations,
Qualifying Trusts and Qualifying Retirement Trusts collectively referred to as “Qualifying Investors”). This summary does not
attempt to discuss all tax consequences to investors that may be subject to special tax treatment under the Puerto Rico Code, the
MLTA or MPTA (such as special partnerships, corporation of individuals and tax-exempt organizations) or under the U.S. Code
(such as “controlled foreign corporations,” “passive foreign investment companies” or “personal holding companies”).
The statements that follow are based on the existing provisions of such statutes and regulations, and judicial decisions and
administrative pronouncements, all of which are subject to change (even with retroactive effect). A prospective investor should
be aware that an opinion of counsel represents only such counsel’s best legal judgment and that it is not binding on the PRTD,
any municipality or agency of Puerto Rico, the United States Internal Revenue Service (the “IRS”) or the courts. Accordingly,
there can be no assurance that the opinions set forth herein, if challenged, would be sustained.
23
Puerto Rico Taxation of the Fund
Income Taxes. As a registered investment company under PRICA, the Fund will be exempt from Puerto Rico income tax for
a taxable year if it distributes to its shareholders at least 90% of its net income for the taxable year within the time period
provided by the Puerto Rico Code (the “90% Distribution Requirement”). In determining its net income for purposes of the 90%
Distribution Requirement, the Fund shall not take into account capital gains and losses and certain items of income (including
interest) that are exempt from taxation under the Puerto Rico Code. The Fund intends to meet the 90% Distribution Requirement
to be exempt from Puerto Rico income tax.
Property Taxes. Under the provisions of the MPTA, the Fund will be subject to property taxes. However, property of the
Fund that consists of repurchase agreements, obligations of the Government of Puerto Rico or the U.S. Government and stocks
of domestic or foreign corporations are exempt from property taxes imposed by the MPTA.
Municipal License Taxes. Pursuant to PRICA, the Fund will not be subject to municipal license taxes authorized to be
imposed by the MLTA on that part of its net taxable income that is distributed to its shareholders. The undistributed net taxable
income generated by the Fund will be subject to a municipal license tax of up to 1.5%, except that interest on obligations issued
by the Government of Puerto Rico, its instrumentalities or political subdivisions, or by the U.S. Government will be exempt from
municipal license tax, regardless of whether such income is distributed or not to the shareholders of the Fund.
Puerto Rico Taxation of Fund Shareholders
Regular Income Taxes. Dividend distributions by the Fund are classified as “Exempt Dividends,” “Capital Gain Dividends”
or “Ordinary Dividends” as discussed below.
A dividend attributable to the Fund’s tax-exempt income under the Puerto Rico Code (“Exempt Dividend”) will not be
taxable under the Puerto Rico Code to a Qualifying Investor if (i) such dividend is designated as an “Exempt Dividend” by the
Fund in a written notice submitted to its shareholders no later than 59 days after the close of the Fund’s taxable year, and (ii)
such dividend does not exceed the earnings and profits of the Fund attributable to income exempt from Puerto Rico income tax
under Section 1031.02 of the Puerto Rico Code, or pursuant to any other Puerto Rico or United States law.
Dividends paid by the Fund from its earnings and profits derived from the sale or exchange of property (“Capital Gain
Dividends”) are taxable as long-term capital gains to Qualifying Investors regardless of how long the shares of the Fund have
been held by the shareholder. Capital Gain Dividends will qualify for the special income tax rate on capital gains of 10% in the
case of Qualifying Individuals and for the alternative tax rate of 15% in the case of Qualifying Corporations.
Special rules may apply to Exempt Dividends and Capital Gain Dividends distributed by the Fund to estates and trusts.
A dividend distributed by the Fund that is not an Exempt Dividend or a Capital Gain Dividend is an “Ordinary Dividend.”
Ordinary Dividends and Capital Gain Dividends received by Qualifying Individuals and Qualifying Corporations are
included in income and subject to Puerto Rico income tax (as ordinary gross income or capital gain, respectively) regardless of
whether they are reinvested in additional shares of the Fund pursuant to the Fund’s dividend reinvestment plan (if and when such
plan is established). Distributions that exceed the earnings and profits of the Fund will be treated as a tax-free return of capital to
a shareholder to the extent of the shareholders basis in the Shares of the Fund, and any excess will be treated as a gain from the
sale or exchange of such shares.
Ordinary Dividends received by Qualifying Individuals, estates and trusts will be subject to a 10% preferential tax to be
withheld at source rather than to the regular tax on ordinary income.
Upon filing a Puerto Rico income tax return, a Qualifying Individual, estate or trust may elect not to be subject to the 10%
preferential tax on the Ordinary Dividends and to be subject to the regular income tax rates provided by the Puerto Rico Code on
ordinary income and the 10% tax withheld at source may be claimed as a credit against Puerto Rico income taxes.
An Ordinary Dividend received by a Qualifying Corporation will be subject to regular and alternative minimum tax. An
Ordinary Dividend received by a Qualifying Corporation will qualify for an 85% dividends received deduction. Qualifying
Corporations will not be eligible for the 10% preferential tax applicable in the case of Qualifying Individuals, estates and trusts.
However, dividends paid to Qualifying Corporations will be subject to the 10% income tax withholding, which amount may be
claimed as a credit against the Puerto Rico income taxes due by the Qualifying Corporation.
24
By purchasing shares of the Fund, investors will be irrevocably agreeing that all Ordinary Dividends distributed to them will
be subject to a 10% Puerto Rico income tax withholding, which will be automatically withheld at the source by the Fund or its
paying agent (including the Distributor or a selected dealer).
Gain recognized by a shareholder from the sale, exchange or other disposition (including a redemption that is not essentially
equivalent to a dividend) of Shares will be treated as a capital gain for shareholders who hold the Shares as a capital asset and as
a long-term capital gain if the Shares have been held by the shareholder for more than six (6) months prior to such sale or
exchange. Long-term capital gains recognized by Qualifying Individuals on the sale, exchange or other disposition of the Shares
will be subject to a 10% income tax rate. Alternatively, the Qualifying Individual may elect to include such long-term capital
gain as ordinary income and be subject to the regular income tax rates imposed under the Puerto Rico Code. Long-term capital
gains recognized by a Qualifying Corporation on the sale, exchange or other disposition of the Shares will be subject to a 15%
income tax rate. Losses from the sale, exchange or other disposition of the Shares that constitute capital assets in the hands of
Qualifying Individuals and Qualifying Corporations which are Puerto Rico corporations are deductible only to the extent of
gains recognized by such shareholders from the sale, exchange or other disposition of capital assets. Qualifying Individuals may
also deduct up to $1,000 of such capital losses against ordinary income.
A trustee of an IRA Account that makes an investment in IRA shares shall, in connection with such investment, be treated
as meeting the investment requirements of Section 1081.02(a)(3) of the Puerto Rico Code and the basis of an owner or
beneficiary in an IRA Account shall be increased by that part of a distribution made by such account that consists of an “Exempt
Dividend,” as defined above. See “General InformationCInvestment Objective and Policies.”
For purposes of the Puerto Rico Code, an investment in Shares by a “financial institution” may be treated as an investment
in an “exempt obligation” for purposes of the interest expense allocation rules for financial institutions of the Puerto Rico Code.
Qualifying Retirement Trusts will not be subject to income taxation on Ordinary Dividends, Capital Gain Dividends and
gains recognized from the sale, exchange or other disposition of Shares of the Fund.
Alternative Minimum Tax. Qualifying Individuals are subject to alternative minimum tax if their regular tax liability is less
than the alternative minimum tax liability. The alternative minimum tax rates range from 10% to 20% depending on the
alternative minimum tax net income. The alternative minimum tax net income is determined by adjusting the individual’s net
income subject to regular income tax rates by, among other items, adding: (i) certain income exempt from the regular income tax
and (ii) income subject to special tax rates as provided in the Puerto Rico Code such as: Ordinary Dividends, Capital Gain
Dividends and long-term capital gains recognized by Qualifying Individuals on the sale, exchange or other taxable disposition of
the Shares. It should be noted that Exempt Dividends distributed by the Fund are not subject to alternative minimum tax.
The alternative minimum tax liability of Qualifying Corporations is not affected by the receipt or accrual of Ordinary
Dividends, Capital Gain Dividends and long-term capital gains recognized on the sale, exchange or other taxable disposition of
the Shares.
Estate and Gift Taxes. The transfer of Shares by gift by a Qualifying Individual will not be subject to gift taxes imposed by
the Puerto Rico Code if such Qualifying Individual is a resident of Puerto Rico for purposes of the Puerto Rico Code as of the
time of the gift. The transfer of Shares by death by a Qualifying Individual will not be subject to estate taxes imposed by the
Puerto Rico Code if such Qualifying Individual (i) is a U.S. citizen who acquired his citizenship solely by reason of birth or
residence in Puerto Rico and (ii) is a resident of Puerto Rico for purposes of the Puerto Rico Code as of the time of death.
Municipal License Taxes. Under the MLTA, all dividends distributed by the Fund to Qualifying Corporations will form part
of their “volume of business” and, therefore, may be subject to a municipal license tax of up to 1.5%, in the case of such
shareholders that are engaged in a financial business, or of up to 0.5%, in the case of such shareholders engaged in non-financial
businesses. Qualifying Individuals will not be subject to a municipal license tax on the Fund’s distributions.
Property Taxes. Under the provisions of the MPTA, the shares are exempt from Puerto Rico personal property taxes in the
hands of the Fund’s shareholders.
The discussion contained in this Section is a general and abbreviated summary of certain Puerto Rico tax considerations
affecting the Fund and the Qualifying Investors, and is not intended as tax advice or to address a shareholder’s particular
circumstances. Investors are urged to consult their tax advisers regarding the tax consequences of investing in the Fund.
25
United States Taxation of the Fund
Income Taxes. In the opinion of Pietrantoni Méndez & Alvarez LLP, based on certain representations made by the Fund,
under current United States federal income tax law, the Fund will not be engaged in a U.S. trade or business. An opinion of
counsel is not binding on the IRS, however, and it is possible that the IRS or a court could disagree with counsel’s conclusion.
Interest received by the Fund from U.S. sources on certain registered obligations (“Portfolio Interest”) and gains derived by the
Fund from the sale or exchange of personal property (other than a “United States Real Property Interest”) are not subject to
United States federal income taxation. It is the intent of the Fund’s management to derive only U.S. source interest income
considered to be Portfolio Interest with respect to its investments in U.S. fixed-income securities. Moreover, as a foreign
corporation not engaged in trade or business, the Fund will only be subject to United States federal income taxation if it realizes
certain items of U.S. source income of a fixed or determinable annual or periodic nature, in which case the Fund will be subject
to withholding of United States federal income tax at a 10% gross rate on U.S. source dividends and at a 30% gross rate on such
other U.S. source income. If the Fund ultimately is found to be engaged in a U.S. trade or business, it would be subject to U.S.
corporate income tax at the regular rates applicable to corporations on that part of its net income that is effectively connected
with such business and, in addition, to a branch profits tax (which generally is imposed on a foreign corporation upon the
repatriation outside of the United States of earnings and profits attributable to a U.S. trade or business) at a 30% rate on its
earnings and profits attributable to such effectively connected income, subject to a number of statutory adjustments.
United States Taxation of Qualifying Investors
Income Taxes. The Fund will be treated as a foreign corporation under the U.S. Code and dividends paid by the Fund will
generally have a Puerto Rico source rather than a U.S. source. Qualifying Corporations (other than U.S. Corporations) that are
not engaged in a U.S. trade or business will not be subject to U.S. taxation on dividends received from the Fund and on gains
from the sale or exchange of Shares. Qualifying Corporations (other than U.S. Corporations) that invest in the Fund will be
subject to United States federal income tax on gain from a disposition of shares only if the gain is effectively connected to a U.S.
trade or business carried on by such corporation.
Under U.S. Code Sections 933 and 937, and the regulations thereunder, Qualifying Individuals who own, directly or
indirectly, less than 10% of the total Shares of the Fund will not be subject to United States income taxation on dividends
received from the Fund. Also, Qualifying Individuals will not be subject to United States income taxation on gains from the sale
or exchange of Shares. However, these shareholders will not generally be allowed a tax deduction for any amount allocable to or
chargeable against amounts so excluded from the Qualifying Individuals’ gross income.
In the case of Qualifying Individuals who own, directly or indirectly, at least 10% of the total Shares, only the Puerto Rico
source ratio of any dividend paid or accrued by the Fund shall be treated as income from sources within Puerto Rico. For these
shareholders, the Puerto Rico source ratio of any dividend from the Fund shall be a fraction, the numerator of which equals the
gross income of the Fund from sources within Puerto Rico during the testing period and the denominator of which equals the
total gross income of the Fund for the testing period. The term “testing period” as used herein means the 3-year period ending
with the close of the taxable year of the payment of the dividend (or such part of such period as the Fund has been in existence,
if less than 3 years). In the case of these shareholders, the part of the dividend determined to be from sources other than Puerto
Rico (after applying the rules described in this paragraph) will be subject to United States income taxation.
Qualifying Individuals should consult their tax advisers to determine if under the provisions of Section 937 of the U.S. Code
and the regulations promulgated thereunder, they meet the direct or indirect 10% ownership requirement described above since
certain attribution rules apply for purposes of determining such 10% ownership requirement. If after consulting his or her tax
adviser, a Qualifying Individuals determines that he or she is a 10% shareholder of the Fund, such Qualifying Individuals must
contact the investment adviser to get the necessary information to determine which part of the dividend received by him or her is
from sources other than Puerto Rico.
Under current United States federal income tax law, the Fund will be treated as a passive foreign investment company
(“PFIC”). Under the PFIC rules, a Fund shareholder that is a U.S. person, i.e., a citizen or resident of the United States, a U.S.
domestic corporation or partnership, or an estate or trust that is taxed as a resident of the United States (such a shareholder is
referred to in this section as a “U.S. shareholder”) and that disposes of its PFIC stock at a gain is treated as receiving an excess
distribution equal to such gain. In addition, if a U.S. shareholder receives a distribution from a PFIC in excess of 125% of the
average amount of distributions such shareholder has received from the PFIC during the three preceding taxable years (or shorter
period if the U.S. shareholder has not held the stock for three years), the U.S. shareholder is treated as receiving an excess
distribution equal to such excess. In general, under the PFIC rules, (i) the excess distribution or gain would be allocated ratably
over the U.S. Shareholder’s holding period for the Shares, (ii) the amount allocated to the current taxable year would be taxed as
26
ordinary income, and (iii) the amount allocated to each of the other taxable years would, with certain exceptions, be subject to
tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed
deferral benefit would be imposed on the resulting tax attributable to each such year.
As an alternative to these rules, U.S. Shareholders may, in certain circumstances, elect a mark-to-market treatment with
respect to these Shares.
Qualifying Corporations (other than U.S. Corporations) are not U.S. shareholders for purposes of the PFIC provisions.
Qualifying Individuals who are citizens of the United States are U.S. shareholders for purposes of the PFIC provisions.
However, under a proposed regulation under the U.S. Code, citizens of the United States who are Qualifying Individuals would
be subject to the rule described in (ii) and (iii) above only to the extent that any excess distribution or gain is considered to be
from sources other than Puerto Rico or is allocated to a taxable year during which the Qualifying Individual held the Shares and
was not a bona fide resident of Puerto Rico during the entire taxable year, or in certain cases, a portion thereof, within the
meaning of Sections 933 and 937 of the U.S. Code. The portion of the excess distribution or gain considered to be Puerto Rico
source income that is allocated to the current taxable year of the Qualifying Individual will not be subject to U.S. income
taxation pursuant to U.S. Code Section 933.
The IRS recently issued regulations under Section 937(b) of the U.S. Code that include an exception to the general source of
income rules (described above) otherwise applicable to dividends paid by Puerto Rico corporations (such as the Fund) in the case
of dividends paid by such Puerto Rico corporations pursuant to certain conduit plans or arrangements (“conduit arrangements”).
Under the regulations, income received pursuant to a conduit arrangement from United States sources would retain its character
as U.S. source income notwithstanding the fact the general sourcing rules would otherwise treat such income as being from
Puerto Rico sources. In general, the regulations describe a conduit arrangement as one in which pursuant to a plan or
arrangement income is received by a person in exchange for consideration provided to another person and such other person
provides the same consideration (or consideration of a similar kind) to a third person in exchange for one or more payments
constituting income from sources within the United States. Based on our analysis, however, we understand that the conduit
regulations were not intended to apply to an actively managed investment company such as the Fund that is subject to regulation
by state authorities and, therefore, would not change the conclusion that dividends paid by the Fund will be considered from
Puerto Rico sources as described above.
Investors that are estates or trusts should consult their tax advisers regarding the U.S. federal tax consequences of an
investment in the Fund.
Estate and Gift Taxes. The transfer of Shares by death or gift by a Qualifying Individual will not be subject to estate and gift
taxes imposed by the U.S. Code if such Qualifying Individual (i) is a U.S. citizen who acquired such citizenship solely by reason
of birth or residence in Puerto Rico and (ii) is a resident of Puerto Rico for purposes of the U.S. Code as of the time of the death
or gift.
The discussion contained in this section is a general and abbreviated summary of certain federal tax considerations affecting
the Fund and the Qualifying Investors, and is not intended as tax advice or to address a shareholder’s particular circumstances.
Investors are urged to consult their tax advisers regarding specific questions as to United States federal or Puerto Rico
taxes or as to the consequences of investing in the Fund.
NET ASSET VALUE
Net asset value per Share is determined by the Administrator as of the close of trading on each day that the NYSE is open
for trading, based on prices at the time of closing (generally, the NYSE closes at 4:00 p.m., prevailing Eastern Time). For
purposes of determining the net asset value of a Share, the amortized cost value of the securities held by the Fund plus any cash
or other assets minus all liabilities is divided by the total number of Shares outstanding at such time.
The Fund’s assets will be valued by the Administrator, with the assistance of the Investment Adviser and Santander
Securities, in good faith and under the supervision of the Fund’s Board of Directors or based upon market quotations when such
quotations are available. Portfolio securities traded in the over-the-counter market are valued at the last available bid price in the
over-the-counter market prior to the time of valuation. When market quotations for securities held by the Fund are not readily
available, they will be valued at fair value by or under the direction of the Board of Directors utilizing quotations and other
information concerning similar securities derived from recognized dealers in those securities or information regarding the trading
spreads quoted by recognized dealers between such securities and U.S. Treasury securities whose maturities are determined to be
27
most closely matched to the average life of the Fund’s securities. Dealers providing pricing information may include Santander
Securities, and in the case of certain securities held by the Fund, Santander Securities might be the sole or best source of pricing
information.
The Fund employs the “amortized cost method” of valuing portfolio securities for the purpose of calculating the net asset
value per share and intends to use its best efforts to continue to maintain a constant net asset value of $1.00 per Share; however,
there can be no assurance that the Fund’s net asset value will always remain at $1.00 per Share. The amortized cost method of
valuation involves valuing a security at its cost and thereafter assuming a constant amortization to maturity of any discount or
premium. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated
value of a security is higher or lower than the price the Fund would receive if the security were sold.
In determining net asset value, the Fund also may utilize the valuations of portfolio securities furnished by a pricing service
approved by the Board of Directors. The pricing service typically values portfolio securities at the bid price or the yield
equivalent when quotations are readily available. Portfolio securities for which quotations are not readily available are valued at
fair market value on a consistent basis as determined by the pricing service using a matrix system to determine valuations. The
procedures of the pricing service and its valuations will be reviewed by the officers of the Fund under the general supervision of
the Board of Directors. Prior to using a pricing service, the Board of Directors will determine in good faith that the use of a
pricing service is a fair method of determining the valuation of portfolio securities.
Notwithstanding the above, assets with maturities of 60 days or less generally will be valued at amortized cost if their
original term to maturity was 60 days or less, or by amortizing the difference between their fair value as of the 61st day prior to
maturity and their maturity value if their original term to maturity exceeded 60 days, unless in either case the Board of Directors
or an authorized committee thereof determines that this does not represent fair value.
DESCRIPTION OF CAPITAL STOCK
The total number of shares of all classes of capital stock which the Fund shall have the authority to issue, upon resolution
approved by the Board of Directors from time to time, is two billion shares (2,000,000,000) of common stock, par value of one
cent ($0.01) per share.
The Board of Directors is authorized to classify or reclassify any unissued Shares by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of
redemption and is similarly authorized to classify or reclassify any issued Shares, provided that such action does not
substantially adversely affect the rights of holders of such issued stock.
The following table shows the amount of (i) capital stock authorized, (ii) capital stock held by the Fund for its own account,
and (iii) capital stock outstanding for each class of authorized securities of the Fund as of March 14, 2011:
Title of Class
Class A Common Stock ..........................
Class B Common Stock*.........................
Class Y Common Stock ..........................
Amount
Authorized
1,499,999,990
10
500,000,000
Amount Held
by Fund
for Its Own
Account
-0-0-0-
Amount
Outstanding
(Exclusive of Amount
Held by Fund for its
Own Account)
43,139,944.850
-0-0-
* Shares of Class B common stock, which will only be offered and sold to the Directors of the Fund that are bona fide residents of Puerto Rico, are nonredeemable and will have no voting rights nor will they be entitled to receive any net income of or other distributions from the Fund.
Common Stock
The Shares, when issued and outstanding, will be fully paid and nonassessable. Holders of Shares are entitled to share
pro-rata in the net assets of the Fund available for distribution to shareholders of common stock upon the liquidation of the Fund.
Holders of Shares are entitled to one vote for each Share held.
Holders of Shares will be entitled to require the Fund to redeem all or any part of the Shares of the Fund outstanding in the
name of such holder of said Common Stock at periodic intervals, as determined by the Board of Directors of the Fund, but not
28
less frequently than once each year. The redemption price shall be the net asset value thereof as determined by the Board of
Directors as prescribed in the Certificate of Incorporation of the Fund.
PERFORMANCE INFORMATION
From time to time, the Fund may include its total return, average annual total return and current dividend return in
advertisements or other types of sales literature. These figures are based on historical earnings and are not intended to indicate
future performance. Total return is computed for a specified period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends and any capital gain distributions on the
reinvestment dates at prices calculated as stated in this prospectus, then dividing the value of the investment at the end of the
period so calculated by the initial amount invested and subtracting 100%. The average annual total return is computed on the
basis of the total return for a specified number of years by adding the total returns for such years and dividing by the number of
years included. The Fund calculates current dividend return by annualizing the most recent dividend distribution and dividing by
the applicable net asset value or the maximum public offering price on the last day of the period for which current dividend
return is presented. The current dividend return may vary from time to time depending on market conditions, the composition of
the Fund’s investment portfolio and operating expenses. These factors and possible differences in the methods used in
calculating current dividend should be considered when comparing current return to yields published for other investment
companies and other investment vehicles. The Fund may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from Lipper, Inc. and other financial publications.
EXCHANGING SHARES
An exchange involves the redemption of all or a portion of the shares of one fund and the purchase of shares of another
fund. As a shareholder, you have the privilege of exchanging shares of the Fund for shares of other First Puerto Rico Funds
registered under the Act and advised by SAM. An exchange may be a taxable transaction depending upon the funds involved.
However, you should note the following policies and restrictions governing exchanges.
$ You may exchange shares only for shares of the same class of another qualifying fund. Not all funds offer all
classes.
$ Exchanges of Shares are subject to minimum investment requirements (except for systematic investment plan
exchanges), and all shares are subject to the other requirements of the fund into which exchanges are made.
$
You must meet the minimum investment amount for each fund.
$ If you hold share certificates, the transfer agent must receive the certificates endorsed for transfer or with
signed stock powers (documents transferring ownership of certificates) before the exchange is effective.
$ The Fund may suspend or terminate your exchange privilege if you engage in an excessive pattern of
exchanges.
$
Before exchanging into a fund, be sure to read its prospectus.
Your shares may be subject to an initial sales charge at the time of the exchange. For more information, contact your
financial consultant. If eligible, you may make exchanges on any Business Day. Requests received after the close of regular
trading on the NYSE are priced at the net asset value next determined.
Your deferred sales charge (if any) will continue to be measured from the date of your original purchase of another fund’s
shares subject to a deferred sales charge.
You can make exchanges only between accounts that have identical regulations.
Although the exchange privilege is an important benefit, excessive exchange transactions can be detrimental to the Fund’s
performance and its shareholders. The Fund may refuse an exchange purchase by any person or group if, in SAM’s judgment, a
pattern of frequent exchanges is excessive and contrary to the best interests of the Fund’s other shareholders. In this event, the
Fund may, in its discretion, decide to limit additional purchase or exchanges by the shareholder. Upon such a determination, the
Fund will provide notice in writing or by telephone to the shareholder at least 15 days prior to suspending the exchange privilege
and during the 15 day period the shareholder will be required to (a) redeem his or her shares in the Fund or (b) remain invested
29
in the Fund or exchange into any of the qualifying funds which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in determining what constitutes an abusive pattern of
exchanges. The Fund also may refuse exchange purchases by any person or group, if in SAM’s judgment, the Fund would be
unable to invest the money effectively in accordance with its investment objective and policies, or would otherwise potentially
be adversely affected.
Redemption procedures are also applicable for exchanging shares, and exchanges will be made upon receipt of all
supporting documents in proper form. If the account registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is required. All exchanges involve a taxable redemption
of shares. The Fund may modify or discontinue the exchange privilege upon 30 days’ prior notice to shareholders.
Neither the Fund nor its agents will be liable for instructions communicated by telephone that are reasonably believed to be
genuine. The Fund or its agents will employ procedures designed to verify the identity of the caller and legitimacy of
instructions (for example, a shareholder’s name and account number will be required and with your consent, phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the telephone redemption and exchange program or to
impose a charge for this service at any time following at least 7 days’ prior notice to shareholders.
PRIVACY POLICY
Attached as Appendix C is a copy of the Privacy Policy as to the information the Fund compiles and maintains on its
investors.
LEGAL MATTERS AND AUDITORS
Certain legal matters in connection with the issuance of the shares of the Fund offered hereby will be passed upon by
Pietrantoni Méndez & Alvarez LLP, San Juan, Puerto Rico, as counsel to the Fund.
Deloitte & Touche LLP, San Juan, Puerto Rico, serves as the independent auditors of the Fund. The independent auditors
are responsible for auditing the financial statements of the Fund. Deloitte & Touche LLP are also the independent auditors of
the other First Puerto Rico Funds, SAM and Santander Securities.
GENERAL INFORMATION
Reports to Shareholders
The fiscal year of the Fund ends on December 31 of each year. An annual report, containing reports showing the Fund’s
portfolio and other information and financial statements audited by the Fund’s independent auditors, is sent to shareholders each
year. After the end of each year, shareholders will receive Puerto Rico income tax information regarding dividends and capital
gain distributions. Only one copy of each shareholder report and certain shareholder communications will be mailed to each
identified shareholder regardless of the number of accounts such shareholder has. If a shareholder wishes to receive separate
copies of each report and communication for each of the shareholder’s related accounts the shareholder should notify in writing:
Santander Asset Management
Santander Tower Building, Suite 1800
Tabonuco Street B-7
Guaynabo, Puerto Rico 00968-3028
Additional Information
Additional information regarding the Fund is on file with the Commissioner.
251701.4
30
APPENDIX A
SECURITIES IN WHICH THE FUND MAY INVEST
This Appendix provides a more detailed description of some of the types of securities, investment strategies and other
instruments in which the Fund may invest. The Fund is not limited by this discussion and may invest in any other types of
instruments not precluded by the investment objectives and policies discussed elsewhere in this prospectus.
Bankers’ Acceptances. The Fund may invest in bankers’ acceptances, which are short-term credit instruments used to
finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is then “accepted” by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the
accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less.
Certificates of Deposit. The Fund may invest in bank certificates of deposit (“CDs”). The Federal Deposit Insurance
Corporation is an agency of the U.S. Government that insures the deposits of certain banks and savings and loan associations up
to $100,000 per deposit. The interest on such deposits may not be insured if this limit is exceeded. Current federal regulations
also permit such institutions to issue insured negotiable CDs in amounts of $100,000 or more, without regard to the interest-rate
ceilings on other deposits. To remain fully insured, these investments currently must be limited to $100,000 per insured bank or
savings and loan association. Investments in CDs are made only with domestic institutions with assets in excess of $1 billion.
Commercial Paper. The Fund may invest in commercial paper that is limited to obligations rated Prime-1 or Prime-2 by
Moody’s, or A-1 or A-2 by S&P, or F-1 or F-2 by Fitch. Commercial paper includes notes, drafts or similar instruments payable
on demand or having a maturity at the time of issuance not exceeding nine months, exclusive of days of grace or any renewal
thereof.
Debt Securities. The Fund may invest in debt securities. The market value of debt securities is influenced primarily by
changes in the level of interest rates. Generally, as interest rates rise, the market value of debt securities decreases. Conversely,
as interest rates fall, the market value of debt securities increases. Factors that could result in a rise in interest rates, and a
decrease in the market value of debt securities, include an increase in inflation or inflation expectations, an increase in the rate of
Puerto Rico or U.S. economic growth, an increase in the Federal budget deficit or an increase in the price of commodities such
as oil.
Floating- and Variable-Rate Obligations. The Fund may also purchase certain types of floating- and variable-rate
securities. The interest payable on a variable-rate obligation is adjusted at predesignated periodic intervals and, on floating-rate
obligations, whenever there is a change in the market rate of interest on which the interest rate payable is based. There is a risk
that the current interest rate on such obligations may not accurately reflect existing market interest rates. These obligations
frequently permit the holder to demand payment of principal at any time, or at specified intervals, and permit the issuer to
prepay, at its discretion, principal plus accrued interest, in each case after a specified notice period. The issuer’s obligations
under the demand feature of such notes and bonds generally are secured by bank letters of credit or other credit support
arrangements. There frequently will be no secondary market for variable- and floating-rate obligations held by the Fund,
although the Fund may be able to obtain payment of principal at face value by exercising the demand feature of the obligation.
The Investment Adviser will consider on an ongoing basis the creditworthiness of the issuers of the floating- and variable-rate
securities held by the Fund.
Illiquid Securities. There is no limitation on the Fund’s ability to purchase or otherwise acquire illiquid securities that is,
securities that cannot be disposed of within a reasonable period of time in the ordinary course of business at approximately the
amount at which the Fund has valued the securities and includes, among other things, securities subject to contractual restrictions
on resale that hinder the marketability of the securities. Illiquid securities also may include certain of the derivative instruments
in which the Fund may invest. However, the Fund does not intend to invest in illiquid securities other than Puerto Rico illiquid
securities. Illiquid securities include repurchase agreements maturing in more than seven days. The Fund will seek to maintain a
dollar-weighted average maturity of 90 days or less in its investment portfolio in order to limit the effect of owning illiquid
securities
Mortgage-backed Securities. Mortgage-backed securities were introduced in the 1970s when the first pool of mortgage
loans was converted into a mortgage pass-through security. Since the 1970s, the mortgage-backed securities market in general
has vastly expanded and a variety of structures have been developed to meet investor needs.
A-1
New types of mortgage-backed securities are developed and marketed from time to time and, consistent with its investment
limitations, the Fund expects to invest in those new types of mortgage-backed securities that the Investment Adviser believes
may assist the Fund in achieving its investment objective. Only mortgage-backed securities issued by financial institutions
operating in Puerto Rico, which securities represent pools of mortgages executed on properties located in Puerto Rico, will
constitute Puerto Rico securities. Such mortgage-backed securities may be issued or guaranteed by one of the agencies
described below, or may have the features discussed below. Not all of the types of securities described below are available in
Puerto Rico.
Mortgage-backed securities are instruments that entitle the holder to a share of all interest and principal payments
underlying the security. The mortgages backing these securities include conventional thirty-year fixed-rate mortgages, graduated
payment mortgages, and adjustable-rate mortgages. During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. Prepayment of mortgages which underlie securities
purchased at a premium often results in capital losses and significant income reduction, while prepayment of mortgages
purchased at a discount often results in capital gains. Because of these unpredictable prepayment characteristics, it is often not
possible to predict accurately the average life or realized yield of a particular issue.
Government National Mortgage Association Securities. GNMA is a wholly owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the
“Housing Act”), authorizes GNMA to guarantee the timely payment of the principal of and interest on securities that are based
on and backed by a pool of specified mortgage loans. To qualify such securities for a GNMA guarantee, the underlying
mortgages must be insured by the Federal Housing Administration under the Housing Act, or Title V of the Housing Act of 1949
(“FHA Loans”), or be guaranteed by the Veterans’ Administration under the Servicemen’s Readjustment Act of 1944, as
amended (“VA Loans”), or be pools of other eligible mortgage loans. The Housing Act provides that the full faith and credit of
the U.S. Government is pledged to the payment of all amounts that may be required to be paid under any guarantee. In order to
meet its obligations under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through mortgage-backed securities may represent a pro rata interest in one or more pools of the following
types of mortgage loans: (i) fixed-rate level-payment mortgage loans; (ii) fixed-rate graduated-payment mortgage loans; (iii)
fixed-rate growing-equity mortgage loans; (iv) fixed-rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage
loans on multifamily residential properties under construction; (vi) mortgage loans on completed multifamily projects; (vii)
fixed-rate mortgage loans as to which escrowed funds are used to reduce the borrower’s monthly payments during the early
years of the mortgage loans (“buydown” mortgage loans); (viii) mortgage loans that provide for adjustments in payments based
on periodic changes in interest rates or in other payment terms of the mortgage loans; and (ix) mortgage-backed serial notes.
Fannie Mae Securities. Fannie Mae is a federally chartered and privately owned corporation established under the Federal
National Association Charter Act. Fannie Mae was originally organized in 1938 as a U.S. Government agency to add greater
liquidity to the mortgage market. Fannie Mae was transformed into a private sector corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. Fannie Mae acquires funds to purchase such loans from investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total amount of funds available for housing.
Each Fannie Mae pass-through mortgage-backed security represents a pro rata interest in one or more pool of FHA Loans,
VA Loans or conventional mortgage loans (i.e., mortgage loans that are not insured or guaranteed by any governmental agency).
The loans contained in those pools consist of: (i) fixed-rate level-payment mortgage loans; (ii) fixed-rate growing-equity
mortgage loans; (iii) fixed-rate graduated-payment mortgage loans; (iv) variable-rate mortgage loans; (v) other adjustable-rate
mortgage loans (“ARMs”); and (vi) fixed-rate mortgage loans secured by multifamily projects. Fannie Mae guarantees timely
payment of principal and interest on Fannie Mae mortgage-backed securities. However, the obligations of Fannie Mae are not
backed by the full faith and credit of the United States. Nevertheless, because of the relationship between Fannie Mae and the
United States, it is widely believed that, under their current legal structure, Fannie Mae mortgage-backed securities present
minimal credit risks.
Freddie Mac Securities. Freddie Mac is a corporate instrumentality of the United States established by the Emergency
Home Finance Act of 1970, as amended (the “Freddie Mac Act”). Freddie Mac was organized primarily for the purpose of
increasing the availability of mortgage credit to finance needed housing. The operations of Freddie Mac currently consist
primarily of the purchase of first lien, conventional, residential mortgage loans and participation interests in such mortgage loans
and the resale of the mortgage loans so purchased in the form of mortgage-backed securities.
The mortgage loans underlying the Freddie Mac mortgage-backed securities typically consist of fixed-rate or adjustable-rate
mortgage loans with original terms to maturity of between ten and 30 years, substantially all of which are secured by first liens
A-2
on one-to four-family residential properties or multifamily projects. Each mortgage loan must meet the applicable standards set
forth in the Freddie Mac Act. Mortgage loans underlying Freddie Mac mortgage-backed securities may include whole loans,
participation interests in whole loans and undivided interests in whole loans and participations in other Freddie Mac mortgagebacked securities.
Freddie Mac guarantees: (i) the timely payment of interest on all Freddie Mac mortgage-backed securities; (ii) the ultimate
collection of principal with respect to some Freddie Mac mortgage-backed securities; and (iii) the timely payment of principal
with respect to other Freddie Mac mortgage-backed securities. However, the obligations of Freddie Mac are not backed by the
full faith and credit of the United States.
ARM and Floating-Rate Mortgage-Backed Securities. Because the interest rates on ARM and floating-rate mortgagebacked securities are reset in response to changes in a specified market index, the values of such securities tend to be less
sensitive to interest-rate fluctuations than the values of fixed-rate securities. ARM mortgage-backed securities represent a right
to receive interest payments at a rate that is to reflect the interest earned on a pool of ARMs. ARMs generally provide that the
borrower’s mortgage interest rate may not be adjusted above a specified lifetime maximum rate or, in some cases, below a
minimum lifetime rate. In addition, certain ARMs provide for limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. ARMs may also provide for limitations on changes in the maximum
amount by which the borrower’s monthly payment may adjust for any single adjustment period. In the event that a monthly
payment is not sufficient to pay the interest accruing on the ARM, any such excess interest is added to the mortgage loan
(“negative amortization”), which is repaid through future monthly payments. If the monthly payment exceeds the sum of the
interest accrued at the applicable mortgage interest rate and the principal payment that would have been necessary to amortize
the outstanding principal balance over the remaining term of the loan, the excess reduces the principal balance of the ARM.
Borrowers under ARMs experiencing negative amortization may take longer to build up their equity in the underlying property
and may be more likely to default.
The rates of interest payable on certain ARMs, and therefore on certain ARM mortgage-backed securities, are based on
indices, such as the one-year constant maturity Treasury Rate, that reflect changes in market interest rates. Others are based on
indices, such as the 11th District Federal Home Loan Bank Cost of Funds index, that tend to lag behind changes in market
interest rates. The values of ARM mortgage-backed securities supported by ARMs that adjust based on lagging indices tend to
be somewhat more sensitive to interest-rate fluctuations than those reflecting current interest-rate levels, although the values of
such ARM mortgage-backed securities still tend to be less sensitive to interest-rate fluctuations than fixed-rate securities.
Floating-rate mortgage-backed securities are classes of mortgage-backed securities that have been structured to represent the
right to receive interest payments at rates that fluctuate in accordance with an index but that generally are supported by pools
comprised of fixed-rate mortgage loans. As with ARM mortgage-backed securities, interest-rate adjustments on floating-rate
mortgage-backed securities may be based on indices that lag behind market interest rates. Interest rates on floating-rate
mortgage-backed securities generally are adjusted monthly. Floating-rate mortgage-backed securities are subject to lifetime
interest-rate caps, but they generally are not subject to limitations on monthly or other periodic changes in interest rates or
monthly payments.
Private Pass-Through Securities. These are mortgage-backed securities issued by a nongovernmental entity, such as a trust.
These securities include collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits
(“REMICs”) that are rated in one of the top two rating categories. While they are generally structured with one or more types of
credit enhancement, private pass-through securities typically lack a guarantee by an entity having the credit status of a
governmental agency or instrumentality.
Collateralized Mortgage Obligations. CMOs are debt obligations or multiclass pass-through certificates issued by agencies
or instrumentalities of the U.S. Government or by private originators or investors in mortgage loans. In a CMO, series of bonds
or certificates are usually issued in multiple classes. Principal and interest paid on the underlying mortgage assets may be
allocated among the several classes of a series of a CMO in a variety of ways. Each class of a CMO, often referred to as a
“tranche,” is issued with a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal
payments of the underlying mortgage assets may cause CMOs to be retired substantially earlier then their stated maturities of
final distribution dates, resulting in a loss of all or part of any premium paid.
REMICs. A REMIC is a CMO that qualifies for special tax treatment under the U.S. Internal Revenue Code and invests in
certain mortgages principally secured by interests in real property. REMICs are not available in Puerto Rico and do not qualify
as Puerto Rico Securities. Investors may purchase beneficial interests in REMICs, which are known as “regular” interests or
“residual” interests. Guaranteed REMIC pass-through certificates (“REMIC Certificates”) issued by Fannie Mae or Freddie Mac
represent beneficial ownership interests in a REMIC trust consisting principally of mortgage loans or Fannie Mae, Freddie Mac
A-3
or GNMA-guaranteed mortgage pass-through certificates. For Freddie Mac REMIC Certificates, Freddie Mac guarantees the
timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying
mortgage participation certificates. Fannie Mae REMIC Certificates are issued and guaranteed as to timely distribution of
principal and interest by Fannie Mae.
Risk Factors. Due to the possibility of prepayment of the underlying mortgage instruments, mortgage-backed securities
generally do not have a known maturity. In the absence of a known maturity, market participants generally refer to an estimated
average life. An average life estimate is a function of an assumption regarding anticipated prepayment patterns, based upon
current interest rates, current conditions in the relevant housing markets and other factors. The assumption is necessarily
subjective, and thus different market participants can produce different average life estimates with regard to the same security.
There can be no assurance that estimated average life will be a security’s actual average life.
Municipal Bonds, Industrial Development Bonds and Private Activity Bonds. Municipal bonds are debt obligations
issued to obtain funds for various public purposes. The two principal classifications of municipal bonds are “general obligation”
bonds and “revenue” bonds. General obligation bonds are secured by the issuer’s pledge of its full faith, credit and taxing power
for the repayment of principal and the payment of interest. Revenue bonds are payable only from the revenues derived from a
particular source, such as the user of the facility being financed. Certain municipal bonds are “moral obligation” issues, which
normally are issued by special purpose public corporations. In the case of such issues, an express or implied “moral obligation”
of a related government unit is pledged to the payment of the debt service but is usually subject to annual budget appropriations.
The Fund may invest in industrial development bonds (“IDBs”) and private activity bonds (“PABs”), which are municipal
bonds issued by or on behalf of public corporations to finance various privately operated facilities, such as airports or pollution
control facilities. IDBs and PABs are generally revenue bonds and thus are not payable from the unrestricted revenue of the
issuer. The credit quality of IDBs and PABs is usually directly related to the credit standing of the user of the facilities being
financed.
The Fund does not presently intend to concentrate its investments, e.g., invest a relatively high percentage of its assets in
Puerto Rico government obligations (such as revenue bonds) issued by entities which may pay their debt service obligations
from the revenues derived from similar projects such as hospitals, multi-family housing, nursing homes, continuing care
facilities, commercial facilities (including hotels), electric utility systems or industrial companies. That limitation may in the
future be changed by the Fund’s Board of Directors. Any future determination to allow concentration of the Fund’s investments
may make the Fund more susceptible to similar economic, political, or regulatory occurrences. As the similarity in issuers
increases, the potential for fluctuation of the net asset value of shares of the Fund also increases. It is anticipated also that a
significant percentage of municipal obligations (e.g., revenue bonds) in the Fund’s portfolio may be issued by entities or secured
by facilities with a relatively short (or with no prior) operating history. Therefore, investors should also be aware of the risks
which these investments might entail, as discussed in this prospectus.
Municipal Lease Obligations. Municipal lease obligations are government securities that may take the form of leases,
installment purchase contracts or conditional sales contracts, or certificates of participation with respect to such contracts or
leases. Municipal lease obligations are issued by municipalities and public corporations to purchase land or various types of
equipment and facilities. Although municipal lease obligations do not constitute general obligations of the municipality for
which the municipality’s taxing power is pledges, they ordinarily are backed by the municipality’s covenant to budget for,
appropriate and make the payments due under the lease obligation.
The liquidity of municipal lease obligations varies. Certain municipal lease obligations contain non-appropriation clauses
which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Some municipal lease obligations of this type are insured as to timely
repayment of principal and payment of interest, even in the event of a failure by the municipality to appropriate sufficient funds
to make payments under the lease. However, in the case of an uninsured municipal lease obligation, the Fund’s ability to recover
under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition of the property in the event of foreclosure might prove
difficult.
Participation Interests in Floating- and Variable-Rate Securities. The Fund may invest in participation interests in
floating- and variable-rate securities. A participation interest gives the Fund an undivided interest in a security or asset owned by
a bank. The Fund has the right to sell the instrument back to the bank. Such right is generally backed by the bank’s irrevocable
letter of credit or guarantee and permits the Fund to draw on the letter of credit on demand, after specified notice, for all or any
part of the principal amount of the Fund’s participation interest plus accrued interest. Generally, the Fund intends to exercise the
A-4
demand under the letters of credit or other guarantees only upon a default under the terms of the underlying security or asset, or
to maintain the Fund’s portfolio in accordance with its investment objective and policies. The ability of a bank to fulfill its
obligations under a letter of credit or guarantee might be affected by possible financial difficulties of its borrowers, adverse
interest-rate or economic conditions, regulatory limitations or other factors. The Investment Adviser will monitor the pricing,
quality and liquidity of the participation interests held by the Fund, and the credit standing of banks issuing letters of credit or
guarantees supporting such participation interests on the basis of published financial information reports of rating services and
bank analytical services.
Participation Interests in Loans. The Fund may invest in participation interests in loans, including loans originated and
serviced by Banco Santander Puerto Rico. These securities represent an undivided fractional interest in a loan obligation of a
borrower. They are typically purchased from banks or dealers that have made the loan or are members of the loan syndicate.
The loans may be to Puerto Rico or U.S. companies. They are subject to the risk of default by the borrower as well as credit
risks of the servicing agent of the participation interest, which can cause the Fund to lose money on its investment. The Fund
may also buy interests in trusts and other entities that hold loan obligations. In that case, the Fund will be subject to the trust’s
credit risks.
Puerto Rico Government Obligations. The Fund may invest in securities issued or guaranteed by the Commonwealth of
Puerto Rico or its agencies and instrumentalities. Such securities include Puerto Rico government securities, such as bills, notes,
bonds and certificates of indebtedness, which differ in their interest rates, maturities and times of issuance, and issues of Puerto
Rico agencies and instrumentalities established under the authority of an act of the Puerto Rico Legislature. These securities may
bear fixed, floating or variable rates of interest, subject to the limitations established in the investment guidelines for the Fund.
See “Floating- and Variable-Rate Obligations” herein. While the Commonwealth of Puerto Rico may provide financial support
to some Puerto Rico agencies or instrumentalities, no assurance can be given that it will always do so, since it is not always so
obligated by law. The Fund will invest in such securities only when such securities meet the rating requirements established
under the guidelines adopted by the Fund’s Board of Directors and when the Investment Adviser deems such investment to be
consistent with the Fund’s investment objectives and policies.
Repurchase Agreements. The Fund may invest in repurchase agreements. A repurchase agreement is a transaction in
which the Fund purchases securities and simultaneously commits to resell the securities to the original seller (a member bank of
the Federal Reserve System or a securities dealer who is a member of a national securities exchange or is a market maker in U.S.
Government securities) at an agreed upon date and price reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities. Repurchase agreements carry certain risks not associated with direct investments in
securities, including possible decline in the market value of the underlying securities and costs to the Fund if the other party to
the repurchase agreement becomes bankrupt, so that the Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities. The value of the underlying securities (or collateral) will be at least equal at all times to the total amount of
the repurchase obligation, including the interest factor.
U.S. Government Securities. The Fund may invest in U.S. Government securities, including a variety of securities that are
issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements secured thereby.
These securities include securities issued and guaranteed by the U.S. Government, such as Treasury bills, Treasury notes, and
Treasury bonds; obligations supported by the right of the issuer to borrow from the U.S. Treasury, such as those of the Federal
Home Loan Banks; and obligations supported only by the credit of the issuer, such as those of the Federal Intermediate Credit
Banks.
When-Issued and Delayed Delivery Transactions. The Fund may enter into agreements with banks or broker-dealers for
the purchase or sale of securities at an agreed-upon price on a specified future date. Such agreements might be entered into, for
example, when the Investment Adviser anticipates a decline in interest rates and is able to obtain a more advantageous yield by
committing currently to purchase securities to be issued later. When the Fund purchases securities on a when-issued or delayed
delivery basis, it is required either (1) to create a segregated account with the Fund’s custodian and to maintain in that account
cash, U.S. Government securities or other high grade debt obligations in an amount equal on a weekly basis to the amount of the
Fund’s when-issued or delayed delivery commitments or (2) to enter into an offsetting forward sale of securities it owns equal in
value to those purchased. The Fund will only make commitments to purchase securities on a when-issued or delayed-delivery
basis with the intention of actually acquiring the securities. However, the Fund may sell these securities before the settlement
date if it is deemed advisable as a matter of investment strategy. When the time comes to pay for when-issued or delayeddelivery securities, the Fund will meet its obligations from then available cash flow or the sale of securities, or, although it would
not normally expect to do so, from the sale of the when-issued or delayed delivery securities themselves (which may have a
value greater or less than the Fund’s payment obligation).
A-5
APPENDIX B
RATINGS OF MUNICIPAL OBLIGATIONS AND DEBT SECURITIES
Description of Municipal and Corporate Debt Ratings of Moody’s Investors Service, Inc. (“Moody’s”)
Moody’s long-term obligation ratings are opinions of the relative credit risk of fixed-income obligations with an original
maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such
ratings use Moody’s Global Scale and reflect both the likelihood of default and any financial loss suffered in the event of default.
Moody’s municipal ratings are opinions of the investment quality of issuers and issues in the U.S. municipal market. As
such, these ratings incorporate Moody’s assessment of the default probability and loss severity of these issuers and issues. There
are nine basic rating categories for long-term obligations, ranging from Aaa (highest quality) to C (lowest quality).
Moody’s ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating
should be weighed solely as one factor in an investment decision, and one should make one’s own study and evaluation of any
issuer whose securities or debt obligations one is considering buying or selling.
Aaa — Obligations rated “Aaa” are judged to be of the highest quality, with minimal credit risk.
Aa — Obligations rated “Aa” are judged to be of high quality and are subject to very low credit risk.
A — Obligations rated “A” are considered upper-medium grade and are subject to low credit risk.
Baa — Obligations rated “Baa” are subject to moderate credit risk. They are considered medium grade and as such
may possess certain speculative characteristics.
Ba — Obligations rated “Ba” are judged to have speculative elements and are subject to substantial credit risk.
B — Obligations rated “B” are considered speculative and are subject to high credit risk.
Caa — Obligations rated “Caa” are judged to be of poor standing and are subject to very high credit risk.
Ca — Obligations rated “Ca” are highly speculative and are likely in, or very near, default, with some prospect of
recovery of principal and interest.
C — Obligations rated “C” are the lowest rated class of bonds and are typically in default, with little prospect for
recovery of principal or interest.
Note: Moody’s appends numerical codifiers 1, 2 and 3 to each generic rating category from Aa through Caa. The modifier 1
indicates that the issuer or obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Description of Moody’s Investors Service — Short-Term Notes and Variable Rate Demand Obligations (“VRDOs”)
In municipal debt issuance, there are three rating categories for short-term obligations that are considered investment
grade. These ratings are designated as Municipal Investment Grade (“MIG”) and are divided into three levels — MIG 1 through
MIG 3. In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG
ratings expire at the maturity of the obligation.
In the case of variable-rate demand obligations (“VRDOs”), a two-component rating is assigned, a long or short-term
debt rating and a demand obligation rating. The first element represents Moody’s evaluation of the degree of risk associated
with scheduled principal and interest payments. The second element represents Moody’s evaluation of the degree of risk
associated with the ability to receive purchase price upon demand (“demand feature”), using a variation of the MIG rating scale,
the Variable Municipal Investment Grade or VMIG rating. When either the long- or short-term aspect of a VRDO is nor rated,
that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1. VMIG rating expirations are a function of each issue’s specific
structural or credit features.
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MIG 1. This designation denotes superior credit quality. Excellent protection is afforded by established cash flows,
highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes strong credit quality. Margins of protection are ample, although not so large as in the
preceding group.
MIG 3. This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and
market access for refinancing is likely to be less well established.
SG. This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient
margins of protection.
VMIG1. This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term
credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price
upon demand.
VMIG2. This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit
strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon
demand.
VMIG3. This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory shortterm credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price
upon demand.
SG. This designation denotes speculative-grade credit quality. Demand features rated in this category may be
supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal
protections necessary to ensure the timely payment of purchase price upon demand.
Description of Moody’s Short-Term Ratings
Moody’s short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may
be assigned to issuers, short-term programs or to individual short-term instruments. Such obligations generally have an original
maturity not exceeding thirteen months, unless explicitly noted. Moody’s employs the following designations to indicate the
relative repayment ability of rated issuers:
P-1.
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2.
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3.
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP.
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Description of Municipal and Corporate Debt Ratings of Standard and Poor’s Ratings Group (“S&P”)
An S&P issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a
specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is
denominated. The opinion reflects S&P’s view of the obligor’s capacity and willingness to meet its financial commitments as
they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the
event of default.
The issue credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as
to market price or suitability for a particular investor.
Issue credit ratings are based, in varying degrees, on S&P’s analysis of the following:
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I. Likelihood of payment capacity and willingness of the obligor to meet its financial commitment on an obligation in
accordance with the terms of the obligation;
II.
Nature of and provisions of the obligation; and
III.
Protection afforded by, and relative position of, the obligation in the event of a bankruptcy,
reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.
Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate
recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority
in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations,
secured and unsecured obligations, or operating company and holding company obligations.).
AAA — An obligation rated “AAA” has the highest rating assigned by S&P. The obligor’s capacity to meet its
financial commitment on the obligation is extremely strong.
AA — An obligation rated “AA” differs from the highest-rated issues only to a small degree. The obligor’s capacity to
meet its financial commitment on the obligation is very strong.
A — An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
BBB — An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC, C — Obligations rated in these categories are regarded as having significant speculative
characteristics. “BB” indicates the least degree of speculation and “C” the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB — An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate
capacity to meet its financial commitment on the obligation.
B — An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB,” but the obligor currently
has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.
CCC — An obligation rated “CCC” is currently vulnerable to nonpayment, and is dependent upon favorable business,
financial and economic conditions to meet its financial commitment on the obligation. In the event of adverse business, financial
or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC — The rating “CC” is currently highly vulnerable to nonpayment.
C — A “C” rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have
payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition
or similar action which have not experienced a payment default. Among others, the “C” may be assigned to subordinated debt,
preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or
when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an
amount of cash or replaced by other instruments having a total value that is less than par.
D — An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation,
including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless
S&P believes such payments will be made during such grace period. The “D” rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation’s rating is lowered
B-3
to ‘D’ upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of
cash or replaced by other instruments having a total value that is less than par.
Plus (+) or Minus (–): The ratings from “AA” to “CCC” may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
pr
The ‘pr’ indicates that the rating is provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that project financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the
risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood
and risk.
NR
Indicates that no rating has been requested, that there is insufficient information on which to base a rating, or
that S & P does not rate a particular obligation as a matter of policy.
Description of S&P’s Short-Term Issue Credit Ratings
Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S.,
for example, that means obligations with an original maturity of no more than 365 days, including commercial paper. Short-term
ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The
result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Mediumterm notes are assigned long-term ratings. S&P short-term issue credit ratings are graded into the following categories:
A-1 — A short-term obligation rated “A-1” is rated in the highest category by S&P. The obligor’s capacity to meet its
financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.
A-2 — A short-term obligation rated “A-2” is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its
financial commitment on the obligation is satisfactory.
A-3 — A short-term obligation rated “A-3” exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B — A short-term obligation rated “B” is regarded as having significant speculative characteristics. Ratings of 'B-1', 'B2', and 'B-3' may be assigned to indicate finer distinctions within the “B” category. The obligor currently has the capacity to meet
its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity
to meet its financial commitments.
B-1— A short-term obligation rated “B-1” is regarded as having a relatively stronger capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
B-2 — A short-term obligation rated “B-2” is regarded as having an average speculative-grade capacity to meet its
financial commitments over the short-term compared to other speculative-grade obligors.
B-3 — A short-term obligation rated “B-3” is regarded as having a relatively weaker capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
C — A short-term obligation rated ‘C” is currently vulnerable to nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its financial commitments.
D — A short-term obligation rated “D” is in payment default. The “D” rating is assigned when S&P believes that a
default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due.
B-4
A short-term issue credit rating is not a recommendation to purchase or sell a security inasmuch as it does not
comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained from other sources it considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information.
Description of S&P’s Municipal Ratings Definitions
An S&P U.S. municipal note rating reflects S&P’s opinion about the liquidity factors and market access risks unique to
the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three
years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P’s analysis will
review the following considerations:
•
Amortization schedule—the larger the final maturity relative to other maturities, the more likely it will be
treated as a note; and
•
Source of Payment—the more dependent the issue is on the market for its refinancing, the more likely it will
be treated as a note.
Note rating symbols are as follows:
SP-1
A strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay
debt service will be given a “+” designation.
SP-2
A satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic
changes over the term of the notes.
SP-3
A speculative capacity to pay principal and interest.
Description of Credit Ratings of Fitch Ratings (“Fitch”)
Ratings assigned by Fitch are opinions based on established criteria and methodologies. Ratings are not facts, and
therefore cannot be described as being “accurate” or “inaccurate.” Users should refer to the definition of each individual rating
for guidance on the dimensions of risk covered by such rating.
Fitch’s opinions are forward looking and include analysts’ views of future performance. In many cases, these views on
future performance may include forecasts, which may in turn (i) be informed by non-disclosable management projections, (ii) be
based on a trend (sector or wider economic cycle) at a certain stage in the cycle, or (iii) be based on historical performance. As a
result, while ratings may include cyclical considerations and typically attempt to assess the likelihood of repayment at
“ultimate/final maturity,” material changes in economic conditions and expectations (for a particular issuer) may result in a
rating change.
Credit ratings do not directly address any risk other than credit risk. Credit ratings do not comment on the adequacy of
market price or market liquidity for rated instruments, although such considerations may affect Fitch’s view on credit risk, such
as access to capital or likelihood of refinancing.
Ratings are relative measures of risk; as a result, the assignment of ratings in the same category to entities and
obligations may not fully reflect small differences in the degrees of risk. Credit ratings, as opinions on relative ranking of
vulnerability to default, do not imply or convey a specific statistical probability of default, notwithstanding the agency’s
published default histories that may be measured against ratings at the time of default. Credit ratings are opinions on relative
credit quality and not a predictive measure of specific default probability.
Ratings are opinions based on all information known to Fitch, including publicly available information and/or nonpublic documents and information provided to the agency by an issuer and other parties. Fitch customarily seeks information
from issuers and relies on all parties for the accuracy of such information and documents. Publication and maintenance of all
ratings are subject to there being sufficient information, consistent with the relevant criteria and methodology, to form a rating
opinion. If any such information should turn out to contain misrepresentations or to be otherwise misleading, the rating
associated with that information may not be appropriate and Fitch Ratings assumes no responsibility for this risk.
If a rating does not benefit from the participation of the issuer/originator, but Fitch is satisfied that “minimum
threshold” information for the given criteria is available from public information and other sources available to Fitch, then the
B-5
non-participatory issuer, as with all issuers, will be afforded the opportunity to comment on the rating opinion and supporting
research prior to it being published.
Ratings are based on information obtained directly from issuers, other obligors, underwriters, their experts, and other
sources Fitch Ratings believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information and has
undertaken no obligation to audit or verify such information or perform any other kind of investigative diligence into the
accuracy or completeness of such information. The assignment of a rating to any issuer or any security should not be viewed as
a guarantee of the accuracy, completeness, or timeliness of the information relied on in connection with the rating or the results
obtained from the use of such information.
Ratings do not constitute recommendations to buy, sell, or hold any security, nor do they comment on the adequacy of
market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of any payments of
any security. Fitch Ratings does not have a fiduciary relationship with any issuer, subscriber or any other individual. Nothing is
intended to or should be construed as creating a fiduciary relationship between Fitch Ratings and any issuer or between the
agency and any user of its ratings. Fitch Ratings does not provide to any party any financial advice, or legal, auditing,
accounting, appraisal, valuation or actuarial services. A rating should not be viewed as a replacement for such advice or services.
Ratings may be changed, qualified, placed on Rating Watch or withdrawn as a result of changes in, additions to,
accuracy of, unavailability of or inadequacy of information or for any reason Fitch Ratings deems sufficient.
The assignment of a rating by Fitch Ratings shall not constitute consent by the agency to use its name as an expert in
connection with any registration statement, offering document or other filings under any relevant securities laws.
Credit Rating Scales
Fitch Ratings’ credit ratings provide an opinion on the relative ability of an entity to meet financial
commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit
ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms
on which they invested. The agency’s credit ratings cover the global spectrum of corporate, sovereign (including supranational
and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations
they issue, as well as structured finance securities backed by receivables or other financial assets.
The terms “investment grade” and “speculative grade” have established themselves over time as shorthand to
describe the categories ‘AAA’ to ‘BBB’ (investment grade) and ‘BB’ to ‘D’ (speculative grade). The terms “investment grade”
and “speculative grade” are market conventions, and do not imply any recommendation or endorsement of a specific security for
investment purposes. “Investment grade” categories indicate relatively low to moderate credit risk, while ratings in the
“speculative” categories either signal a higher level of credit risk or that a default has already occurred.
A designation of “Not Rated” or “NR” is used to denote securities not rated by Fitch where Fitch has rated
some, but not all, securities comprising an issuance capital structure.
Credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and
are not predictive of a specific frequency of default or loss.
Fitch Ratings’ credit ratings do not directly address any risk other than credit risk. In particular, ratings do not
deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market
considerations. However, in terms of payment obligation on the rated liability, market risk may be considered to the extent that it
influences the ability of an issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that
they influence the size or other conditionality of the obligation to pay upon a commitment (for example, in the case of indexlinked bonds).
In the default components of ratings assigned to individual obligations or instruments, the agency typically
rates to the likelihood of non-payment or default in accordance with the terms of that instrument’s documentation. In limited
cases, Fitch Ratings may include additional considerations (i.e., rate to a higher or lower standard than that implied in the
obligation’s documentation). In such cases, the agency will make clear the assumptions underlying the agency’s opinion in the
accompanying rating commentary.
B-6
Description of Fitch’s Long-Term Rating Scales
Ratings of individual securities or financial obligations of a corporate issuer address relative vulnerability to default on
an ordinal scale. In addition, for financial obligations in corporate finance, a measure of recovery given default on that liability
is also included in the rating assessment.
AAA — Bonds are considered of the highest credit quality. “AAA” ratings denote the lowest expectation of credit risk.
They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA — Bonds are considered of very high credit quality. “AA” ratings denote expectations of very low credit risk.
They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A — Bonds are considered of high credit quality. “A” ratings denote expectations of low credit risk. The capacity for
payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business
or economic conditions than is the case for higher ratings.
BBB — Bonds are considered of good credit quality. “BBB” ratings indicate that expectations of credit risk are
currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic
conditions are more likely to impair this capacity.
BB — Bonds are considered speculative. “BB” ratings indicate an elevated vulnerability to credit risk, particularly in
the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be
available to allow financial commitments to be met.
B — Bonds are considered highly speculative. “B” ratings indicate that material credit risk is present.
CCC — Ratings “CCC” indicate that substantial credit risk is present.
CC — Ratings “CC” indicate very high levels of credit risk.
C — Ratings “C” indicate exceptionally high levels of credit risk.
The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such
suffixes are not added to the “AAA” obligation rating category, or to corporate finance obligation ratings in the categories below
“B.”
WD: Indicates that the rating has been withdrawn and the issue or issuer is no longer rated by Fitch Ratings.
Rating Watch: Rating Watches indicate that there is a heightened probability of a rating change and the likely
direction of such a change. These are designated as “Positive,” indicating a potential upgrade, “Negative,” for a potential
downgrade, or “Evolving,” if ratings may be raised, lowered or affirmed. However, ratings that are not on Rating Watch can be
raised or lowered without being placed on Rating Watch first, if circumstances warrant such an action.
A Rating Watch is typically event-driven and, as such, it is generally resolved over a relatively short period. The event
driving the Watch may be either anticipated or have already occurred, but in both cases, the exact rating implications remain
undetermined. The Watch period is typically used to gather further information and/or subject the information to further
analysis. Additionally, a Watch may be used where the rating implications are already clear, but where a triggering event (e.g.,
shareholder or regulatory approval) exists. The Watch will typically extend to cover the period until the triggering event is
resolved or its outcome is predictable with a high enough degree of certainty to permit resolution of the Watch.
Rating Watches can be employed by all analytical groups and are applied to the ratings of individual entities and/or
individual instruments. At the lowest categories of speculative grade (‘CCC’, ‘CC’ and ‘C’) the high volatility of credit profiles
may imply that almost all ratings should carry a Watch. Watches are nonetheless only applied selectively in these categories,
where a committee decides that particular events or threats are best communicated by the addition of the Watch designation.
B-7
Rating Outlook: Rating Outlooks indicate the direction a rating is likely to move over a one- to two-year period. They
reflect financial or other trends that have not yet reached the level that would trigger a rating action, but which may do so if such
trends continue. The majority of Outlooks are generally Stable, which is consistent with the historical migration experience of
ratings over a one- to two-year period. Positive or Negative rating Outlooks do not imply that a rating change is inevitable and,
similarly, ratings with Stable Outlooks can be raised or lowered without a prior revision to the Outlook, if circumstances warrant
such an action. Occasionally, where the fundamental trend has strong, conflicting elements of both positive and negative, the
Rating Outlook may be described as Evolving.
Outlooks are currently applied on the long-term scale to issuer ratings in corporate finance (including sovereigns,
industrials, utilities, financial institutions and insurance companies) and public finance outside the U.S.; to issue ratings in public
finance in the U.S.; to certain issues in project finance; to Insurer Financial Strength Ratings; to issuer and/or issue ratings in a
number of National Rating scales; and to the ratings of structured finance transactions. Outlooks are not applied to ratings
assigned on the short-term scale and are applied selectively to ratings in the ‘CCC,’ ‘CC’ and ‘C’ categories. Defaulted ratings
typically do not carry an Outlook.
Description of Fitch’s Investment Grade Short-Term Ratings
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity
or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the
relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short term” based on
market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations, and up to 36
months for obligations in U.S. public finance markets. Fitch short-term ratings are as follows:
F-1
Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong credit feature.
F-2
F-3
adequate.
Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of financial commitments.
Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of financial commitments is
B
Speculative Short-Term Credit Quality. Minimal capacity for timely payment of financial commitments, plus
heightened vulnerability to near term adverse changes in financial and economic conditions.
C
High Short-Term Default Risk. Default is a real possibility.
RD
Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although
it continues to meet other financial obligations. Applicable to entity ratings only.
D
Default. Indicates a broad-based default event for an entity, or the default of a specific short-term obligation.
(+) or Minus (–): Plus or minus signs are used with a rating symbol to indicate the relative position of a credit within the
rating category.
Plus and minus signs, however, are not used in short-term ratings other than “F-1.”
B-8
APPENDIX C
(This Appendix is not part of this Prospectus)
PRIVACY POLICY
First Puerto Rico Daily Liquidity Fund, Inc. (the “Fund”) is committed to protecting the personal information that it collects
about individuals who are prospective, former or current investors. The Fund collects personal information for business
purposes to process requests and transactions and to provide customer service. Personal information is obtained from the
following sources:
Investor application and other forms, which may include your name(s), address, social security number, or tax identification
number;
Written and electronic correspondence, including telephone contacts; and
Account history, information about Fund transactions and balances in your accounts with Santander Securities Corporation
or our affiliates, other fund holdings in the First Puerto Rico family of funds, and any affiliation with Santander BanCorp and its
affiliates and subsidiaries.
The Fund limits access to personal information to those employees who need to know that information in order to process
transactions and service accounts. Employees are required to maintain and protect the confidentiality of personal information.
The Fund maintains physical, electronic, and procedural safeguards to protect personal information.
The Fund may share personal information described above with its affiliates for business purposes, such as to facilitate the
servicing of accounts. The Fund may share the personal information described above for business purposes with a non-affiliated
third party only if the entity is under contract to perform transaction processing, servicing or maintaining investor accounts on
behalf of the Fund. The Fund may share personal information with its affiliates or other companies who are not affiliates of the
Fund that perform marketing services on the Fund’s behalf or to other financial institutions with whom it has marketing
agreements for joint products or services. These companies are not permitted to use personal information for any purposes
beyond the intended use (or as permitted by law). The Fund does not sell personal information to third parties for their
independent use. The Fund may also disclose personal information to regulatory authorities or otherwise as permitted by law.
C-1
APPENDIX D
PUERTO RICO RESIDENCY REPRESENTATION LETTER
(Individuals)
To:
_________________________________ [name of Distributor or Dealer]
[_______], Puerto Rico
Re:
Puerto Rico Residency Status
To Whom It May Concern:
I provide the following information and representations in connection with opening and maintaining my account with
_________________________________. In my account I may hold or purchase certain securities issued by closed-end and/or
open-end mutual funds that are exempt from registration under the U.S. Investment Company Act of 1940 (collectively, “Mutual
Funds”), including shares of common stock, preferred stock and/or debt securities (“Puerto Rico Investments”) for which
Santander Securities Corporation acts as distributor and/or underwriter, which Puerto Rico Investments are exempt from
registration under the U.S. Securities Act of 1933 and/or the U.S. Investment Company Act of 1940, based, in part, on the
requirement that they be offered or sold only to individuals who have their principal residence in Puerto Rico (“Puerto Rico
Residents”), all as disclosed in their respective prospectuses or offering materials. I understand that the delivery of this letter
executed by me is required as a condition for my purchase of the Puerto Rico Investments.
Accordingly, I hereby represent to you that:
1.
I have acquired or propose to acquire Puerto Rico Investments for my own account and will be the sole
beneficial owner thereof.
2.
As of the date of this letter, I am an individual whose principal residence is in Puerto Rico.
3.
If I cease to be a Puerto Rico Resident, I will (i) notify you within 30 days of ceasing to be a Puerto Rico
Resident, (ii) liquidate my holdings in any Puerto Rico Investment when such liquidation becomes economically feasible, and
(iii) not acquire additional Puerto Rico Investments.
4.
I hereby acknowledge that if at the time of purchase of Puerto Rico Investments I am not a Puerto Rico
Resident, Santander Securities Corporation may declare any such purchase to be null and void.
5.
I acknowledge that any purchases of Puerto Rico Investments will not be made on behalf of a retirement plan
subject to ERISA.
6.
I acknowledge that Mutual Funds may enter into purchase and sale transactions and other transactions with
affiliated entities as described in the prospectus of each Mutual Fund and I hereby consent to such transactions as described in
the applicable prospectus.
______________________________
Signature
______________________________
Date
______________________________
Name
______________________________
Account Number
D-1
PUERTO RICO RESIDENCY REPRESENTATION LETTER
(Joint Individual Accounts)
To:
_________________________________ [name of Distributor or Dealer]
[_______], Puerto Rico
Re:
Puerto Rico Residency Status
To Whom It May Concern:
We provide the following information and representations in connection with opening and maintaining our account with
_________________________________. In our account we may hold or purchase certain securities issued by closed-end and/or
open-end mutual funds that are exempt from registration under the U.S. Investment Company Act of 1940 (collectively, “Mutual
Funds”), including shares of common stock, preferred stock and/or debt securities (“Puerto Rico Investments”) for which
Santander Securities Corporation acts as distributor and/or underwriter, which Puerto Rico Investments are exempt from
registration under the U.S. Securities Act of 1933 and/or the U.S. Investment Company Act of 1940, based, in part, on the
requirement that they be offered or sold only to individuals who have their principal residence in Puerto Rico (“Puerto Rico
Residents”), all as disclosed in their respective prospectuses or offering materials. We understand that the delivery of this letter
executed by us is required as a condition for our purchase of the Puerto Rico Investments.
Accordingly, we hereby represent to you that:
1.
We have acquired or propose to acquire Puerto Rico Investments for our own account and will be the sole
beneficial owners thereof.
2.
As of the date of this letter, we are individuals whose principal residence is in Puerto Rico.
3.
If we cease to be Puerto Rico Residents, we will (i) notify you within 30 days of ceasing to be Puerto Rico
Residents, (ii) liquidate our holdings in any Puerto Rico Investment when such liquidation becomes economically feasible, and
(iii) not acquire additional Puerto Rico Investments.
4.
We hereby acknowledge that if at the time of purchase of Puerto Rico Investments we are not Puerto Rico
Residents, Santander Securities Corporation may declare any such purchase to be null and void.
5.
We acknowledge that any purchases of Puerto Rico Investments will not be made on behalf of a retirement
plan subject to ERISA.
6.
We acknowledge that Mutual Funds may enter into purchase and sale transactions and other transactions with
affiliated entities as described in the prospectus of each Mutual Fund and we hereby consent to such transactions as described in
the applicable prospectus.
______________________________
Signature
______________________________
Date
______________________________
Signature
______________________________
Date
______________________________
Name
______________________________
Account Number
D-2
PUERTO RICO RESIDENCY REPRESENTATION LETTER
(Business Organizations)
To:
_________________________________ [name of Distributor or Dealer]
[_______], Puerto Rico
Re:
Puerto Rico Residency Status
To Whom It May Concern:
We provide the following information and representations in connection with opening and maintaining our account with
_________________________________. In our account we may hold or purchase certain securities issued by closed-end and/or
open-end mutual funds that are exempt from registration under the U.S. Investment Company Act of 1940 (collectively, “Mutual
Funds”), including shares of common stock, preferred stock and/or debt securities (“Puerto Rico Investments”) for which
Santander Securities Corporation acts as distributor and/or underwriter, which Puerto Rico Investments are exempt from
registration under the U.S. Securities Act of 1933 and/or the U.S. Investment Company Act of 1940, based, in part, on the
requirement that they be offered or sold only to individuals who have their principal residence in Puerto Rico or to corporations
or other business organizations that have their principal office and principal place of business within Puerto Rico (“Puerto Rico
Residents”), all as disclosed in their respective prospectuses or offering materials. We understand that the delivery of this letter
executed by us is required as a condition for our purchase of the Puerto Rico Investments.
Accordingly, we hereby represent to you that:
1.
We have acquired or propose to acquire Puerto Rico Investments for our own account and will be the sole
beneficial owner thereof.
2.
As of the date of this letter, we are a corporation, partnership or other form of business organization that has its
principal office and principal place of business within Puerto Rico and that has not been organized for the purpose of acquiring
Puerto Rico Investments and, if organized as a trust, the trustee and all beneficiaries of the trust are residents of Puerto Rico.
3.
If, as of the date of this letter, we are organized as a non-business trust, the trust has its principal office and
principal place of business within Puerto Rico and the trustee and all beneficiaries of the trust are Puerto Rico Residents.
4.
If we cease to be a Puerto Rico Resident, we will (i) notify you within 30 days of ceasing to be a Puerto Rico
Resident, (ii) liquidate our holdings in any Puerto Rico Investment when such liquidation becomes economically feasible, and
(iii) not acquire additional Puerto Rico Investments.
5.
We hereby acknowledge that if at the time of purchase of Puerto Rico Investments we are not a Puerto Rico
Resident, Santander Securities Corporation may declare any such purchase to be null and void.
6.
We acknowledge that any purchases of Puerto Rico Investments will not be made on behalf of a retirement
plan subject to ERISA.
7.
We acknowledge that Mutual Funds may enter into purchase and sale transactions and other transactions with
affiliated entities as described in the prospectus of each Mutual Fund and we hereby consent to such transactions as described in
the applicable prospectus.
______________________________
Signature
______________________________
Date
______________________________
Name
______________________________
Account Number
______________________________
Business Organization
D-3
FIRST PUERTO RICO DAILY LIQUIDITY FUND
Daily Liquidity Fund
Prospectus
March 24, 2011
Daily Liquidity Fund
Prospectus
March 24, 2011
This prospectus contains important
information about the shares of Common
Stock of the Fund. Please read it before
investing and keep it for future reference.