May 1,
2022 (As Amended and Restated January 1, 2023)
STATEMENT
OF ADDITIONAL INFORMATION FOR
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Investor Shares |
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Institutional Shares |
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Parnassus
Core Equity Fund |
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(PRBLX |
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(PRILX |
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Parnassus
Growth Equity Fund |
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(PFGEX |
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(PFPGX |
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Parnassus
Value Equity Fund (formerly Parnassus Endeavor Fund) |
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(PARWX |
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(PFPWX |
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Parnassus
Mid Cap Fund |
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(PARMX |
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(PFPMX |
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Parnassus
Mid Cap Growth Fund |
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(PARNX |
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(PFPRX |
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Parnassus
Fixed Income Fund |
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(PRFIX |
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(PFPLX |
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Parnassus
Funds
Parnassus
Income Funds
1
Market Street, Suite 1600
San
Francisco, CA 94105
(800)
999-3505
The
“Parnassus Funds” or the “Funds,” as referenced collectively in this statement
of additional information, are composed of two trusts. The Parnassus Funds trust
consists of four mutual funds: the Parnassus Growth Equity Fund, the Parnassus
Value Equity Fund (formerly known as the Parnassus Endeavor Fund), the Parnassus
Mid Cap Fund, and the Parnassus Mid Cap Growth Fund. The Parnassus Income Funds
trust consists of two mutual funds: the Parnassus Core Equity Fund and the
Parnassus Fixed Income Fund. The Funds are managed by Parnassus Investments,
LLC. Each of the Funds offers two classes of shares, Investor Shares and
Institutional Shares, which differ only in their ongoing fees and investment
eligibility requirements.
The
Funds’ audited financial statements for the fiscal year ended December 31,
2021 are incorporated into this statement of additional information by reference
to the Funds’ annual report to shareholders dated December 31, 2021, as
filed with the Securities and Exchange Commission on February 4, 2022. This
means that you should consider the Funds’ audited financial statements to be
part of the statement of additional information. This statement of additional
information is not a prospectus and should be read in conjunction with the
current prospectus of the Funds, dated May 1, 2022, as amended and
supplemented to date. You may obtain a free copy of the prospectus, the annual
report or semiannual report by calling the Funds at (800) 999-3505, writing
to the Funds at the above address or visiting the Funds’ website,
www.parnassus.com.
TABLE
OF CONTENTS
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B-2 |
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B-17 |
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B-24 |
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B-26 |
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B-26 |
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B-30 |
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B-31 |
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B-31 |
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B-32 |
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B-32 |
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B-37 |
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B-37 |
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B-38 |
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B-38 |
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B-46 |
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B-48 |
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AA-1 |
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AB-1 |
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INVESTMENT
OBJECTIVES AND POLICIES
The
investment objective of the Parnassus Growth Equity Fund, the Parnassus Value
Equity Fund, the Parnassus Mid Cap Fund, and the Parnassus Mid Cap Growth Fund
is to achieve long-term capital appreciation. The investment objective of the
Parnassus Core Equity Fund is both capital appreciation and current income. The
investment objective of the Parnassus Fixed Income Fund is to provide a high
level of current income consistent with safety and preservation of capital. Each
of the Funds is diversified. The Funds’ prospectus describes the investment
objective and principal investment strategies of each Fund. Prior to May 1,
2020, the Parnassus Mid Cap Growth Fund was known as the Parnassus Fund. Prior
to December 30, 2022, the Parnassus Value Equity Fund was known as the
Parnassus Endeavor Fund.
Investment Restrictions
The
Funds have adopted the following investment restrictions (in addition to those
indicated in the prospectus) as fundamental policies that may not be changed
without the approval of the holders of a “majority” (as defined in the
Investment Company Act of 1940, as amended [the “1940 Act”]) of the applicable
Fund’s outstanding shares. A vote of the holders of a “majority” (as so defined)
of a Fund’s outstanding shares means a vote of the holders of the lesser of
(i) 67% or more of the Fund’s shares present or represented by proxy at a
meeting at which more than 50% of the outstanding shares are present or
represented by proxy, or (ii) more than 50% of the outstanding
shares.
The
Funds may not:
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(1) |
With
respect to 75% of a Fund’s total net assets, purchase any security, other
than obligations of the U.S. government, its agencies or instrumentalities
(“U.S. government securities”), if as a result: (i) more than 5% of a
Fund’s total net assets (taken at current value) would then be invested in
securities of a single issuer or (ii) a Fund would hold more than 10%
of the outstanding voting securities of any one
issuer. |
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(2) |
Purchase
any security if, as a result, any Fund would have 25% or more of its net
assets (at current value) invested in a single
industry. |
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(3) |
Purchase
securities on margin (however, the Funds may obtain such short-term
credits as may be necessary for the clearance of
transactions). |
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(4) |
Make
short sales of securities, purchase on margin or purchase puts, calls,
straddles or spreads. |
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(5) |
Issue
senior securities, borrow money or pledge their assets, except that each
Fund may borrow from a bank for temporary or emergency purposes in amounts
not exceeding 10% (taken at the lower of cost or current value) of its net
assets (not including the amount borrowed) and pledge its assets to secure
such borrowings. A Fund will not make additional purchases while any
borrowings are outstanding. |
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(6) |
Buy
or sell commodities or commodity contracts, including futures contracts or
real estate, real estate limited partnerships or other interests in real
estate. (The 1940 Act currently permits investments in commodities.) Each
Fund may purchase and sell securities that are secured by real estate and
securities of companies that invest or deal in real
estate. |
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(7) |
Act
as underwriter, except to the extent that in connection with the
disposition of portfolio securities, each Fund may be deemed to be an
underwriter under certain federal securities
laws. |
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(8) |
Participate
on a joint (or joint and several) basis in any trading account in
securities. |
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(9) |
Invest
in securities of other registered investment companies, except that each
Fund may invest up to 10% of its assets in money-market funds, but no more
than 5% of its assets in any one fund and no Fund may own more than 3% of
the outstanding voting shares of any one fund. This restriction does not
apply to a transaction that is a part of a merger, consolidation or other
acquisition or regarding collateral held for securities lending
arrangements, which are deposited into money-market
funds. |
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(10) |
Invest
in interests in oil, gas or other mineral exploration or development
programs or in oil, gas or other mineral leases, although each Fund may
invest in the common stocks of companies that invest in or sponsor such
programs. (No Fund will invest in any such companies in violation of its
fossil-fuel free investment strategy.) |
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Make
loans, except through repurchase agreements; however, the Funds may engage
in securities lending and may also acquire debt securities and other
obligations consistent with the applicable Fund’s investment objective(s)
and its other investment policies and restrictions. Investing in a debt
instrument that is convertible into equity or investing in a community
loan fund is not considered the making of a
loan. |
As
a general rule, the percentage limitations referred to in these restrictions
apply only at the time of investment other than with respect to a Fund’s
borrowing of money. A later increase or decrease in a percentage that results
from a change in value in the portfolio securities held by a Fund will not be
considered a violation of such limitation, and the Fund will not necessarily
have to sell a portfolio security or adjust its holdings in order to
comply.
B-2
Portfolio Turnover
The
Parnassus Core Equity Fund, the Parnassus Mid Cap Fund, the Parnassus Value
Equity Fund and the Parnassus Fixed Income Fund did not have significant changes
in portfolio turnover rates over the two most recently completed fiscal
years. For the year ended December 31, 2020, the turnover rates for
the Parnassus Core Equity Fund, the Parnassus Mid Cap Fund, the Parnassus Value
Equity Fund and the Parnassus Fixed Income Fund were 37.15%, 41.00%, 52.77% and
37.77%, respectively. For the year ended December 31, 2021, the turnover
rates for the Parnassus Core Equity Fund, the Parnassus Mid Cap Fund, the
Parnassus Value Equity Fund and the Parnassus Fixed Income Fund were
25.82%, 34.76%, 37.22% and 31.29%, respectively. The Parnassus Mid Cap Growth
Fund did have a significant change in its turnover rate between 2020 and 2021
due to the Fund’s transition during 2020 from being a multi-cap fund to a
mid-cap growth fund. The Parnassus Mid Cap Growth Fund’s turnover rate for the
year ended December 31, 2020 was 82.46%, and the Fund’s turnover rate for
the year ended December 31, 2021 was 28.73%. The Parnassus Growth Equity
Fund was not operational prior to December 28, 2022 and therefore does not
have historical portfolio turnover.
Operating Policies
Each
of the Funds has adopted the following operating policies (unless otherwise
noted), which may be changed by a vote of the majority of the Funds’
Trustees:
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(1) |
With
the exception of the Parnassus Fixed Income Fund, a Fund may purchase
warrants up to a maximum of 5% of the value of its total net assets. The
Parnassus Fixed Income Fund may not purchase
warrants. |
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(2) |
The
Parnassus Core Equity Fund, the Parnassus Growth Equity Fund, the
Parnassus Value Equity Fund, the Parnassus Mid Cap Fund and the Parnassus
Mid Cap Growth Fund may not hold or purchase foreign currency except as
may be necessary in the settlement of foreign securities transactions. The
Parnassus Fixed Income Fund may not hold or purchase foreign
currency. |
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A
Fund may not make illiquid investments if thereafter more than 15% of the
value of its net assets would be so invested. Illiquid securities include,
among others, the following: (i) those which are restricted (namely,
those which cannot freely be resold for legal or contractual reasons);
(ii) fixed time-deposits subject to withdrawal penalties (other than
overnight deposits); (iii) repurchase agreements having a maturity of
more than seven days; and (iv) investments for which market
quotations are not readily available. However, the illiquid securities do
not include obligations that are payable at principal amount plus accrued
interest within seven days after purchase or commercial paper issued under
Section 4(2) of the Securities Act of 1933, as amended (the “1933
Act”), or securities eligible for resale under Rule 144A of the 1933 Act
that have been determined to be liquid pursuant to procedures adopted by
the Boards of Trustees. |
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(4) |
With
respect to the Parnassus Growth Equity Fund, the Parnassus Value Equity
Fund, the Parnassus Mid Cap Fund, the Parnassus Mid Cap Growth Fund and
the Parnassus Fixed Income Fund, in accordance with the requirements of
Rule 35d-1 under the 1940 Act, it is an operating policy of each Fund to
normally invest at least 80% of its net assets, plus borrowings for
investment purposes, in the particular type of investments suggested by
its name. The Parnassus Growth Equity Fund and the Parnassus Value Equity
Fund normally invest at least 80% of their net assets, plus borrowings for
investment purposes, in equities. Specifically, the Parnassus Growth
Equity Fund invests in equity securities of large-sized growth companies
with market capitalizations greater than the median market capitalization
of the Russell 1000® Growth Index (which
was $16 billion as of May 31, 2022); and the Parnassus Value Equity
Fund mainly invests in equity securities that, in the Adviser’s opinion,
are undervalued, but they must also have good prospects for long-term
capital appreciation over the course of the expected holding period. The
Parnassus Mid Cap Fund invests at least 80% of its net assets, plus
borrowings for investment purposes, in companies that have a market
capitalization between that of the smallest and largest constituents of
the Russell Midcap Index (which was between $0.5 billion and
$47.6 billion as of May 28, 2021). The Parnassus Mid Cap Growth
Fund invests at least 80% of its net assets, plus borrowings for
investment purposes, in companies that have a market capitalization
between that of the smallest and largest constituents of the Russell
Midcap Growth Index (which was between $0.7 billion and
$47.6 billion as of May 28, 2021). The Parnassus Fixed Income
Fund invests at least 80% of its net assets, plus borrowings for
investment purposes, in fixed income securities, particularly in
investment-grade bonds. Attached as Annex A to this statement of
additional information is a description of the corporate bond ratings of
Moody’s Investors Service, Inc. and Standard & Poor’s
Corporation. If the Board of Trustees determines to change this
non-fundamental policy for these Funds, the Funds will provide 60 days
prior written notice to the shareholders before implementing the change of
policy. |
The
aforementioned percentage restrictions on investment or utilization of assets
refer to the percentage at the time an investment is made, except for those
percentage restrictions relating to investments in illiquid securities and bank
borrowings. If these restrictions are adhered to at the time an investment is
made, and such percentage subsequently changes as a result of changing market
values or some similar event, no violation of a Fund’s fundamental restrictions
will be deemed to have occurred. Any changes in a Fund’s investment restrictions
made by the Boards of Trustees will be communicated to shareholders prior to
their implementation.
B-3
Market Risk
Various
market risks can affect the price or liquidity of an issuer’s securities in
which a Fund may invest. Returns from the securities in which a Fund invests may
underperform returns from the various general securities markets. Different
types of securities tend to go through cycles of outperformance and
underperformance in comparison to the general securities markets. Adverse events
occurring with respect to an issuer’s performance or financial position can
depress the value of the issuer’s securities. The liquidity in a market for a
particular security will affect its value and may be affected by factors
relating to the issuer, as well as the depth of the market for that security.
Other market risks that can affect value include a market’s current attitudes
about types of securities, market reactions to political or economic events,
including litigation, and tax and regulatory effects (including lack of adequate
regulations for a market or particular type of instrument). See below for a
discussion of recent market developments.
Markets
may, in response to governmental actions or intervention, economic or market
developments, or other external factors, experience periods of high volatility
and reduced liquidity. During those periods, a Fund may experience high levels
of shareholder redemptions, and may have to sell securities at times when they
would otherwise not do so, potentially at unfavorable prices. Securities may be
difficult to value during such periods. These risks may be heightened for fixed
income securities due to the current historically low interest rate
environment.
There
is a risk that policy changes by the United States and the Federal Reserve, as
well as certain foreign central banks like the European Central Bank, could
include increasing interest rates, which may negatively affect the Funds. For
example, in March 2022, the Federal Reserve began increasing interest rates in
response to sustained inflation, labor shortages and global supply chain
bottlenecks. Therefore, the risks associated with rising interest rates, such as
increased volatility and reduced liquidity in the financial markets, are
currently heightened. A significant increase in interest rates may cause a
decline in the market for equity securities and, as a result, the value of a
Fund’s equity securities. These events and potential resulting market volatility
could limit or preclude a Fund’s ability to achieve its investment objective and
affect its performance.
Federal,
state, and other governments, their regulatory agencies, or self-regulatory
organizations may take actions that affect the regulation of the securities in
which a Fund invests or the issuers of such securities in ways that are
unforeseeable. Legislation or regulation also may change the way in which the
Funds or the Adviser is regulated. Such legislation, regulation, or other
government action could limit or preclude a Fund’s ability to achieve its
investment objective and affect such Fund’s performance.
Political,
social or financial instability, civil unrest and acts of terrorism are other
potential risks that could adversely affect an investment in a security or in
markets or issuers generally. In addition, political developments in foreign
countries or the United States may at times subject such countries to sanctions
from the U.S. government, foreign governments and/or international institutions
that could negatively affect a Fund’s investments in issuers located in, doing
business in or with assets in such countries.
A
Fund may continue to accept new subscriptions and to make additional investments
in instruments in accordance with such Fund’s principal investment strategies to
strive to meet the Fund’s investment objectives under all types of market
conditions, including unfavorable market conditions.
Recent Market Conditions and Events
Periods
of unusually high volatility in the financial markets and restrictive credit
conditions, sometimes limited to a particular sector or a geography, continue to
occur. Some countries, including the United States, have adopted and/or are
considering the adoption of more protectionist trade policies, a move away from
the tighter financial industry regulations that followed the financial crisis,
and/or substantially reducing corporate taxes. The exact shape of these
policies is still being considered, but the equity and debt markets may react
strongly to expectations of change, which could increase volatility, especially
if the market’s expectations are not borne out. A rise in protectionist
trade policies, slowing global economic growth, risks associated with epidemic
and pandemic diseases, risks associated with the United Kingdom’s (the “UK”)
departure from the European Union (the “EU”), the risk of trade disputes, and
the possibility of changes to some international trade agreements, could affect
the economies of many nations, including the United States, in ways that cannot
necessarily be foreseen at the present time, and may negatively impact the
markets in which the Funds invest.
B-4
An
outbreak of respiratory disease caused by a novel coronavirus (COVID-19) was
first detected in Wuhan City, Hubei Province, China in 2019 and developed into a
global pandemic. While vaccines have been developed and approved for use by
various governments and efforts have been made to contain its spread, the
duration of the COVID-19 outbreak and its effects, including any adverse effects
on the Fund, cannot be predicted with certainty. COVID-19 has caused extreme
volatility in the financial markets, a domestic and global economic downturn,
and significant disruptions to supply chains, the workforce, consumer demand,
healthcare systems and travel. The Federal Reserve, as well as other governments
and central banks, have taken extreme and unprecedented measures to support
global and local financial markets and economies in response to COVID-19,
including significant fiscal and monetary policy changes, which may affect the
value, volatility and liquidity of securities and other assets. Given the
uncertainty surrounding the magnitude, duration and effects of COVID-19, as well
as the success of the measures taken by governmental authorities and central
banks, it is difficult to predict the potential impact to the value and
liquidity of the Fund’s investments and the Fund’s performance. Further,
COVID-19, and any steps taken to mitigate its effects, may result in disruptions
to the services provided to the Fund by its service providers. The Adviser will
monitor developments and seek to manage the Fund in a manner consistent with
achieving the Fund’s investment objective, but there can be no assurance that it
will be successful in doing so.
Foreign Equity Securities
The
Parnassus Core Equity Fund, the Parnassus Growth Equity Fund, the Parnassus
Value Equity Fund, the Parnassus Mid Cap Fund and the Parnassus Mid Cap Growth
Fund may each purchase foreign securities and American Depositary Receipts
(“ADRs”) of foreign companies up to a maximum of 20% of the value of their total
net assets. In addition to ADRs, such Funds may hold foreign securities in the
form of American Depository Shares (“ADSs”), Global Depository Receipts (“GDRs”)
and European Depository Receipts (“EDRs”), or other securities convertible into
foreign securities. Generally, American banks or trust companies issue ADRs and
ADSs, which evidence ownership of underlying foreign securities. GDRs represent
global offerings where an issuer issues two securities simultaneously in two
markets, usually publicly in a non-U.S. market and privately in the U.S. market.
EDRs (sometimes called Continental Depository Receipts [“CDRs”]) are similar to
ADRs, but are usually issued in Europe. Typically issued by foreign banks or
trust companies, EDRs and CDRs evidence ownership of foreign securities.
Generally, ADRs and ADSs in registered form trade in the U.S. securities
markets, GDRs in the U.S. and European markets, and EDRs and CDRs (in bearer
form) in European markets. Such investments increase a portfolio’s
diversification and may enhance return, but they also involve some special
risks, such as exposure to potentially adverse local political and economic
developments; nationalization and exchange controls; potentially lower liquidity
and higher volatility; possible problems arising from accounting, disclosure,
settlement and regulatory practices that differ from U.S. standards; and the
chance that fluctuations in foreign exchange rates will decrease the
investment’s value (favorable change can increase its value). When determining
whether a company’s equity securities are considered to be a “foreign security,”
the Adviser typically gives the most weight to the location of the company and
the location of the exchange(s) where most of the firms’ equity securities are
traded, but each company is evaluated using multiple factors. The location of a
company can be determined by where it is organized, where its profits and
revenues are derived and where its assets are located, as well as other
factors.
On
January 31, 2020, the United Kingdom (“UK”) officially withdrew from the
European Union (“EU”). A transition phase ended on December 31, 2020. On
December 30, 2020, the EU and the UK signed the EU-UK Trade and Cooperation
Agreement (“TCA”), an agreement governing certain elements of the EU’s and the
UK’s relationship following the end of the transition period, which
provisionally went into effect at the beginning of 2021. Even with the TCA,
there is likely to be considerable uncertainty relating to the potential ongoing
consequences of the withdrawal. The impact on the UK and European economies and
the broader
B-5
global
economy could be significant, resulting in increased volatility and illiquidity,
currency fluctuations, impacts on arrangements for trading and on other existing
cross-border cooperation arrangements (whether economic, tax, fiscal, legal,
regulatory or otherwise), and in potentially lower growth for companies in the
UK, Europe and globally, which could have an adverse effect on the value of a
Fund’s investments. In addition, if one or more other countries were to exit the
European Union or abandon the use of the euro as a currency, the value of
investments tied to those countries or the euro could decline significantly and
unpredictably.
A
number of countries in Europe have suffered terror attacks, and additional
attacks may occur in the future. The Russian invasion of Ukraine has resulted in
an ongoing military conflict and economic sanctions against certain Russian
individuals and companies; and this conflict may expand and military attacks
could occur elsewhere in Europe. Europe also has been struggling with mass
migration from the Middle East and Africa. The ultimate effects of these events
and other sociopolitical or geographical issues are not known, but could
profoundly affect global economies and markets.
Political
developments impacting international trade, including trade disputes and
increased tariffs, particularly between the U.S. and China and Canada and China,
may negatively impact markets and cause weaker macroeconomic conditions. Markets
may be materially adversely affected by political, economic or social
instability or events, including the renegotiation or nullification of
agreements and treaties, the imposition of onerous regulations, embargoes,
sanctions, and fiscal policy, changes in laws governing existing operations,
financial constraints, including currency restrictions and exchange rate
fluctuations, unreasonable taxation and the behavior of international public
officials, joint venture partners or third-party representatives.
Foreign Fixed Income Securities
The
Parnassus Fixed Income Fund may make limited use (not more than 20% of its net
assets) of foreign fixed income securities. The foreign fixed income securities
in which the Fund may invest must be U.S. dollar denominated, and may include
obligations of supranational organizations or corporations. Similar to the
Parnassus equity funds, the Adviser gives the most weight to the location of the
company’s headquarters and the location of the exchange(s) where most of the
firms’ debt is traded when determining if an issuance is a foreign security.
Foreign fixed income securities are subject to the same risks as foreign equity
securities and to the same risks as other debt securities.
Foreign
government debt securities, sometimes known as sovereign debt securities,
include debt securities issued, sponsored, or guaranteed by: governments or
governmental agencies, instrumentalities, or political subdivisions located in
emerging or developed market countries; government owned, controlled, or
sponsored entities located in emerging or developed market countries; and
entities organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by any of the above issuers.
A
supranational entity is a bank, commission, or company established or
financially supported by the national governments of one or more countries to
promote reconstruction, trade, harmonization of standards or laws; economic
development; and humanitarian, political, or environmental initiatives.
Supranational debt obligations include: Brady Bonds (which are debt securities
issued under the framework of the Brady Plan as a means for debtor nations to
restructure their outstanding external indebtedness); participations in loans
between emerging market governments and financial institutions; and debt
securities issued by supranational entities such as the World Bank, Asia
Development Bank, European Investment Bank, and the European Economic Community.
Obligations of the World Bank and certain other supranational entities are
supported by subscribed but unpaid commitments of member countries. There is no
assurance that these commitments will be undertaken or complied with in the
future. If one or more shareholders of a supranational entity fails to make
necessary additional capital contributions, the supranational entity may be
unable to pay interest or repay principal on its debt securities.
Foreign
government debt securities are subject to risks in addition to those relating to
debt securities generally. Governmental issuers of foreign debt securities may
be unwilling or unable to pay interest and repay principal, or otherwise meet
obligations when due, and may require that the conditions for payment be
renegotiated. As a sovereign entity, the issuing government may be immune from
lawsuits in the event of its failure or refusal to pay the obligations when due.
The debtor’s willingness or ability to repay in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its non-U.S.
reserves, the availability of sufficient non-U.S. exchange on the date a payment
is due, the relative size of the debt service burden to the issuing country’s
economy as a whole, the sovereign debtor’s policy toward principal international
lenders, such as the International Monetary Fund or the World Bank, and the
political considerations or constraints to which the sovereign debtor may be
subject. Governmental debtors also will be dependent on expected disbursements
from foreign governments or multinational agencies and the country’s access to,
or balance of, trade. Some governmental debtors have in the past been able to
reschedule or restructure their debt payments without the approval of debt
holders or declare moratoria on payments, and similar occurrences may happen in
the future. There is no bankruptcy proceeding by which a Fund may collect in
whole or in part on debt subject to default by a government.
Change or Influence Control Over Portfolio
Companies
As
a shareholder of a portfolio company, each Fund reserves the right to freely
communicate its views on matters of policy to the company’s management, board of
directors and other shareholders when a policy may affect the value of the
Fund’s investment or impact the Funds’ social investing criteria. In exercising
this right, each of the Funds may, from time to time, use its ownership
B-6
interest
in a portfolio company to seek to change or influence control of the company’s
management; provided that the Funds do not currently anticipate taking such
actions. For example, a Fund might take steps, either individually or as part of
a group, (a) to actively support, oppose, or influence a company’s
decision-making, (b) to seek changes in a company’s management or board of
directors, (c) to effect the sale of all or some of a company’s assets,
(d) to vote to participate in or oppose a takeover of a portfolio company
or an acquisition by a portfolio company, or (e) to serve as lead plaintiff
in a matter related to a portfolio company.
Investing
for purposes of changing or influencing control of management could result in
additional expenses to a Fund, including expenses associated with operational or
regulatory requirements and the ongoing cost of potential litigation. It could
also restrict a Fund’s ability to freely dispose of the securities of a
portfolio company with respect to which it is deemed to be investing to effect
control, which might adversely affect the Fund’s liquidity as well as the sale
price of those securities. Finally, greater public disclosure may be required
regarding a Fund’s investment and trading strategies in regulatory filings
relating to such securities.
Limited Partnerships
With
the exception of the Parnassus Fixed Income Fund, each of the Funds may also
invest up to 5% of their total net assets in venture-capital limited
partnerships. Investments in limited partnerships pose special investment risks.
A limited partnership is generally taxed as a pass-through entity; i.e., the
income and expenses of the partnership are not taxed at the partnership level
but are passed through to its limited partners, such as the Fund, who include
their allocated share of the partnership’s income and expenses in their own
calculations of income and expense. The investment in limited partnerships may
potentially cause non-compliance by the Fund with certain tax laws and
regulations and subject the Funds to penalties under the tax laws. Limited
partnership units are illiquid (and are subject to the restriction on illiquid
investments discussed above) and subject to contractual transfer restrictions;
thus, a Fund will generally not be able to sell an investment in a limited
partnership but will be required to hold it for the entire term of the
partnership. As a limited partner, a Fund generally is not permitted to
participate in the management of the partnership. A Fund’s liability generally
is limited to the amount of its commitment to the partnership. When a Fund makes
an investment in a limited partnership, it signs a subscription agreement
committing it to a certain investment amount; this amount is generally not paid
all at once, but rather drawn down over time by the partnership’s general
partner as investment opportunities present themselves. As a result, a Fund must
set aside sufficient assets to be able to fund any future capital calls. Limited
partnerships have relatively concentrated holdings; as a consequence, the return
on a partnership may be adversely impacted by the poor performance of a small
number of investments, especially if the partnership needs to mark down the
valuation of one or more of its holdings.
Warrants and Put and Call Options
Each
Fund (excluding the Parnassus Fixed Income Fund), to the extent consistent with
its investment objective and investment strategies, may purchase warrants and
put and call options on securities. By purchasing a put option, a Fund obtains
the right (but not the obligation) to sell the option’s underlying security at a
fixed strike price. In return for this right, the Fund pays the current market
price for the option (known as the option premium). The Fund may terminate its
position in a put option it has purchased by allowing it to expire or by
exercising the option.
If
the option is allowed to expire, the Fund will lose the entire premium it paid.
If the Fund exercises the option, it completes the sale of the underlying
security at the strike price. The Fund may also terminate a put option position
by closing it out in the secondary market at its current price, if a liquid
secondary market exists. The buyer of a put option can expect to realize a gain
if security prices fall substantially. However, if the underlying security’s
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The
features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying security at the option’s strike price. A call buyer
attempts to participate in potential price increases of the underlying security
with risk limited to the cost of the option if security prices fall. At the same
time, the buyer can expect to suffer a loss if security prices do not rise
sufficiently to offset the cost of the option.
Warrants
are similar to call options in that the purchaser of a warrant has the right
(but not the obligation) to purchase the underlying security at a fixed price.
Warrants are issued by the issuer of the underlying security, whereas options
are not. Warrants typically have exercise periods in excess of those of call
options. Warrants do not carry the right to receive dividends or vote with
respect to the securities they entitle the holder to purchase, and they have no
rights to the assets of the issuer. Warrants are more speculative than the
underlying investment. A warrant ceases to have value if it is not exercised
prior to its expiration date.
Repurchase Agreements
Each
of the Funds may purchase the following securities, subject to repurchase
agreements: certificates of deposit, certain bankers’ acceptances and securities
that are direct obligations of, or that are fully guaranteed as to principal, by
the United States or any agency or instrumentality of the United States. A
repurchase transaction occurs when at the time a Fund purchases a security, the
Fund also resells it to the vendor (normally a commercial bank or a
broker-dealer) and must deliver the security (and/or securities substituted for
them under the
B-7
repurchase
agreement) to the vendor on an agreed-upon date in the future. Such securities,
including any securities so substituted, are referred to as the “Resold
Securities.” The Adviser will consider the creditworthiness of any vendor of
repurchase agreements and will continuously monitor the collateral so that it
never falls below the resale price. The resale price is in excess of the
purchase price in that it reflects an agreed-upon market interest rate effective
for the period of time during which a Fund’s money is invested in the Resold
Securities. The majority of these transactions run from day to day, and the
delivery pursuant to the resale typically will occur within one to five days of
the purchase. Repurchase agreements with a maturity of more than seven days are
considered to be illiquid and are subject to the restriction on illiquid
investments discussed above. A Fund’s risk is limited to the ability of the
vendor to pay the agreed-upon sum upon the delivery date.
If
there is a default, the Resold Securities constitute collateral for the
repurchase obligation and will be promptly sold by the Fund in question.
However, there may be delays and costs in establishing a Fund’s rights to the
collateral and the value of the collateral may decline. A Fund will bear the
risk of loss in the event that the other party to the transaction defaults on
its obligation and the Fund is delayed or prevented from exercising its right to
dispose of the underlying securities, including the risk of a possible decline
in the value of the underlying securities during the period in which the Fund
seeks to assert its rights.
Repurchase
agreements can be considered as loans “collateralized” by the Resold Securities
(such agreements being defined as “loans” in the 1940 Act.) The return on such
“collateral” may be more or less than that from the repurchase agreement. The
Resold Securities will be marked to market every business day so that the value
of the “collateral” is at least equal to the value of the loan, including the
accrued interest earned thereon. All Resold Securities will be held by the
Funds’ custodian, either directly or through a securities depository.
Lending Portfolio Securities
To
generate additional income, each of the Funds may lend its portfolio securities
to broker-dealers (“brokers”), banks or other institutional borrowers of
securities. The borrower, at all times during the loan, must maintain with the
applicable Fund cash, U.S. government securities or equivalent collateral or
provide to the Fund an irrevocable letter of credit in favor of the Fund equal
in value to at least 102% of the value of loaned domestic securities and 105% of
the value of loaned foreign securities on a daily basis. This collateral will be
valued daily. Should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund in question. During the
time portfolio securities are on loan, the borrower pays the Funds any dividends
or interest received on such securities. Although the borrower must pledge
collateral in the form of cash or U.S. government securities, a Fund may invest
the collateral in U.S. government securities or short-term, high-quality
money-market instruments with maturities of 397 days or less, which may also
include other money-market funds that are registered investment companies. The
Funds’ social investing criteria may not be applied to investments made with the
collateral. While a Fund does not have the right to vote securities that are on
loan, each of the Funds intends to terminate the loan and regain the right to
vote if that is considered important with respect to the investment. The
borrower can repay the loan at any time and a Fund can demand repayment at any
time.
For
the fiscal year ended 2021, the Funds earned income and incurred the following
costs and expenses as a result of their securities lending activities: (The
Parnassus Growth Equity Fund was not operational prior to December 28,
2022.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
|
Gross Income1 |
|
|
Revenue Split2 |
|
|
Cash Collateral Management Fees3 |
|
|
Administrative Fees4 |
|
|
Indemnification Fees5 |
|
|
Rebates to Borrowers |
|
|
Other Fees |
|
|
Total Cost of the Securities Lending Activities |
|
|
Net Income from the Securities Lending Activities |
|
Parnassus
Core Equity Fund |
|
$ |
21,064 |
|
|
$ |
1,564 |
|
|
$ |
13,243 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
14,807 |
|
|
$ |
6,257 |
|
Parnassus
Value Equity Fund |
|
$ |
1,047,908 |
|
|
$ |
198,608 |
|
|
$ |
54,867 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
253,475 |
|
|
$ |
794,433 |
|
Parnassus
Mid Cap Fund |
|
$ |
44,375 |
|
|
$ |
3,418 |
|
|
$ |
27,280 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
30,698 |
|
|
$ |
13,677 |
|
Parnassus
Mid Cap Growth Fund |
|
$ |
37,109 |
|
|
$ |
3,589 |
|
|
$ |
19,161 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
22,750 |
|
|
$ |
14,359 |
|
Parnassus
Fixed Income Fund |
|
$ |
3,827 |
|
|
$ |
642 |
|
|
$ |
618 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
1,260 |
|
|
$ |
2,567 |
|
1 |
Gross
income includes income from the reinvestment of cash
collateral. |
2 |
Revenue
split represents the share of revenue generated by the securities lending
program and paid to the securities lending
agent. |
3 |
Cash
collateral management fees include fees deducted from a pooled cash
collateral reinvestment vehicle that are not included in the revenue
split. The contractual management fees are derived from the pooled cash
collateral reinvestment vehicle’s most recently available prospectus or
offering memorandum and are an estimate based on the cash collateral
reinvestment vehicle’s expense ratio and average annual account balances.
Actual fees incurred from a pooled cash collateral reinvestment vehicle
may differ due to other expenses, fee waivers and expense
reimbursements. |
B-8
4 |
These
administrative fees are not included in the revenue
split. |
5 |
These
indemnification fees are not included in the revenue
split. |
Convertible Securities
Each
Fund, to the extent consistent with its investment objective and investment
strategies, may invest in convertible securities. Convertible securities include
fixed income securities that may be exchanged or converted into a predetermined
number of shares of the issuer’s underlying common stock at the option of the
holder during a specified period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures, units consisting
of “usable” bonds and warrants or a combination of the features of several of
these securities. Convertible securities are senior to common stocks in an
issuer’s capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
gives an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the issuing company, depending upon a
market price advance in the convertible security’s underlying common
stock.
Preferred Stock
Each
Fund, to the extent consistent with its investment objective and investment
strategies, may invest in preferred stocks. Preferred stock includes convertible
and non-convertible preferred and preference stocks that are senior to common
stock. Preferred stock has a preference over common stock in liquidation (and
generally dividends as well) but is subordinated to the liabilities of the
issuer in all respects. As a general rule, the market value of preferred stock
with a fixed dividend rate and no conversion element varies inversely with
interest rates and perceived credit risk, while the market price of convertible
preferred stock generally also reflects some element of conversion value.
Because preferred stock is junior to debt securities and other obligations of
the issuer, deterioration in the credit quality of the issuer will cause greater
changes in the value of a preferred stock than in a senior debt security with
similar stated yield characteristics. Unlike interest payments on debt
securities, preferred stock dividends are payable only if declared by the
issuer’s board of directors. Preferred stock also may be subject to optional or
mandatory redemption provisions.
Real Estate Investment Trusts
A
real estate investment trust (“REIT”) is a corporation, or a business trust that
would otherwise be taxed as a corporation, which meets the definitional
requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The
Code permits a qualifying REIT to deduct dividends paid, thereby effectively
eliminating corporate-level federal income tax and making the REIT a
pass-through vehicle for federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually a substantial portion of its otherwise
taxable income.
REITs
are characterized as equity REITs, mortgage REITs and hybrid REITs. Equity
REITs, which may include operating or finance companies, own real estate
directly and the value of, and income earned by, the REITs depend upon the
income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs is affected by tax and
regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the 1940 Act.
Fixed Income Securities
Yields
on fixed income securities are dependent on a variety of factors, including the
general conditions of the money market and other fixed income securities
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. All fixed income securities, including U.S. government
securities, can change in value when there is a change in interest rates or the
issuer’s actual or perceived creditworthiness or ability to meet its
obligations.
There
is normally an inverse relationship between the market value of securities
sensitive to prevailing interest rates and actual changes in interest rates. In
other words, an increase in interest rates produces a decrease in market value.
The longer the remaining maturity (and duration) of a security, the greater will
be the effect of interest rate changes on the market value of that
security.
B-9
Changes
in the ability of an issuer to make payments of interest and principal and in
the markets’ perception of an issuer’s creditworthiness will also affect the
market value of the fixed income securities of that issuer. Obligations of
issuers of fixed income securities (including municipal securities) are subject
to the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Reform Act of 1978. In
addition, the obligations of municipal issuers may become subject to laws
enacted in the future by Congress, state legislatures, or referenda extending
the time for payment of principal and/or interest, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. Changes in the ability of an issuer to make payments of interest and
principal and in the market’s perception of an issuer’s creditworthiness will
also affect the market value of the fixed income securities of that issuer. The
possibility exists, therefore, that, the ability of any issuer to pay, when due,
the principal of and interest on its fixed income securities may become
impaired.
LIBOR
Many
debt securities, derivatives and other financial instruments utilize LIBOR as
the reference or benchmark rate for variable interest rate calculations.
However, the use of LIBOR came under pressure following manipulation
allegations. Despite increased regulation and other corrective actions since
that time, concerns have arisen regarding its viability as a benchmark, due
largely to reduced activity in the financial markets that it measures.
In
June 2017, the Alternative Reference Rates Committee, a group of large U.S.
banks working with the Federal Reserve, announced its selection of a new Secured
Overnight Funding Rate (“SOFR”), which is intended to be a broad measure of
secured overnight U.S. Treasury repo rates, as an appropriate replacement for
LIBOR. The Federal Reserve Bank of New York began publishing the SOFR in 2018,
with the expectation that it could be used on a voluntary basis in new
instruments and transactions. Bank working groups and regulators in other
countries have suggested other alternatives for their markets, including the
Sterling Overnight Interbank Average Rate in England.
The
UK Financial Conduct Authority (“FCA”), which regulates LIBOR, no longer
persuades nor requires banks to submit rates for the calculation of LIBOR and
certain other reference rates. Although certain LIBOR rates, including the
one-week and two-month USD LIBOR, ceased publication as of December 31,
2021, a selection of widely used U.S. dollar-based LIBOR rates will continue to
be published until June 2023, in order to assist with the transition away from
LIBOR. The impact of the discontinuation of LIBOR and the transition to an
alternative rate remains uncertain. Various financial industry groups are
planning for the transition, but there are obstacles to converting certain
longer-term securities and transactions to a new benchmark. Neither the effect
of the transition process nor its ultimate success can yet be known. The
transition process might lead to increased volatility and illiquidity in markets
that currently rely on the LIBOR to determine interest rates. It could also lead
to a reduction in the value of some LIBOR-based investments and reduce the
effectiveness of new hedges placed against existing LIBOR-based instruments.
Because the usefulness of LIBOR as a benchmark could deteriorate during the
transition period, these effects could occur prior to the end of June
2023.
High-Yield Securities
Greater Risk
of Loss. There is a greater risk that issuers of lower-rated
securities will default than issuers of higher-rated securities. Issuers of
lower-rated securities generally are less creditworthy and may be highly
indebted, financially distressed or bankrupt. These issuers are more vulnerable
to real or perceived economic changes, political changes or adverse industry
developments. In addition, high-yield securities are frequently subordinated to
the prior payment of senior indebtedness. If an issuer fails to pay principal or
interest on securities held by a Fund, the Fund would experience a decrease in
income and a decline in the market value of its investments.
Sensitivity
to Interest Rate and Economic Changes. The income and market value
of lower-rated securities may fluctuate more than higher-rated securities.
Although non-investment grade securities tend to be less sensitive to interest
rate changes than investment grade securities, non-investment grade securities
are more sensitive to short-term corporate, economic and market developments.
During periods of economic uncertainty and change, the market price of the
investments in lower-rated securities may be volatile. The default rate for
high-yield bonds tends to be cyclical, with defaults rising in periods of
economic downturn.
Valuation
Difficulties. It is often more difficult to value lower-rated
securities than higher-rated securities. If an issuer’s financial condition
deteriorates, accurate financial and business information may be limited or
unavailable. In addition, the lower-rated investments may be thinly traded and
there may be no established secondary market. Because of the lack of market
pricing and current information for investments in lower-rated securities,
valuation of such investments is much more dependent on judgment than is the
case with higher-rated securities.
Liquidity. There may be no
established secondary or public market for investments in lower-rated
securities. Such securities are frequently traded in markets that may be
relatively less liquid than the market for higher-rated securities. In addition,
relatively few institutional purchasers may hold a major portion of an issue of
lower-rated securities at times. As a result, a Fund may be required to sell
investments at substantial losses or retain them indefinitely when an issuer’s
financial condition is deteriorating.
B-10
Credit
Quality. Credit quality of non-investment grade securities can
change suddenly and unexpectedly, and even recently issued credit ratings may
not fully reflect the actual risks posed by a particular high-yield
security.
New
Legislation. Future legislation may have a possible negative
impact on the market for high-yield, high-risk bonds. As an example, in the late
1980’s, legislation required federally insured savings and loan associations to
divest their investments in high-yield, high-risk bonds. New legislation, if
enacted, could have a material negative effect on a Fund’s investments in
lower-rated securities.
United States Government Obligations
The
Funds may invest in U.S. government obligations. These consist of various types
of marketable securities issued by the United States Treasury, i.e., bills,
notes and bonds. Such securities are direct obligations of the United States
government and differ mainly in the length of their maturity. Treasury bills,
the most frequently issued marketable government security, have a maturity of up
to one year and are issued on a discount basis.
Cybersecurity Considerations
With
the increased use of technologies such as mobile devices and web-based or
“cloud” applications, and the dependence on the internet and computer systems to
conduct business, the Funds are susceptible to operational, information security
and related risks. In general, cybersecurity incidents can result from
deliberate attacks or unintentional events (arising from external or internal
sources) that may cause the Funds to lose proprietary information, suffer data
corruption, physical damage to a computer or network system or lose operational
capacity. Cybersecurity attacks include, but are not limited to, infection by
malicious software, such as malware or computer viruses or gaining unauthorized
access to digital systems, networks or devices that are used to service the
Funds’ operations (e.g., through “hacking,” “phishing” or malicious software
coding) or other means for purposes of misappropriating assets or sensitive
information, corrupting data or causing operational disruption. Cybersecurity
attacks may also be carried out in a manner that does not require gaining
unauthorized access, such as causing denial-of-service attacks on the Funds’
website (i.e., efforts to make network services unavailable to intended users).
In addition, authorized persons could inadvertently or intentionally release
confidential or proprietary information stored on the Funds’ systems.
Cybersecurity
incidents affecting the Adviser, other service providers to the Funds or their
stockholders (including, but not limited to, Fund accountants, custodians,
sub-custodians, transfer agents and financial intermediaries) have the ability
to cause disruptions and impact business operations, potentially resulting in
financial losses to both the Funds and their stockholders, interference with the
Funds’ ability to calculate its net asset value, impediments to trading, the
inability of Fund stockholders to transact business and the Funds to process
transactions (including fulfillment of fund share purchases and redemptions),
violations of applicable privacy and other laws (including the release of
private stockholder information) and attendant breach notification and credit
monitoring costs, regulatory fines, penalties, litigation costs, reputational
damage, reimbursement or other compensation costs, forensic investigation and
remediation costs, and/or additional compliance costs. Similar adverse
consequences could result from cybersecurity incidents affecting issuers of
securities in which the Funds invest, counterparties with which the Funds
engages in transactions, governmental and other regulatory authorities, exchange
and other financial market operators, banks, brokers, dealers, insurance
companies and other financial institutions (including financial intermediaries
and other service providers) and other parties.
The
use of internet- or cloud-based programs, technologies and data storage
applications generally heightens cyber risks. Any of such circumstances could
subject a Fund to substantial losses, including losses relating to
misappropriation of assets, intellectual property or confidential information;
corruption, deletion or destruction of data; physical damage and repairs to
systems; reputational harm; financial losses from remedial actions; and/or
disruption of operations. Third parties, including activist, criminal,
nation-state or terrorist actors, may also attempt fraudulently to induce Fund
personnel to disclose sensitive information (including passwords) to gain access
to data, accounts, funds or other assets, or otherwise to inflict harm.
Cybersecurity
risks are enhanced during periods of business disruption, particularly during
long periods of disruption that require an increase in telecommuting, such as
those caused by the current coronavirus pandemic, or by other widespread public
health emergencies or other natural or man-made disasters.
Mortgage-Backed Securities and Other
Asset-Backed Securities
The
Parnassus Fixed Income Fund may invest in mortgage-backed and other asset-backed
securities (i.e., securities backed by credit card receivables, automobile loans
or other assets). Mortgage-backed securities are securities that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans secured by real property. Mortgage-backed securities include:
(1) Government Agency Mortgage-Backed Securities; (2) Privately Issued
Mortgage-Backed Securities; and (3) collateralized mortgage obligations and
multiclass pass-through securities.
B-11
Government
Agency Mortgage-Backed Securities. Mortgage-backed securities
include Government Agency Mortgage-Backed Securities, which represent
participation interests in pools of residential mortgage loans originated by
United States governmental or private lenders and guaranteed, to the extent
provided in such securities, by the United States government or one of its
agencies or instrumentalities. Such securities, with the exception of
collateralized mortgage obligations, are ownership interests in the underlying
mortgage loans and provide for monthly payments that are a “pass-through” of the
monthly interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees paid to the
guarantor of such securities and the servicer of the underlying mortgage
loans.
The
Government Agency Mortgage-Backed Securities in which the Parnassus Fixed Income
Fund may invest will include those issued or guaranteed by Ginnie Mae, Fannie
Mae and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). As more
fully described below, these securities may include collateralized mortgage
obligations, multiclass pass-through securities and stripped Mortgage-Backed
Securities.
Ginnie Mae
Certificates. Ginnie Mae 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 Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration Act, or Title V of the
Housing Act of 1949, or guaranteed by the Veterans’ Administration under the
Servicemen’s Readjustment Act of 1944, as amended, or by pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
United States government is pledged to the payment of all amounts that may be
required to be paid under any guarantee. To meet its obligations under such
guarantee, Ginnie Mae is authorized to borrow from the U.S. Treasury with no
limitations as to amount.
Fannie Mae
Certificates. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act. Fannie Mae was originally established in 1938 as a
United States Government agency to provide supplemental liquidity to the
mortgage market and was transformed into a shareholder-owned and privately
managed corporation by legislation enacted in 1968. Fannie Mae provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. Fannie Mae
acquires funds to purchase home mortgage loans from many capital market
investors that ordinarily may not invest in mortgage loans directly, thereby
expanding the total amount of funds available for housing.
Each
Fannie Mae Certificate entitles the registered holder thereof to receive amounts
representing such holder’s pro rata interest in scheduled principal payments and
interest payments (at such Fannie Mae Certificate’s pass-through rate, which is
net of any servicing and guarantee fees on the underlying mortgage loans), and
any principal prepayments, on the mortgage loans in the pool represented by such
Fannie Mae Certificate and such holder’s proportionate interest in the full
principal amount of any foreclosed or otherwise finally liquidated mortgage
loan. The full and timely payment of principal of and interest on each Fannie
Mae Certificate will be guaranteed by Fannie Mae, which guarantee is not backed
by the full faith and credit of the United States government.
Freddie Mac
Certificates. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended. Freddie Mac was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of needed housing. The
principal activity of Freddie Mac currently consists 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 securities, primarily Freddie Mac Certificates.
Freddie
Mac guarantees to each registered holder of a Freddie Mac Certificate the timely
payment of interest at the rate provided for by such Freddie Mac Certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac Certificate ultimate collection of all principal of the related
mortgage loans, without any offset or deduction, but, generally, does not
guarantee the timely payment of scheduled principal. Freddie Mac may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than 30 days
following (i) foreclosure sale, (ii) payment of claim by any mortgage
insurer, or (iii) the expiration of any right of redemption, whichever
occurs later, but in any event no later than one year after demand has been made
upon the mortgagor for accelerated payment of principal. The obligations of
Freddie Mac under its guarantee are obligations solely of Freddie Mac and are
not backed by the full faith and credit of the United States government.
Privately
Issued Mortgage-Backed Securities. Privately Issued
Mortgage-Backed Securities are issued by private issuers and represent an
interest in or are collateralized by (i) Mortgage-Backed Securities issued
or guaranteed by the U.S. government or one of its agencies or instrumentalities
(“Privately Issued Agency Mortgage-Backed Securities”), or (ii) whole
mortgage loans or non-Agency collateralized Mortgage-Backed Securities
(“Privately Issued Non-Agency Mortgage-Backed Securities”). These securities are
structured similarly to the Ginnie Mae, Fannie Mae and Freddie Mac mortgage
pass-through securities described above and are issued by originators of and
investors in mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Privately Issued Agency Mortgage-Backed Securities usually are
backed by a pool of Ginnie Mae, Fannie Mae and Freddie Mac Certificates.
Privately Issued Non-Agency Mortgage-Backed Securities usually are backed by a
pool of conventional fixed-rate or adjustable rate mortgage loans (“ARMs”) that
are not guaranteed by an entity having the credit status of Ginnie Mae, Fannie
Mae or Freddie Mac, and generally are structured with one or more types of
credit enhancement. As more fully described below, these securities may include
collateralized mortgage obligations and multiclass pass-through
securities.
B-12
The
Parnassus Fixed Income Fund may invest in subordinated Privately Issued
Non-Agency Mortgage-Backed Securities (“Subordinated Securities”). Subordinated
Securities have no governmental guarantee, and are subordinated in some manner
as to the payment of principal and/or interest to the holders of more senior
Privately Issued Non-Agency Mortgage-Backed Securities. The holders of
Subordinated Securities typically are compensated with a higher stated yield
than are the holders of more senior Privately Issued Non-Agency Mortgage-Backed
Securities. On the other hand, Subordinated Securities typically subject the
holder to greater risk than senior Privately Issued Non-Agency Mortgage-Backed
Securities and tend to be rated in a lower rating category, and frequently a
substantially lower rating category, than the senior Privately Issued Non-Agency
Mortgage-Backed Securities. Subordinated Securities generally are likely to be
more sensitive to changes in prepayment and interest rates, and the market for
such securities may be less liquid than is the case for traditional fixed income
securities and senior Privately Issued Non-Agency Mortgage-Backed
Securities.
Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities. Mortgage-Backed Securities
include collateralized mortgage obligations or “CMOs,” which are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or
Freddie Mac Certificates, but also may be collateralized by other
Mortgage-Backed Securities or whole loans (such collateral collectively
hereinafter referred to as “Mortgage Assets”). CMOs include multiclass
pass-through securities, which can be equity interests in a trust composed of
mortgage assets. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income thereon, provide the funds to pay debt service on
the CMOs or make scheduled distributions on the multiclass pass-through
securities. CMOs may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. The issuer
of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit.
In
a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a “tranche,” is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on classes of the CMOs on a monthly, quarterly or
semiannual basis. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a CMO series in innumerable ways, some of
which bear substantially more risk than others. In particular, certain classes
of CMOs and other types of mortgage pass-through securities, including
interest-only classes, principal-only classes, inverse floaters, Z or accrual
classes and companion classes, are designed to be highly sensitive to changes in
prepayment and interest rates and can subject the holder to extreme reductions
of yield and loss of principal. The Parnassus Fixed Income Fund may invest in
such high-risk, derivative Mortgage-Backed Securities.
Stripped
Mortgage-Backed Securities. The Parnassus Fixed Income Fund may
invest in stripped Mortgage-Backed Securities issued by the U.S. Government
(“SMBS”). SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of Mortgage
Assets. A common type of SMBS will have one class receiving all of the interest
from the Mortgage Assets, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying Mortgage
Assets experience greater-than-anticipated prepayments of principal, the Fund
may fail to fully recover its initial investment in these securities. The market
value of the class consisting entirely of principal payments generally is
unusually volatile in response to changes in interest rates. The yield on a
class of SMBS that receives all or most of the interest from Mortgage Assets are
generally higher than prevailing market yields on other Mortgage-Backed
Securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped.
Adjustable-Rate Mortgage Loans.
Certain mortgage loans underlying the Mortgage-Backed Securities in which the
Fund may invest will be ARMs. ARMs eligible for inclusion in a mortgage
pool will generally provide for a fixed initial mortgage interest rate for a
specified period of time. Thereafter, the interest rates (the “Mortgage Interest
Rates”) may be subject to periodic adjustment based on changes in the applicable
index rate (the “Index Rate”). The adjusted rate would be equal to the Index
Rate plus a gross margin, which is a fixed percentage spread over the Index Rate
established for each ARM at the time of its origination.
There
are various types of indices that provide the basis for rate adjustments on
ARMs. Commonly utilized indices include the one-year, three-year and
five-year constant maturity Treasury rates, the three-month Treasury Bill rate,
the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year LIBOR, the prime rate
of a specific bank or commercial paper rates. Some indices, such as the one-year
constant maturity Treasury rate, closely mirror changes in market interest rate
levels. Others, such as the 11th District Federal Home Loan Bank Cost of Funds
index, tend to lag behind changes in market rate levels and tend to be somewhat
less volatile. The degree of volatility in the market value of the Fund’s
portfolio, and therefore in the net asset value of the Fund’s shares, will be a
function of the length of the interest rate reset periods and the degree of
volatility in the applicable indices.
B-13
Asset-Backed
Securities. Asset-backed securities may involve certain risks that
are not presented by Mortgage-Backed Securities arising primarily from the
nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). Non-mortgage asset-backed
securities do not have the benefit of the same security interest in the
collateral as Mortgage-Backed Securities. Credit card receivables are generally
unsecured, and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which have given debtors the right to
reduce the balance due on the credit cards. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is the risk that the purchaser would acquire an interest superior to that
of the holders of related automobile receivables. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
payments on the receivables together with recoveries on repossessed collateral
may not, in some cases, be able to support payments on these securities.
Asset-backed
securities may be subject to greater risk of default during periods of economic
downturn than other instruments. Also, while the secondary market for
asset-backed securities is ordinarily quite liquid, in times of financial stress
the secondary market may not be as liquid as the market for other types of
securities, which could cause the Parnassus Fixed Income Fund to experience
difficulty in valuing or liquidating such securities.
Extension
and Prepayment Risk. The yield characteristics of Mortgage-Backed
Securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans generally may be prepaid at any time. As a result, if the
Parnassus Fixed Income Fund purchases such a security at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if the Parnassus Fixed Income Fund
purchases these securities at a discount, faster-than-expected prepayments will
increase, while slower-than-expected prepayments will reduce, yield to
maturity.
Prepayment
risk occurs when declining interest rates cause prepayments to occur faster than
expected, thus more quickly removing the mortgages from the pool. In this
situation, the Parnassus Fixed Income Fund may not earn the expected return and
may experience a loss. Additionally, in this environment, the Parnassus Fixed
Income Fund may have to reinvest the proceeds at relatively lower yields.
Extension risk occurs in the opposite market condition: when underlying rates
are rising faster than expected and loans are not paid off as quickly as
expected. In this case, the bond’s maturity is extended, which may impact
returns and may cause the Parnassus Fixed Income Fund to miss an opportunity to
reinvest at relatively higher yields.
Prepayment
and extension risk are more impactful for Residential Mortgage-Backed
Securities, or mortgage pass-throughs, including bonds issued by Fannie Mae and
Freddie Mac. Residential mortgages have no refinancing restrictions, unlike
Commercial Mortgage-Backed Securities, which are composed of commercial
mortgages. Commercial mortgages frequently include provisions such as yield
maintenance or additional penalties for early repayment, thereby reducing the
likelihood of prepayment. Because extension risk comes from changing rates of
prepayment, extension risk is also dampened for these securities.
Liquidity. No assurance can be
given as to the liquidity of the market for certain Mortgage-Backed Securities,
such as CMOs and multiclass pass-through securities. Determination as to the
liquidity of such securities will be made in accordance with guidelines
established by the Funds’ Boards of Trustees. In accordance with such
guidelines, the Adviser will monitor the Parnassus Fixed Income Fund’s
investments in such securities with particular regard to trading activity,
availability of reliable price information and other relevant information.
Illiquid Securities
Each
Fund may invest up to 15% of its net assets in illiquid securities. Illiquid
securities are those securities that a Fund reasonably expects cannot be sold or
disposed of in current market conditions in seven calendar days or fewer without
the sale or disposition significantly changing the market value of the
investment. Each Fund will take into account relevant market, trading and
investment-specific considerations when determining whether a security is an
illiquid security. Illiquid securities may include those securities whose
disposition would be subject to legal restrictions (“restricted securities”).
However, certain restricted securities that may be resold pursuant to Rule 144A
under the Securities Act may be considered liquid. Rule 144A permits certain
qualified institutional buyers to trade in privately placed securities not
registered under the Securities Act. Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both readily
ascertainable market values for Rule 144A securities and the ability to
liquidate these securities to satisfy redemption requests. However, an
insufficient number of qualified institutional buyers interested in purchasing
Rule 144A securities held by a Fund could adversely affect their marketability,
causing the Fund to sell securities at unfavorable prices.
B-14
The
Funds have implemented a liquidity risk management program and related
procedures to identify illiquid securities pursuant to Rule 22e-4 of the
1940 Act, and the Board of Trustees has approved the administrator of the
liquidity risk management program. Under the liquidity risk management program,
each Fund may invest in illiquid securities; however, no Fund may acquire
illiquid securities if, as a result, more than 15% of the value of the Fund’s
net assets would be invested in such securities. A determination of whether a
security is illiquid is based upon guidelines contained in the Funds’ liquidity
risk management program and depends upon relevant facts and circumstances. Under
the Funds’ liquidity risk management program, the term “illiquid security” means
a security that a Fund reasonably expects cannot be sold or disposed of in
current market conditions in seven calendar days or fewer without the sale or
disposition significantly changing the market value of the security. Illiquid
securities generally include securities subject to restrictions on resale as a
matter of contract or law, interest-only and principal-only mortgage-backed
securities issued by private issuers and repurchase agreements maturing in more
than seven days. The Board of Trustees will review no less frequently than
annually a written report prepared by the administrator of the Funds’ liquidity
risk management program that addresses the operation of the program and assesses
its adequacy and effectiveness of implementation.
Restricted
securities may be sold in privately negotiated or other exempt transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act. When registration is required, a Fund may be obligated
to pay all or part of the registration expenses and a considerable time may
elapse between the decision to sell and the sale date. If, during such period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than the price that prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in good faith
by the Adviser in accordance with procedures approved by the Board of
Trustees.
Responsible Investment Policy
The
Adviser considers environmental, social and governance (ESG) characteristics as
part of the investment process for the Funds. These considerations may include,
on a non-principal basis, consideration of third-party research as well as
consideration of proprietary research regarding an issuer. ESG information and
data, including from third party research providers, may be incomplete,
inaccurate, or unavailable, or may present conflicting information and data with
respect to an issuer, which in each case could cause the Portfolio Managers of
the Fund to incorrectly assess an issuer’s business practice with respect to ESG
characteristics. As a result, the Fund may underperform funds that do not screen
companies based on ESG factors or funds that use different third party research
providers.
The
Adviser will consider those ESG characteristics it deems relevant or additive
when making investment decisions for the Funds, and seeks to invest in companies
with positive performance on environmental, social and governance criteria. The
ESG characteristics utilized in the Funds’ investment process are anticipated to
evolve over time and one or more characteristics may not be relevant with
respect to all issuers that are eligible for investment.
The
Adviser uses strategic engagement, which may include direct communication, such
as letters, emails, phone calls or in-person meetings, with company management
teams to encourage positive change on ESG factors. Such engagement may include
the submission of non-binding shareholder proposals that recommend specific
positive changes on ESG factors at companies held in the Funds’ portfolios.
These proposals are made under Rule 14a-8 of the Securities Exchange Act. As
non-binding recommendations to management of the applicable company, the
shareholder proposals do not have the effect or purpose of changing or
influencing control of the company. The Funds do not submit binding shareholder
proposals and do not seek to change the board of directors of portfolio
companies by nominating persons to serve as directors.
The
Adviser also votes proxies consistent with its proxy voting policies and
procedures, which are stated in the SAI. With regard to the Parnassus Fixed
Income Fund, the Adviser will take into consideration factors specific to fixed
income investments when making these value judgments. The Fixed Income Fund may
invest in securities that are appropriate based on their specific criteria, but
that may not be appropriate for the U.S. equity funds.
The
Funds will not invest in companies that derive significant revenues from the
manufacture of alcohol or tobacco products or from direct involvement with
gambling. The Funds do not invest in companies with significant revenues derived
from the manufacture of weapons or the generation of electricity from nuclear
power. The Funds are fossil-fuel free, meaning they do not invest in companies
that derive significant revenues from the extraction, exploration, production or
refining of fossil fuels; each Fund may invest in companies that use fossil
fuel-based energy to power their operations or for other purposes. The Funds
define “significant revenues” as being 10% or greater.
The
responsible investment criteria of the Funds limit the availability of
investment opportunities. However, the Funds’ Boards of Trustees and the Adviser
believe that there are sufficient investments available that can meet the Funds’
responsible investment criteria and still enable the Funds to provide a
competitive rate of return.
ESG
characteristics are not the sole considerations when making investment decisions
for the Funds. Further, investors can differ in their views of what constitutes
positive or negative ESG characteristics. As a result, the Funds may invest in
issuers that do
B-15
not
reflect the beliefs and values with respect to ESG of any particular investor.
ESG considerations may affect the Funds’ exposure to certain companies or
industries and the Funds may forego certain investment opportunities. While the
Funds view ESG considerations as having the potential to contribute positively
to their long-term performance, there is no guarantee that such results will be
achieved.
Disclosure of Portfolio Holdings
As
summarized herein, the Funds maintain written policies and procedures regarding
the disclosure of their portfolio holdings to ensure that disclosure of
information about portfolio securities is in the best interests of the Funds’
shareholders, and these policies and procedures specify when disclosure is
authorized. Included in these policies and procedures are procedures to address
conflicts of interest. In addition to the authorized disclosure in the policies
and procedures, the Board of Trustees or the Funds’ Chief Compliance Officer may
authorize the disclosure of a Fund’s portfolio holdings prior to the public
disclosure of such information. The Funds may not receive any compensation for
providing portfolio holdings information. The Funds’ Chief Compliance Officer
will report periodically to the Boards of Trustees with respect to compliance
with the Funds’ portfolio holdings disclosure policies and procedures.
There
may be instances where the interests of a Fund’s shareholders respecting the
disclosure of information about portfolio holdings may conflict or appear to
conflict with the interests of the Adviser, any principal underwriter for the
Fund or an affiliated person of the Fund (including such affiliated person’s
investment adviser or principal underwriter). In such situations, the conflict
must be disclosed to the Boards of Trustees, and the Boards must be afforded the
opportunity to determine whether or not to allow such disclosure.
SEC and Website Disclosure
The
Funds will publicly disclose all holdings in their semiannual and annual reports
to shareholders, which are filed with the Securities and Exchange Commission
(“SEC”) on a semi-annual basis on Form N-CSR. The Funds post their
shareholder reports on their website at www.parnassus.com. The Funds also file a
complete schedule of portfolio holdings with the SEC for the first and third
quarters of the Funds’ fiscal year on Part F of Form N-PORT. Portfolio
holdings included in Part F of Form N-PORT become publicly available
on the SEC’s website within 60 days after the end of that fiscal quarter. Public
regulatory filings will also be available on the SEC’s website at
www.sec.gov.
The
Funds publish their entire portfolio holdings information as of the end of each
month and quarter on the Parnassus Funds’ website (www.parnassus.com). Portfolio
information may include portfolio management commentary and portfolio
statistics. This information is available to anyone who visits the website and
is updated on or about 10 business days following the end of each month.
Holdings information will remain on the website until updated for the subsequent
time period.
Service Providers
The
Funds have entered into arrangements with certain third-party service providers
for services that require these groups to have access to the Funds’ portfolios
on a more frequent basis than is publicly available (in some cases, on a daily
basis). As a result, such third-party service providers may receive portfolio
holdings information prior to, and more frequently than, the public disclosure
of such information. There is no set time between the date of such information
being provided to the service providers and the date on which the information is
publicly disclosed, as the information is provided to the service providers on
an as-needed basis in connection with the services they provide to the Funds. In
each case, the Funds’ Boards of Trustees have determined that such advanced
disclosure is supported by a legitimate business purpose and that the recipient
is subject to a duty to keep the information confidential. These third-party
service providers include the Funds’ independent registered public accounting
firm (the “Auditor”), legal counsel, custodian, financial printer, pricing
service provider, auditor and proxy voting service.
Rating and Ranking Organizations
The
Funds’ Boards of Trustees have determined that the Funds may provide their
entire portfolios to the following rating and ranking organizations:
Bloomberg
L.P.
FactSet
Morningstar,
Inc.
Refinitiv
(parent company of Lipper)
The
Funds’ management has determined that these organizations provide investors with
a valuable service and, therefore, are willing to provide them with portfolio
information. The Funds may not pay these organizations or receive any
compensation from them for providing this information. This information is
provided on the condition that it be kept confidential and that such
organizations not trade on such information.
B-16
Other Individuals and Organizations
Occasionally,
certain third parties, including individual shareholders, institutional
investors and other third-party organizations, request information about the
Funds’ portfolio holdings before they are publicly disclosed. Where executive
management believes there is a legitimate business purpose for such disclosure,
the disclosure may be made provided that (i) management, including the
Chief Compliance Officer, have reasonably concluded that the recipient will not
distribute the information to other persons who might use the information for
purposes of purchasing or selling the Funds or their portfolio securities before
their portfolio holdings are publicly disclosed; and (ii) the recipient
signs a written confidentiality agreement, if not subject to a specific duty of
confidentiality by law.
The
Adviser may manage other accounts such as separate accounts, private accounts,
unregistered products, and portfolios sponsored by companies other than the
Adviser. These other accounts may be managed in a similar fashion to the Funds
and thus may have similar portfolio holdings. Such accounts may be subject to
different portfolio holdings disclosure policies that permit public disclosure
of portfolio holdings information in different forms and at different times than
the Funds’ portfolio holdings disclosure policies. Additionally, clients of such
accounts have access to their portfolio holdings and are generally not subject
to the Funds’ portfolio holdings disclosure policies.
MANAGEMENT
The
Funds’ Boards of Trustees decide matters of general policy and supervise the
activities of the Adviser. All Trustees serve indefinite terms, and they each
oversee five portfolios (Funds) in the Parnassus Funds complex. The Funds
consist of two trusts, the Parnassus Funds trust and the Parnassus Income Funds
trust (each a “Trust” and, collectively, the “Trusts”). Each of the Trusts has
its own Board of Trustees (collectively, the “Board”). The same individuals
serve as Trustees and Officers of each Trust. The Funds’ Officers conduct and
supervise the daily business operations of the Funds.
As
Alecia A. DeCoudreaux, an Independent Trustee, serves as the Chairperson of
the Board, and in that capacity coordinates the activities of the Independent
Trustees and the Board as a whole, and acts as a liaison with the Trust’s
officers, legal counsel, and other Trustees between meetings, the Independent
Trustees have determined that there is not a need for a Lead Independent Trustee
function at this time. The Trusts have determined that their leadership
structure is appropriate as they believe the structure provides for adequate
input and influence from the Independent Trustees and management in overseeing
the Funds.
Through
its direct oversight role, and indirectly through the Audit Committee, officers
of the Funds and the Funds’ service providers, the Funds’ Boards of Trustees
performs a risk oversight function for the Funds. To effectively perform its
risk oversight function, the Boards, among other things, perform the following
activities: receive and review reports related to the performance and operations
of the Funds; review and approve, as applicable, the compliance policies and
procedures of the Funds; approve the Funds’ principal investment policies; adopt
policies and procedures designed to deter market timing; meet with
representatives of various service providers, including the Adviser and the
Auditor of the Funds, to review and discuss the activities of the Funds and to
provide direction with respect thereto; and appoint a chief compliance officer
of the Funds who oversees the implementation and testing of the Funds’
compliance program and reports to the Boards regarding compliance matters for
the Funds and their service providers.
The
Audit Committee consists solely of Independent Trustees. As referenced above,
the Audit Committee plays a significant role in the risk oversight of the Funds
as it meets at least annually with the auditors of the Funds and quarterly with
the Funds’ Chief Compliance Officer.
Not
all risks that may affect the Funds can be identified nor can controls be
developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Funds, the Adviser or other service providers. Moreover, it is necessary to bear
certain risks (such as investment-related risks) to achieve the Funds’ goals. As
a result of the foregoing and other factors, the Funds’ ability to manage risk
is subject to substantial limitations.
B-17
The
Trustees and Officers of the Funds are as set forth on the following pages (ages
and employment tenures listed are as of December 31, 2022).
|
|
|
|
|
|
|
|
|
|
|
Name, Age
and Address |
|
Position
With Funds |
|
Term of Office
and
Length of
Time Served |
|
Principal Occupation
During Past Five Years |
|
Directorships
Outside
the
Parnassus
Complex |
|
Number of Funds in Parnassus Complex Overseen by Trustee |
INDEPENDENT
TRUSTEES
(Trustees
who are not deemed to be “interested persons” of the Funds as defined in
the 1940 Act) |
|
|
|
|
|
|
Alecia A.
DeCoudreaux, 67
c/o
Parnassus Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Trustee, Chairperson of Board |
|
Indefinite*
Since
December 2013 for Parnassus Income Funds and Parnassus Funds |
|
Director of CVS Health Corporation and
member of audit committee since 2015. Director of the William and Flora
Hewlett Foundation since 2014 and Chair of Audit Committee from 2016-2022.
President of Mills College from 2011 to 2016. Trustee Emerita of Wellesley
College, Honorary Director of the Indiana University Foundation and
Emerita Board Member of the Indiana University School of Law Board of
Visitors. |
|
CVS Health Corporation |
|
6 |
|
|
|
|
|
|
Rajesh
Atluru, 52
c/o
Parnassus Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Trustee |
|
Indefinite*
Since
September 2021 for Parnassus Income Funds and Parnassus Funds |
|
Founder and Managing Director of Activate
Capital, a private equity/venture capital investment firm focusing on
sustainable investments in energy, mobility and industrial ecosystems. |
|
None |
|
6 |
|
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|
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|
|
Donald
J. Boteler, 73
c/o
Parnassus Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Trustee, Chair of Audit Committee |
|
Indefinite*
Since
May 2012 for Parnassus Income Funds and Parnassus Funds |
|
Independent Trustee of FAM Funds
since 2012. From 2016 to 2020, served as a member of the Town Council of
South Bethany, Delaware, and Chairman of the town’s Budget and Finance
Committee. Currently serving as a member of the town’s Budget and Finance
Committee. |
|
FAM Funds |
|
6 |
|
|
|
|
|
|
Amy K. Johnson, 56 c/o Parnassus
Investments, LLC 1 Market Street, Ste. 1600 San Francisco, CA
94105 |
|
Trustee |
|
Indefinite Since December 2022 for
Parnassus Income Funds and Parnassus Funds |
|
Managing Director and Global Head of
Operations, Columbia Threadneedle Investments, the global asset management
business of Ameriprise Financial, Inc. From 2016-2019. |
|
Federal Home Loan Bank of Des Moines |
|
6 |
B-18
|
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|
|
|
|
Name, Age
and Address |
|
Position
With Funds |
|
Term of Office
and
Length of
Time Served |
|
Principal Occupation
During Past Five Years |
|
Directorships
Outside
the
Parnassus
Complex |
|
Number of Funds in Parnassus Complex Overseen by Trustee |
INDEPENDENT
TRUSTEES
(Trustees
who are not deemed to be “interested persons” of the Funds as defined in
the 1940 Act) |
Eric
P. Rakowski, 63
c/o
Parnassus Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Trustee |
|
Indefinite*
Since
September 2021 for Parnassus Income Funds and Parnassus Funds |
|
Professor of Law, University of California
at Berkeley School of Law since 1990. |
|
AMG Funds
(41
portfolios); AMG Pantheon Fund, LLC (1 portfolio); AMG Pantheon Master
Fund, LLC (1 portfolio); AMG Pantheon Subsidiary Fund, LLC (1 portfolio);
AMG Pantheon Lead Fund LLC (1 portfolio); Harding, Loevner Funds, Inc. (10
portfolios); Third Avenue Trust (3 portfolios) (2002-2019); and Third
Avenue Variable Trust (1 portfolio) (2002-2019) |
|
6 |
|
|
|
|
|
|
Roy
Swan, Jr., 57
c/o
Parnassus Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Trustee |
|
Indefinite*
Since
September 2021 for Parnassus Income Funds and Parnassus Funds |
|
Head of The Ford Foundation’s Mission
Investments program, managing the foundation’s portfolio of
mission-related investments, program-related investments and grants
dedicated to the impact investing field since 2018. Before joining the
Ford Foundation in 2018, Mr. Swan was a managing director at Morgan
Stanley, where he held roles including co-head of Global Sustainable
Finance, President and COO of Morgan Stanley Trust and founding CEO
and Managing Member of Morgan Stanley Impact Small Business Investment
Company LLC, where he remains a Member. |
|
Aequi Acquisition Corp. |
|
6 |
|
|
|
|
|
|
Kay
Yun, 58
c/o
Parnassus Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Trustee, Chair of Nominating and
Governance Committee |
|
Indefinite*
Since
July 2017 for Parnassus Income Funds and Parnassus Funds |
|
Partner and Chief Financial Officer at
Health Evolution Partners in San Francisco since 2007. Currently an
emeritus trustee at the American Conservatory Theater and a trustee at San
Francisco University High School. |
|
None |
|
6 |
* |
Subject
to the mandatory retirement age |
B-19
|
|
|
|
|
|
|
|
|
|
|
Name, Age
and Address |
|
Position
With Funds |
|
Term of Office
and
Length of
Time Served |
|
Principal Occupation
During Past Five Years |
|
Directorships
Outside
the
Parnassus
Complex |
|
Number of Funds in Parnassus Complex Overseen by Trustee |
INTERESTED
TRUSTEE
(Mr. Allen
is an “interested person” of the Funds as defined in the 1940 Act because
of his ownership in the Adviser) |
|
|
|
|
|
|
Benjamin
E. Allen, 44
Parnassus
Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
President and Chief Executive Officer and
Trustee |
|
Indefinite
Since 2017
for Parnassus Income Funds and Parnassus Funds |
|
Chief Executive Officer of Parnassus
Investments since 2018. President of Parnassus Investments since 2017.
Vice President of Parnassus Investments from 2008 to 2017; employed by
Parnassus Investments since 2005. Portfolio Manager of the Parnassus Core
Equity Fund since 2012. Vice President of Parnassus Funds and Parnassus
Income Funds from 2015 to 2017. |
|
None |
|
6 |
* |
Subject
to the mandatory retirement age |
|
|
|
|
|
|
|
Name, Age and Address |
|
Positions
With Funds |
|
Term
of Office
and
Length of
Time
Served |
|
Principal Occupation
During Past Five Years |
OFFICERS
(other
than Benjamin E. Allen) |
|
|
|
|
Todd
C. Ahlsten, 49
Parnassus
Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Vice President |
|
Indefinite
Since 2001 |
|
Chief Investment Officer of Parnassus
Investments since 2007; Vice President of Parnassus Investments from 2007
– 2021; Executive Vice President of Parnassus Investments since 2021;
employed by Parnassus Investments since 1995. Portfolio Manager of the
Parnassus Core Equity Fund since 2001. Vice President of Parnassus Funds
and Parnassus Income Funds since 2001. |
|
|
|
|
Downey
H. Blount, 51
Parnassus
Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Assistant Secretary |
|
Indefinite
Since 2015 |
|
Deputy Chief Compliance Officer of
Parnassus Investments since 2019. Chief Compliance Officer of Parnassus
Funds Distributor from 2015 to 2019. Senior Compliance Officer of
Parnassus Investments from 2014 to 2018. |
B-20
|
|
|
|
|
|
|
Name, Age and Address |
|
Positions
with Funds |
|
Term
of Office
and
Length of
Time
Served |
|
Principal Occupation
During Past Five Years |
OFFICERS
(other
than Benjamin E. Allen)
(Continued) |
|
|
|
|
Marc
C. Mahon, 44
Parnassus
Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Executive Vice President, Principal
Accounting Officer and Treasurer |
|
Indefinite
As
Principal Accounting Officer and Treasurer, since 2007
As
Executive Vice President, since July 2017 |
|
Chief Financial Officer of Parnassus
Investments since 2007. Chief Operating Officer of Parnassus Investments
since 2018. Executive Vice President of Parnassus Investments since
2017. |
|
|
|
|
John
V. Skidmore II, 56
Parnassus
Investments, LLC
1
Market Street, Ste. 1600
San
Francisco, CA 94105 |
|
Chief
Compliance
Officer,
Fidelity Bond Officer and Secretary |
|
Indefinite
Since 2008 |
|
Chief Compliance Officer of Parnassus
Funds, Parnassus Income Funds and Parnassus Investments since
2008. |
Benjamin
E. Allen was appointed as a Trustee effective as of January 1, 2021,
replacing Jerome L. Dodson, who retired as a Trustee. Mr. Allen is
President and Chief Executive Officer of Parnassus Investments, where he has
worked since 2005. He is a portfolio manager of the Core Equity Fund and has
been a portfolio manager since 2012. Mr. Allen has been President of the
Funds since 2017 and Chief Executive of the Funds since 2017. His experience and
skills as a portfolio manager, as well as his familiarity with the investment
strategies utilized by Parnassus Investments for the Funds, led to the
conclusion that he should serve as a Trustee.
Donald
J. Boteler and Alecia A. DeCoudreaux have served as Trustees from 2012 and 2013,
respectively, and Kay Yun and Amy Johnson were appointed as Trustees in 2017 and
2022, respectively. Mr. Boteler’s knowledge of the investment advisory
industry and the regulatory framework that governs mutual funds are beneficial
to the Funds’ operations. Ms. DeCoudreaux’s management and corporate
governance experience help ensure that the Funds adhere to best practices in
their governance. Ms. Yun’s broad experience with investments and issuers
allows her to provide insight on industry and regulatory developments that
benefit the Funds. Roy Swan, Jr. is well qualified to serve as a Trustee due to
his significant experience in impact investment, finance, and public company
management. Rajesh Atluru is well qualified to serve as a Trustee due to his
subject matter expertise in sustainability and technology, and his investment
experience. Eric P. Rakowski is well qualified to serve as a Trustee due to his
knowledge about the investment advisory business, including mutual fund
distribution, portfolio valuation, compliance, and auditing, and his governance
experience serving as a mutual fund director. Amy K. Johnson is well qualified
to serve as a Trustee due to her involvement in and knowledge of operations and
financial management, and her experience in the global asset management
industry. Also, as reflected in the information provided in the table above,
they are all experienced business persons and consultants, familiar with
financial statements and responsible investing. We believe each takes a
constructive and thoughtful approach to addressing issues facing the Funds, and
are well qualified to serve as Trustees.
As
discussed above, the combination of skills and attributes of all of the Trustees
led to the conclusion that each should serve as a Trustee. The mandatory
retirement age for Independent Trustees is 75.
The
Funds’ Boards of Trustees decide matters of general policy and supervise the
activities of the Adviser. All Trustees serve indefinite terms (subject to the
mandatory retirement age for Independent Trustees), and they each oversee five
Funds in the Fund Complex. Each of the Trusts has its own Board of Trustees. The
same individuals serve as Trustees and Officers of each Trust. The Funds’
Officers conduct and supervise the daily business operations of the Funds.
Alecia A. DeCoudreaux serves as the Chairperson of the Board, and is the
presiding officer at all meetings of the Boards of Trustees.
The
Trustees have determined that the leadership structure is appropriate as they
believe they have ample input into their meetings, ample access to information
about the Funds, and effective communications with management of the Adviser.
Also, having an Independent Trustee serve as the Chairperson and a supermajority
of Independent Trustees (75% of the Board is composed of Independent Trustees)
allows the Board and management to have proper alignment and dialogue on all
matters within the authority of the Board, including those related to risk
oversight.
B-21
Trustee
Compensation
For
the fiscal year ended December 31, 2021, the Trusts paid each of their
Trustees who is not affiliated with the Adviser an aggregate annual fee of
$175,000 in addition to reimbursement for
certain out-of-pocket expenses. For the fiscal year ending
December 31, 2022, the Trusts will pay each of their Trustees who is not
affiliated with the Adviser an aggregate annual fee of $175,000 in addition to
reimbursement for certain out-of-pocket expenses, plus an additional annual
retainer of $25,000 to the Chairperson of the Board, and an additional annual
retainer of $12,500 to each of the Chairperson of the Audit Committee and the
Chairperson of the Nominating and Governance Committee. The Funds comprise a
“family of investment companies.” The Trusts have no retirement or pension plans
for their Trustees.
The
following table sets forth the aggregate compensation paid by the Trusts and the
Boards of any other investment companies managed by Parnassus Investments to the
Trustees who are not affiliated with the Adviser for the fiscal year ended
December 31, 2021. Roy Swan, Jr., Rajesh Atluru, and Eric P. Rakowski have
not previously served on the Fund’s Board of Trustees. Amy K. Johnson joined the
Parnassus Fund Boards on December 1, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
and Position(1) |
|
Aggregate Compensation From Funds |
|
|
Pension or Retirement Benefits Accrued as Part of Fund Expenses |
|
|
Total Compensation From Fund and Fund Complex Paid to Trustees |
|
Alecia
A. DeCoudreaux |
|
$ |
175,000 |
|
|
|
None |
|
|
$ |
175,000 |
|
Donald
J. Boteler |
|
$ |
175,000 |
|
|
|
None |
|
|
$ |
175,000 |
|
Kay
Yun |
|
$ |
175,000 |
|
|
|
None |
|
|
$ |
175,000 |
|
Rajesh
Atluru |
|
$ |
43,750 |
|
|
|
None |
|
|
$ |
43,750 |
|
Eric
P. Rakowski |
|
$ |
43,750 |
|
|
|
None |
|
|
$ |
43,750 |
|
Roy
Swan, Jr. |
|
$ |
43,750 |
|
|
|
None |
|
|
$ |
43,750 |
|
(1) |
Each
of the above named Trustees is a Trustee of the Funds who is not
affiliated with the Adviser. Trustees who are interested do not receive
compensation from the Trusts. |
Trustee
Ownership of Funds
The
following table sets forth the dollar range of shares of the Funds and the total
in the family of investment companies beneficially owned by each Trustee as of
December 31, 2021. Amy K. Johnson joined the Parnassus Fund Boards on
December 1, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Parnassus Core Equity Fund |
|
|
Parnassus Mid Cap Fund |
|
|
Parnassus Value Equity Fund |
|
|
Parnassus Mid Cap Growth Fund |
|
|
Parnassus Fixed Income Fund |
|
|
Total in Family of Investment Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interested Trustee |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benjamin
E. Allen |
|
|
Over $ 100,000 |
|
|
|
Over $
100,000 |
|
|
|
Over $
100,000 |
|
|
|
Over $ 100,000 |
|
|
|
Over $ 100,000 |
|
|
|
Over $
100,000 |
|
|
|
Independent Trustees |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rajesh
Atluru |
|
|
$ 50,001‑$100,000 |
|
|
|
$ 50,001‑$100,000 |
|
|
|
$ 50,001‑$100,000 |
|
|
|
None |
|
|
|
None |
|
|
|
Over $
100,000 |
|
Donald
J. Boteler |
|
|
$
Over $100,000 |
|
|
|
Over
$ 100,000 |
|
|
|
Over $
100,000 |
|
|
|
Over
$ 100,000 |
|
|
|
$ 10,001‑$50,000 |
|
|
|
Over $
100,000 |
|
Alecia
A. DeCoudreaux |
|
|
$ 50,001-$100,000 |
|
|
|
$ 10,001-$50,000 |
|
|
|
$ 50,001-$100,000 |
|
|
|
$ 10,001‑$50,000 |
|
|
|
$ 10,001-$50,000 |
|
|
|
Over $
100,000 |
|
Eric
P. Rakowski |
|
|
Over
$ 100,000 |
|
|
|
$ 10,001-$50,000 |
|
|
|
$ 50,001-$100,000 |
|
|
|
None |
|
|
|
None |
|
|
|
Over $
100,000 |
|
Roy
Swan, Jr. |
|
|
$ 10,001-$50,000 |
|
|
|
$ 10,001-$50,000 |
|
|
|
$ 10,001-$50,000 |
|
|
|
$ 10,001-$50,000 |
|
|
|
$ 10,001-$50,000 |
|
|
|
$ 50,001‑$100,000 |
|
Kay
Yun |
|
|
Over $ 100,000 |
|
|
|
Over
$ 100,000 |
|
|
|
Over
$ 100,000 |
|
|
|
Over
$ 100,000 |
|
|
|
$ 1-$10,000 |
|
|
|
Over $
100,000 |
|
B-22
Trustee
Meetings and Committees
The
Boards of Trustees have a standing audit committee and a standing nominating and
governance committee, but do not have a standing compensation committee. The
Boards of Trustees believe that it is appropriate not to have a compensation
committee because the Board as a whole can adequately serve the function of
considering trustee compensation.
Through
its direct oversight role, and indirectly through the Audit Committee, officers
of the Funds and the Funds’ service providers, the Funds’ Boards of Trustees
performs a risk oversight function for the Funds. To effectively perform their
risk oversight function, the Boards, among other things, perform the following
activities: receive and review reports related to the performance and operations
of the Funds; review and approve, as applicable, the compliance policies and
procedures of the Funds; approve the Funds’ principal investment policies; adopt
policies and procedures designed to deter market timing; meet with
representatives of various service providers, including the Adviser and the
independent registered public accounting firm of the Funds, to review and
discuss the activities of the Funds and to provide direction with respect
thereto; and appoint a chief compliance officer of the Funds who oversees the
implementation and testing of the Funds’ compliance program and reports to the
Boards regarding compliance matters for the Funds and their service
providers.
The
Audit Committee consists solely of Independent Trustees. The current members are
Donald J. Boteler, Alecia A. DeCoudreaux, Roy Swan, Jr., and Eric P.
Rakowski. As referenced above, the Audit Committee plays a significant role
in the risk oversight of the Funds as it meets at least annually with the
auditors of the Funds and quarterly with the Funds’ Chief Compliance Officer.
The Audit Committee met four times during the last fiscal year.
The
Nominating and Governance Committee was created during 2021 and consists solely
of Independent Trustees. The current members are Alecia A. DeCoudreaux, Kay Yun,
and Rajesh Atluru. Benjamin E. Allen is a non-voting, advisory member of the
Committee.
Not
all risks that may affect the Funds can be identified nor can controls be
developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness and some risks are simply beyond the reasonable control of the
Funds, the Adviser or other service providers. Moreover, it is necessary to bear
certain risks (such as investment-related risks) to achieve the Funds’ goals. As
a result of the foregoing and other factors, the Funds’ ability to manage risk
is subject to substantial limitations. The Audit Committee is responsible for
assisting the Board of Trustees in overseeing the Funds’ independent auditors,
accounting policies and procedures and other areas relating to the Funds’
auditing processes (including advising the Board on the election of independent
auditors, reviewing the scope of the annual audit activities of the auditors and
reviewing audit results).
The
Boards of Trustees held four meetings in 2021. Each Trustee attended at least
75% of the aggregate of (a) the total number of meetings of the Board and
(b) the total number of meetings held by all committees of the Board on
which the Trustee served. The first board meeting for Rajesh Atluru, Eric P.
Rakowski and Roy Swan, Jr. after being elected by shareholders was in December
2021.
Code of Ethics
The
Parnassus Funds have adopted a code of ethics under Rule 17j-1 of the 1940 Act.
Parnassus Investments is also subject to this code. The code permits personnel
subject to the code to invest in securities, subject to certain restrictions,
including, without limitation, pre-clearance requirements. Personnel subject to
the code may not invest in securities purchased or held by the portfolios of the
Parnassus Funds, but may continue to hold securities they purchased prior to one
of the Parnassus Funds purchasing or investing in such securities. Parnassus
Funds Distributor, LLC (“Distributor”) relies on the principal underwriters
exception under Rule 17j-1(c)(3), as the Distributor is not affiliated with the
Trust or the Adviser, and no officer, director or general partner of the
Distributor serves as an officer, director or general partner of the Trust or
the Adviser.
Proxy Voting
Proxy
voting policies and procedures for the portfolios of the Parnassus Funds are
included as Annex B attached to
this statement of additional information. Proxy voting expenses incurred by the
Adviser on behalf of the Funds and other accounts will be fairly and equitably
allocated among the Funds and the other accounts holding the applicable
securities. The actual voting records for the portfolios of the Parnassus Funds
are available on the Funds’ website, www.parnassus.com, and on the website of
the SEC at www.sec.gov, both
free of charge. The SEC website contains information regarding how the Funds and
the portfolios of the Parnassus Funds voted portfolio securities during the most
recent 12-month period ended June 30, while the Funds’ website gives
information about the votes in real time, or as soon as possible after a vote
has been cast.
B-23
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As
of September 30, 2022
Parnassus
Core Equity Fund—Investor Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
30.33 |
% |
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY
10281 |
|
|
17.99 |
% |
LPL
Financial |
|
4707 Executive
Drive |
|
San Diego, CA
92121 |
|
|
9.01 |
% |
Raymond
James |
|
880 Carillon
Pkwy |
|
Saint Petersburg, FL 33716 |
|
|
7.57 |
% |
TD
Ameritrade, Inc. |
|
P. O. Box 2226 |
|
Omaha, NE
68103-2226 |
|
|
6.94 |
% |
American
Enterprise Investment Service |
|
P. O. Box 9446 |
|
Minneapolis, MN
55440 |
|
|
5.52 |
% |
Parnassus
Core Equity Fund—Institutional Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY
10281 |
|
|
23.44 |
% |
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
22.15 |
% |
Pershing,
LLC |
|
Pershing Plaza |
|
Jersey City, NJ
07399 |
|
|
10.92 |
% |
JP
Morgan Securities, LLC |
|
4 Chase
Metrotech
Ctr.,
3rd Fl. |
|
Brooklyn, NY
11245 |
|
|
8.97 |
% |
* |
The shares owned by Charles Schwab, Inc.,
National Financial Services, LLC, LPL Financial, Raymond James, TD
Ameritrade, Inc., American Enterprise Investment Service, Pershing, LLC
and JP Morgan Securities, LLC were owned of record
only. |
As of September 30, 2022, the Trustees and
Officers as a group (11 persons) owned less than 1.00% of the outstanding shares
of the Parnassus Core Equity Fund-Investor shares and the Parnassus Core Equity
Fund-Institutional shares, respectively.
Parnassus
Mid Cap Fund—Investor Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY
10281 |
|
|
23.88 |
% |
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
17.13 |
% |
American
Enterprise Investment Service |
|
P. O. Box 9446 |
|
Minneapolis, MN
55440 |
|
|
10.07 |
% |
LPL
Financial |
|
4707 Executive
Drive |
|
San Diego, CA
92121 |
|
|
7.13 |
% |
Raymond
James |
|
880 Carillon
Pkwy |
|
Saint Petersburg, FL 33716 |
|
|
7.22 |
% |
TD
Ameritrade, Inc. |
|
P. O. Box 2226 |
|
Omaha, NE
68103-2226 |
|
|
6.26 |
% |
Morgan
Stanley Smith Barney, LLC |
|
1 New York Plz 12th Fl. |
|
New York, NY
10004 |
|
|
6.42 |
% |
B-24
Parnassus
Mid Cap Fund—Institutional Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
Pershing,
LLC |
|
Pershing Plaza |
|
Jersey City, NJ
07399 |
|
|
38.76 |
% |
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
13.99 |
% |
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY
10281 |
|
|
9.95 |
% |
Raymond
James |
|
880 Carillon
Pkwy |
|
Saint Petersburg, FL 33716 |
|
|
8.59 |
% |
* |
The shares owned by National Financial
Services, LLC, Charles Schwab, Inc., American Enterprise Investment
Service, LPL Financial, Raymond James, TD Ameritrade, Inc., Morgan Stanley
Smith Barney, LLC and Pershing, LLC were owned of record
only. |
As of September 30, 2022, the Trustees and
Officers as a group (11 persons) owned less than 1.00 % of the outstanding
shares of the Parnassus Mid Cap Fund-Investor shares and the Parnassus Mid Cap
Fund-Institutional shares, respectively.
Parnassus
Endeavor Fund—Investor Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
National
Financial Services, LLC |
|
200 Liberty Street |
|
New York, NY
10281 |
|
|
33.22 |
% |
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
11.43 |
% |
American
Enterprise Investment Service |
|
P. O. Box 9446 |
|
Minneapolis, MN
55440 |
|
|
9.06 |
% |
LPL
Financial |
|
4707 Executive
Drive |
|
San Diego, CA
92121 |
|
|
7.54 |
% |
Pershing,
LLC |
|
Pershing Plaza |
|
Jersey City, NJ
07399 |
|
|
6.72 |
% |
TD
Ameritrade, Inc. |
|
P. O. Box 2226 |
|
Omaha, NE
68103-2226 |
|
|
5.01 |
% |
Parnassus
Endeavor Fund—Institutional Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY
10281 |
|
|
22.97 |
% |
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
12.39 |
% |
Merrill
Lynch, Pierce, Fenner & Smith, Inc. |
|
4800 Deer Lake Dr. E 1st Fl. |
|
Jacksonville, FL
32246 |
|
|
8.91 |
% |
Pershing,
LLC |
|
Pershing Plaza |
|
Jersey City, NJ
07399 |
|
|
8.71 |
% |
Wells
Fargo Clearing Services, LLC |
|
2801 Market
Street |
|
St.
Louis, MO 63103 |
|
|
7.41 |
% |
* |
The shares owned by National Financial
Services, LLC, Charles Schwab, Inc., American Enterprise Investment
Service, LPL Financial, Pershing LLC, TD Ameritrade, Inc., Merrill Lynch,
Pierce, Fenner & Smith, Inc. and Wells Fargo
Clearing Services, LLC were owned of record
only. |
As of September 30, 2022, the Trustees and
Officers as a group (11 persons) owned less than 1.00% of the outstanding shares
of the Parnassus Endeavor Fund-Investor shares and the Parnassus Endeavor
Fund-Institutional shares, respectively.
Parnassus
Mid Cap Growth Fund—Investor Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
15.32 |
% |
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY
10281 |
|
|
11.09 |
% |
Parnassus
Mid Cap Growth Fund—Institutional Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY 10281 |
|
|
13.09 |
% |
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
11.00 |
% |
* |
The shares owned by Charles Schwab, Inc. and
National Financial Services, LLC were owned of record only.
|
As of September 30, 2022, the Trustees and
Officers as a group (11 persons) owned less than 1.00% of the outstanding shares
of the Parnassus Mid Cap Growth Fund-Investor shares and 2.28% of the
outstanding shares of the Parnassus Mid Cap Growth Fund-Institutional shares,
respectively.
Parnassus
Fixed Income Fund—Investor Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
23.47 |
% |
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY
10281 |
|
|
13.47 |
% |
TD
Ameritrade, Inc. |
|
P. O. Box 2226 |
|
Omaha, NE
68103-2226 |
|
|
6.51 |
% |
Vantagepoint
Traditional IRA |
|
777 North
Capitol Street, NE |
|
Washington, DC
20002 |
|
|
5.37 |
% |
B-25
Parnassus
Fixed Income Fund—Institutional Shares
|
|
|
|
|
|
|
|
|
Principal Holders of Securities* |
|
Address |
|
City, State and Zip Code |
|
Percentage Ownership |
|
Charles
Schwab, Inc. |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
|
|
32.68 |
% |
National
Financial Services, LLC |
|
200 Liberty
Street |
|
New York, NY
10281 |
|
|
26.77 |
% |
Pershing,
LLC |
|
Pershing Plaza |
|
Jersey City, NJ
07399 |
|
|
12.69 |
% |
* |
The shares owned by Charles Schwab, Inc.,
National Financial Services, LLC, Vantagepoint Traditional IRA, TD
Ameritrade, Inc. and Pershing, LLC were owned of record
only. |
As of September 30, 2022, the Trustees and
Officers as a group (11 persons) owned less than 1.00% of the outstanding shares
of the Parnassus Fixed Income Fund-Investor shares and the Parnassus Fixed
Income Fund-Institutional shares, respectively.
Prior
to December 28, 2022, there were no outstanding shares of the Parnassus
Growth Equity Fund.
STANDING
AUDIT COMMITTEE
The
Audit Committee currently consists of Donald J. Boteler, Alecia A. DeCoudreaux,
Eric P. Rakowski and Roy Swan, Jr. The responsibilities of the Audit Committee
are to assist the Boards of Trustees in overseeing the Trusts’ Auditor,
accounting policies and procedures, and other areas relating to the Trusts’
auditing processes. The function of the Audit Committee and the Boards of
Trustees is oversight. It is management’s responsibility to maintain appropriate
systems for accounting and internal control, and it is the registered
independent public accounting firm’s responsibility to plan and carry out a
proper audit. The Auditor is responsible to the Boards of Trustees and the Audit
Committee. The Audit Committee met four times during the fiscal year ended
December 31, 2021. Mr. Rakowski and Mr. Swan were appointed to
the Audit Committee in December 2021.
In
overseeing the Auditor, the Audit Committee: (1) reviews the Auditor’s
independence from the Funds and management, and from the Adviser;
(2) reviews periodically the level of fees approved for payment to the
Auditor and the pre-approved non-audit services it has provided to the Funds to
ensure their compatibility with the Auditor’s independence; (3) reviews the
Auditor’s performance, qualifications and quality control procedures;
(4) reviews the scope of and overall plans for the annual audit;
(5) reviews the Auditor’s performance, qualifications and quality control
procedures; (6) consults with management and the Auditors with respect to
the Funds’ processes for risk assessment and risk management; (7) reviews
with management the scope and effectiveness of the Funds’ disclosure controls
and procedures, including for purposes of evaluating the accuracy and fair
presentation of the company’s financial statements in connection with
certifications made by the CEO and CFO; and (8) reviews significant legal
developments and the Funds’ processes for monitoring compliance with law and
compliance policies.
In
determining each year whether to reappoint the Auditors as the Funds’
independent registered public accounting firm, the Audit Committee takes
into consideration a number of factors, including, for example, the following:
(1) the length of time the Auditor has been engaged by the Funds as the
independent registered public accounting firm; (2) the Auditor’s historical
and recent performance on the audit; (3) an assessment of the professional
qualifications and past performance of the lead audit partner and the Auditor;
(4) the quality of the audit Committee’s ongoing discussions with the
Auditor; (5) an analysis of the Auditor’s known legal risks and significant
proceedings; and (6) external data relating to audit quality and
performance, including recent Public Company Accounting Oversight Board
(“PCAOB”) reports on the Auditor and its peer firms. Based on the audit
committee’s evaluation, the Audit Committee then determines whether it believes
that the Auditor is independent and that it is in the best interests of the
Funds and their shareholders to retain the Auditor to serve as the independent
registered public accounting firm.
THE
ADVISER
Parnassus
Investments acts as the Funds’ investment adviser. Under its Investment Advisory
Agreement (“Agreement”) with each of the Funds, the Adviser acts as investment
adviser for each Fund and, subject to the supervision of the Boards of Trustees,
directs the investments of each Fund in accordance with its investment
objective, policies and limitations. The Adviser also provides the Funds with
all necessary office facilities and personnel for servicing the Funds’
investments, and pays the salaries and fees of all Officers and all Trustees of
the Trusts who are “interested persons” under the 1940 Act. The Adviser also
provides the management and administrative services necessary for the operation
of the Funds, including supervising relations with the custodian, transfer
agent, Auditor and attorneys. The Adviser also prepares all shareholder
communications, maintains the Funds’ records, registers the Funds’ shares under
state and federal laws and does the staff work for the Boards of Trustees.
B-26
Each
of the Agreements provides that the Adviser shall not be liable to the
applicable Fund for any loss to the Fund except by reason of the Adviser’s
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under the Agreement.
Affiliated
Managers Group, Inc., an investment holding company with stakes in a diverse
group of boutique investment firms, holds a majority interest in Parnassus
Investments, LLC. The remaining interest is held by a broad group of Parnassus
Investments professionals. Parnassus Investments is governed by its senior
employees and conducts its business independently.
The
Parnassus Core Equity Fund pays the Adviser a fee for services performed at the
annual rate of 0.75% of the first $30 million in assets, 0.70% of the next
$70 million, 0.65% of the next $400 million, 0.60% of the next
$9.5 billion and 0.55% of the amount above $10 billion. During 2019,
2020 and 2021, the Parnassus Core Equity Fund paid to Parnassus Investments the
following fees under the Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year End |
|
Total Fees |
|
|
Fees Waived |
|
|
Fees Retained |
|
|
Reimbursements in Addition to Fee Waivers |
|
2021 |
|
$ |
160,304,343 |
|
|
$ |
0 |
|
|
$ |
160,304,343 |
|
|
$ |
0 |
|
2020 |
|
$ |
110,353,220 |
|
|
$ |
0 |
|
|
$ |
110,353,220 |
|
|
$ |
0 |
|
2019 |
|
$ |
98,972,398 |
|
|
$ |
0 |
|
|
$ |
98,972,398 |
|
|
$ |
0 |
|
The
Parnassus Growth Equity Fund pays the Adviser a fee for services performed at
the annual rate of 0.75% of the first $30 million in assets; 0.70% of the next
$70 million; 0.65% of the next $400 million; 0.60% of the next $9.5 billion; and
0.55% of the amount above $10 billion. Prior to December 28, 2022, the Fund
had no operations.
The
Parnassus Value Equity Fund pays the Adviser a fee for services performed at the
annual rate of 0.85% of the first $100 million in assets, 0.80% of the next
$100 million, 0.75% of the next $300 million and 0.65% of the amount
above $500 million. During 2019, 2020 and 2021, the Parnassus Value Equity
Fund paid to Parnassus Investments the following fees under the
Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year End |
|
Total Fees |
|
|
Fees Waived |
|
|
Fees Retained |
|
|
Reimbursements in Addition to Fee Waivers |
|
2021 |
|
$ |
30,760,844 |
|
|
$ |
14,323 |
|
|
$ |
30,746,521 |
|
|
$ |
0 |
|
2020 |
|
$ |
20,281,925 |
|
|
$ |
148,628 |
|
|
$ |
20,133,297 |
|
|
$ |
0 |
|
2019 |
|
$ |
26,559,525 |
|
|
$ |
603,973 |
|
|
$ |
25,955,552 |
|
|
$ |
0 |
|
The
Parnassus Mid Cap Fund pays the Adviser a fee for services performed at the
annual rate of 0.85% of the first $100 million in assets, 0.80% of the next
$100 million, 0.75% of the next $300 million and 0.70% of the amount
above $500 million. During 2019, 2020 and 2021, the Parnassus Mid Cap Fund
paid to Parnassus Investments the following fees under the Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year End |
|
Total Fees |
|
|
Fees Waived |
|
|
Fees Retained |
|
|
Reimbursements in Addition to Fee Waivers |
|
2021 |
|
$ |
55,534,925 |
|
|
$ |
124,298 |
|
|
$ |
55,410,627 |
|
|
$ |
0 |
|
2020 |
|
$ |
38,541,003 |
|
|
$ |
278,485 |
|
|
$ |
38,262,518 |
|
|
$ |
0 |
|
2019 |
|
$ |
26,923,280 |
|
|
$ |
413,767 |
|
|
$ |
26,509,513 |
|
|
$ |
0 |
|
B-27
The
Parnassus Mid Cap Growth Fund pays the Adviser a fee for services performed at
the annual rate of 0.70% of the first $100 million in assets, 0.65% of the
next $100 million and 0.60% of the amount above $200 million. During
2019, 2020 and 2021, the Parnassus Mid Cap Growth Fund paid to Parnassus
Investments the following fees under the Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year End |
|
Total Fees |
|
|
Fees Waived |
|
|
Fees Retained |
|
|
Reimbursements in Addition to Fee Waivers |
|
2021 |
|
$ |
6,894,422 |
|
|
$ |
0 |
|
|
$ |
6,894,422 |
|
|
$ |
0 |
|
2020 |
|
$ |
5,772,003 |
|
|
$ |
0 |
|
|
$ |
5,772,003 |
|
|
$ |
0 |
|
2019 |
|
$ |
5,813,265 |
|
|
$ |
0 |
|
|
$ |
5,813,265 |
|
|
$ |
0 |
|
The
Parnassus Fixed Income Fund pays the Adviser a fee for services performed at the
annual rate of 0.50% of the first $200 million in assets, 0.45% of the next
$200 million and 0.40% of the amount above $400 million. During 2019,
2020 and 2021, the Parnassus Fixed Income Fund paid to Parnassus Investments the
following fees under the Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year End |
|
Total Fees |
|
|
Fees Waived |
|
|
Fees Retained |
|
|
Reimbursements in Addition to Fee Waivers |
|
2021 |
|
$ |
2,070,518 |
|
|
$ |
414,378 |
|
|
$ |
1,656,140 |
|
|
$ |
0 |
|
2020 |
|
$ |
1,509,642 |
|
|
$ |
232,872 |
|
|
$ |
1,276,770 |
|
|
$ |
0 |
|
2019 |
|
$ |
1,105,326 |
|
|
$ |
305,569 |
|
|
$ |
799,757 |
|
|
$ |
0 |
|
B-28
The
computation of advisory fees is based on the average daily net assets for each
class of shares in each Fund independently.
Parnassus
Investments has contractually agreed to reduce its investment advisory fee to
the extent necessary to limit total operating expenses for the following Funds,
as stated below (as a percentage of net assets):
|
|
|
|
|
|
|
|
|
|
|
Investor Shares |
|
|
Institutional Shares |
|
Parnassus
Core Equity Fund |
|
|
0.82 |
% |
|
|
0.61 |
% |
Parnassus
Growth Equity Fund |
|
|
0.84 |
% |
|
|
0.63 |
% |
Parnassus
Value Equity Fund |
|
|
0.88 |
% |
|
|
0.65 |
% |
Parnassus
Mid Cap Fund |
|
|
0.96 |
% |
|
|
0.75 |
% |
Parnassus
Mid Cap Growth Fund |
|
|
0.80 |
% |
|
|
0.68 |
% |
Parnassus
Fixed Income Fund |
|
|
0.68 |
% |
|
|
0.45 |
% |
These
agreements will not be terminated prior to May 1, 2023, and may be
continued indefinitely by the Adviser on a year-to-year basis.
Other
than with regard to the Parnassus Growth Equity Fund, a discussion regarding the
basis for the Boards of Trustees approving the renewal of each of the investment
advisory agreements with Parnassus Investments is available in the Funds’ most
recent semiannual report to shareholders for the most recent semiannual period
ended June 30. A discussion regarding the basis for the Boards of Trustees
approving the investment advisory agreements with Parnassus Investments, LLC is
available in the Funds’ proxy statement filed with the Securities and Exchange
Commission on July 19, 2021. A discussion regarding the basis for the
Boards of Trustees approving the investment advisory agreement for the Parnassus
Growth Equity Fund with Parnassus Investments will be available in the Fund’s
first annual or semiannual report to shareholders.
In
addition to the fee payable to the Adviser, the Funds are responsible for their
operating expenses, including: (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and expenses
of their Trustees other than those affiliated with the Adviser; (v) legal
and audit expenses; (vi) fees and expenses related to the preparation of
tax returns for the Funds; (vii) fees and expenses of the Funds’ custodian,
transfer agent and accounting services agent; (viii) expenses incident to
the issuance of their shares, including issuance on the payment of or
reinvestment of dividends; (ix) fees and expenses incident to the
registration under federal or state securities laws of the Funds or their
shares; (x) expenses of preparing, printing and mailing reports and notices
and proxy material to shareholders of the Funds; (xi) all other expenses
incidental to holding meetings of the Funds’ shareholders; (xii) security
pricing services of third-party vendors; (xiii) the cost of providing the
record of proxy votes on the website; (xiv) dues or assessments of or
contributions to the Investment Company Institute, the Social Investment Forum
or any successor; and (xv) such nonrecurring expenses as may arise,
including litigation affecting the Funds and the legal obligations for which the
Funds may have to indemnify their Officers and Trustees with respect thereto. In
allocating brokerage transactions, the Agreement states that the Adviser may
consider research provided by brokerage firms.
Parnassus
Investments serves as the fund accounting and fund administration agent for the
Fund, pursuant to that certain Amended and Restated Agreement for Fund
Accounting and Fund Administration Services. On May 1, 2020, Brown Brothers
Harriman was appointed as sub-administrator and assumed the fund accounting
duties when it entered into that certain Administrative Agency Agreement with
Parnassus Investments. In this capacity, Brown Brothers Harriman handles all
fund accounting services, including calculating the daily net asset values and
is paid a fee for these services by Parnassus Investments. As fund accountant
and fund administrator, Parnassus Investments received the amounts detailed
below. For the year ended December 31, 2019, the Parnassus Core Equity
Fund, the Parnassus Mid Cap Fund, the Parnassus Value Equity Fund, the Parnassus
Mid Cap Growth Fund and the Parnassus Fixed Income Fund paid accounting and
administrative fees of $5,403,636, $1,202,092, $1,265,140, $299,542 and $70,897,
respectively. For the year ended December 31, 2020, the Parnassus Core
Equity Fund, the Parnassus Mid Cap Fund, the Parnassus Value Equity Fund, the
Parnassus Mid Cap Growth Fund and the Parnassus Fixed Income Fund paid
accounting and administrative fees of $5,953,474, $1,697,397, $942,929, $292,326
and $97,598, respectively. For the year ended December 31, 2021, the
Parnassus Core Equity Fund, the Parnassus Mid Cap Fund, the Parnassus Value
Equity Fund, the Parnassus Mid Cap Growth Fund and the Parnassus Fixed Income
Fund paid accounting and administrative fees of $8,696,305, $2,429,920,
$1,430,538, $346,552 and $136,548, respectively. The Parnassus Growth Equity
Fund was not operational prior to December 28, 2022 and therefore does not
have historical accounting and administrative fees.
B-29
PORTFOLIO
TRANSACTIONS
In
connection with the Adviser’s duties to arrange for the purchase and the sale of
securities held in the portfolio of a Fund by placing purchase and sale orders
for the Fund, the Adviser shall select such brokers as shall, in the Adviser’s
judgment, implement the policy of the Funds to achieve “best execution,” i.e.,
prompt and efficient execution at the most favorable securities price. In making
such selection, the Adviser is authorized in the Agreement to consider the
reliability, integrity and financial condition of the broker. The Adviser is
also authorized to consider whether the broker provides brokerage and/or
research services to the Funds and/or other accounts of the Adviser. The
Agreement states that the commissions paid to such brokers may be higher than
another broker would have charged if a good faith determination is made by the
Adviser that the commission is reasonable in relation to the services provided,
viewed in terms of either that particular transaction or the Adviser’s overall
responsibilities as to the accounts as to which it exercises investment
discretion. The Adviser shall use its judgment in determining that the amount of
commissions paid are reasonable in relation to the value of brokerage and
research services provided and need not place nor attempt to place specific
dollar value on such services nor on the portion of commission rates reflecting
such services. The Funds recognize in the Agreement that, on any particular
transaction, a higher than usual commission may be paid due to the difficulty of
the transaction in question.
The
research services discussed above may be provided in written form or through
direct contact with individuals and may include information as to particular
companies and securities as well as market, economic or institutional areas and
information assisting the Fund in the valuation of its investments. The research
that the Adviser receives for a Fund’s brokerage commissions, whether or not
useful to that Fund, may be useful to the Adviser in managing the accounts of
the Adviser’s other advisory clients. Similarly, the research received for the
commissions of such other accounts may be useful to a Fund. To the extent that
electronic or other products provided by brokers are used by the Adviser for
non-research purposes, the Adviser will use its best judgment to make a
reasonable allocation of the cost of the product attributable to non-research
use.
Research
services provided through brokerage will be those providing information and
analyses that assist the portfolio manager in making investment decisions.
Brokerage services are used to facilitate trade execution. Examples of such
research services include FactSet investment analytics tools, Bloomberg
information and research, MSCI social research, publications containing
investment information and recommendations and individual reports written about
specific companies. The Funds also utilize a trade order management system to
facilitate trade execution.
The
Adviser also participates in “commission sharing arrangements” to receive
eligible research and brokerage products and services. In commission sharing
arrangements, the Adviser may effect transactions, subject to best execution,
through a broker and request that the broker allocate a portion of the
commission or commission credits to a segregated “research pool(s)” maintained
by the broker. The Adviser may then direct such broker to pay for various
products and services that are eligible under the safe harbor of
Section 28(e). Participating in commission sharing arrangements may enable
the Adviser to (1) strengthen its key brokerage relationships;
(2) consolidate payments for research and brokerage products and services;
and (3) continue to receive a variety of high-quality research and
brokerage products and services while facilitating best execution in the trading
process.
During
2021, the Parnassus Core Equity Fund, the Parnassus Mid Cap Fund, the Parnassus
Value Equity Fund and the Parnassus Mid Cap Growth Fund paid $794,792, $167,137,
$115,883 and $9,950, respectively, to Cowen Westminster Research in brokerage
commissions under a commission sharing arrangement, as described above. The
Parnassus Growth Equity Fund was not operational prior to December 28,
2022.
In
the over-the-counter market, securities may trade on a “net” basis, with dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes a profit to the dealer. Money-market
instruments usually trade on a “net” basis as well. On occasion, certain
money-market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid. In underwritten offerings, securities are
purchased at a fixed price that includes compensation to the underwriter,
generally referred to as the underwriter’s concession or discount.
During
2019, 2020 and 2021, the Parnassus Core Equity Fund, the Parnassus Mid Cap Fund,
the Parnassus Value Equity Fund, the Parnassus Mid Cap Growth Fund and the
Parnassus Fixed Income Fund paid brokerage commissions and made payments in
conjunction with brokerage and research services, as stated below. The Parnassus
Growth Equity Fund was not operational prior to December 28,
2022.
B-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund Name |
|
Year Paid |
|
Brokerage Commissions |
|
|
Brokerage and Research Services |
|
|
Total Transactions |
|
Parnassus
Core Equity Fund |
|
2019 |
|
$ |
1,990,209 |
|
|
$ |
1,258,259 |
|
|
$ |
12,653,562,662 |
|
Parnassus
Value Equity Fund |
|
2019 |
|
$ |
1,126,473 |
|
|
$ |
976,717 |
|
|
$ |
5,505,307,234 |
|
Parnassus
Mid Cap Fund |
|
2019 |
|
$ |
882,608 |
|
|
$ |
744,266 |
|
|
$ |
3,404,852,364 |
|
Parnassus
Mid Cap Growth Fund |
|
2019 |
|
$ |
279,160 |
|
|
$ |
245,192 |
|
|
$ |
890,996,081 |
|
Parnassus
Fixed Income Fund |
|
2019 |
|
$ |
2,359 |
|
|
$ |
2,359 |
|
|
$ |
223,020,674 |
|
Parnassus
Core Equity Fund |
|
2020 |
|
$ |
2,046,243 |
|
|
$ |
1,327,943 |
|
|
$ |
14,495,892,461 |
|
Parnassus
Value Equity Fund |
|
2020 |
|
$ |
835,700 |
|
|
$ |
746,035 |
|
|
$ |
3,750,406,373 |
|
Parnassus
Mid Cap Fund |
|
2020 |
|
$ |
1,447,029 |
|
|
$ |
1,247,175 |
|
|
$ |
5,180,579,622 |
|
Parnassus
Mid Cap Growth Fund |
|
2020 |
|
$ |
352,800 |
|
|
$ |
298,435 |
|
|
$ |
1,679,280,075 |
|
Parnassus
Fixed Income Fund |
|
2020 |
|
$ |
1,956 |
|
|
$ |
1,956 |
|
|
$ |
357,618,132 |
|
Parnassus
Core Equity Fund |
|
2021 |
|
$ |
1,889,165 |
|
|
$ |
1,081,870 |
|
|
$ |
16,845,075,176 |
|
Parnassus
Value Equity Fund |
|
2021 |
|
$ |
686,989 |
|
|
$ |
559,281 |
|
|
$ |
4,459,541,504 |
|
Parnassus
Mid Cap Fund |
|
2021 |
|
$ |
1,345,993 |
|
|
$ |
1,160,415 |
|
|
$ |
5,775,994,092 |
|
Parnassus
Mid Cap Growth Fund |
|
2021 |
|
$ |
131,844 |
|
|
$ |
117,884 |
|
|
$ |
693,967,513 |
|
Parnassus
Fixed Income Fund |
|
2021 |
|
$ |
5,724 |
|
|
$ |
5,724 |
|
|
$ |
348,674,530 |
|
Parnassus
Investments has clients other than the Parnassus Funds that have objectives
similar to the Funds. Normally, orders for securities trades are placed
separately for each client. However, some recommendations may result in
simultaneous buying or selling of securities along with the Funds. As a result,
the demand for securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price of those
securities. Parnassus Investments does not favor one client over another in
making recommendations or placing orders, and in some situations, orders for
different clients may be aggregated. In cases where the aggregate order is
executed in a series of transactions at various prices on a given day, each
participating client’s proportionate share of such order reflects the average
price paid or received with respect to the total order. Also, should only a
partial order be filled, each client would ordinarily receive a pro rata share
of the total order.
DISTRIBUTOR
AND DISTRIBUTION AGREEMENT
Prior
to May 1, 2019, the distributor of the Funds, Parnassus Funds Distributor,
LLC, was a wholly-owned subsidiary of the Adviser. Distributor did not receive
any net underwriting discounts or commissions, compensation on redemptions and
repurchases, brokerage commissions or other compensation in 2018.
Effective
as of May 1, 2019, Parnassus Funds Distributor, LLC was acquired by
Foreside Distributors, LLC (“Foreside Distributors”). The Trust has entered into
a distribution agreement (the “Distribution Agreement”) under Distributor, a
wholly owned subsidiary of Foreside Distributors, with principal offices at
Three Canal Plaza, Suite 100, Portland, Maine 04101, which acts as the
distributor of each Fund in connection with the continuous offering of the
Funds’ shares. The Distributor distributes shares of the Funds on a best efforts
basis and is not obligated to sell any specific quantity of Fund shares. The
Distributor and its officers have no role in determining the investment policies
or which securities are to be purchased or sold by the Trust. The Distributor is
not affiliated in any way with the Funds or the Adviser.
Under
a License Agreement (the “License Agreement”) with Foreside Distributors,
Parnassus Investments agrees that the name “Parnassus Funds” may be used by
Foreside Distributors and its subsidiary, Parnassus Funds Distributor, LLC, in
connection with providing services to the Trust on a royalty-free basis.
Parnassus Investments has reserved to itself the right to grant the
non-exclusive right to use the name “Parnassus Funds” to any other person. The
License Agreement provides that at such time as the License Agreement is no
longer in effect, Foreside Distributors and Distributor will cease using the
name “Parnassus.”
SHAREHOLDER
SERVICING PLAN
Pursuant
to a Shareholder Servicing Plan and Agreement (the “Servicing Plan”) with each
of the Funds, Parnassus Investments may arrange for third parties to provide
certain services, including account maintenance, record keeping and other
personal services to
B-31
their
clients who invest in the Funds. These third parties may include broker/dealers,
banks, third-party administrators, registered investment advisors or other
financial institutions. For these third-party services, each of the Funds may
pay service providers an aggregate service fee at a rate not to exceed
0.25% per annum of the applicable Fund’s average daily net assets. However,
the Institutional Shares are not subject to any service fees, pursuant to the
Servicing Plan. Parnassus Investments may elect to pay service providers and
other third parties an additional amount from its own funds to cover additional
servicing fees and other arrangements, which may promote the sale of Fund shares
(the making of such payments could create a conflict of interest for financial
intermediaries receiving such payments). To the extent any of the shareholder
services are provided by Parnassus Investments, Parnassus Investments does not
receive any additional compensation outside of what it receives for acting as
fund accounting and fund administration agent under the Agreement for Fund
Accounting and Fund Administration Services. For the year ended
December 31, 2019, the Parnassus Core Equity Fund, the Parnassus Mid Cap
Fund, the Parnassus Value Equity Fund, the Parnassus Mid Cap Growth Fund and the
Parnassus Fixed Income Fund paid service providers the following amounts:
$21,703,442, $4,974,888, $6,883,205, $1,024,577 and $304,591, respectively. For
the year ended December 31, 2020, the Parnassus Core Equity Fund, the
Parnassus Mid Cap Fund, the Parnassus Value Equity Fund, the Parnassus Mid Cap
Growth Fund and the Parnassus Fixed Income Fund paid service providers the
following amounts: $21,775,042, $5,102,201, $4,440,410, $973,146 and $304,340,
respectively. For the year ended December 31, 2021, the Parnassus Core
Equity Fund, the Parnassus Mid Cap Fund, the Parnassus Value Equity Fund, the
Parnassus Mid Cap Growth Fund and the Parnassus Fixed Income Fund paid service
providers the following amounts: $28,501,960, $5,971,653, $5,996,275, $1,000,571
and $417,704, respectively. The Parnassus Growth Equity Fund was not operational
prior to December 28, 2022 and therefore does not have historical fund
accounting and administrative fees.
ADDITIONAL
MARKETING AND SUPPORT PAYMENTS
The
Funds may pay fees to financial intermediaries, such as brokers or third-party
administrators, for non-distribution related sub-transfer agency,
administrative, sub-accounting, and other shareholder services. Fees paid
pursuant to such agreements are generally based on either (i) a percentage
of the average daily net assets of Fund shareholders serviced by a financial
intermediary or (ii) the number of accounts held by Fund shareholders that
are serviced by a financial intermediary. Any fees paid pursuant to such
agreements may be in addition to, rather than in lieu of, fees the Funds may pay
to financial intermediaries.
The
Adviser also may pay certain financial intermediaries for certain activities
related to the Funds. These payments are separate from any fees the Funds pay to
those financial intermediaries. Any payments made by the Adviser are made from
its own assets and not from the assets of the Funds. These payments do not
increase the price paid by investors for the purchase of shares of, or the cost
of owning, a Fund. The Adviser may pay for financial intermediaries to
participate in marketing activities and presentations, educational training
programs, activities designed to make registered representatives, other
professionals, and individual investors more knowledgeable about the Funds, or
activities relating to the support of technology platforms and reporting
systems.
The
Adviser may also make payments to financial intermediaries for certain printing,
publishing, and mailing costs associated with the Funds. Additionally, the
Adviser may make payments to financial intermediaries that make shares of the
Funds available to their clients or for otherwise promoting the Funds. Payments
of this type are sometimes referred to as revenue-sharing payments.
Payments
to a financial intermediary may be significant to that financial intermediary,
and amounts that financial intermediaries pay to an investor’s salesperson or
other investment professional may also be significant for the investor’s
salesperson or other investment professional. Because a financial intermediary
may make decisions about which investment options it will recommend or make
available to its clients and what services to provide for various products based
on payments it receives or is eligible to receive, these payments create
conflicts of interest between the financial intermediary and its clients, and
these financial incentives may cause the financial intermediary to recommend the
Funds over other investments. The same conflict of interest exists with respect
to an investor’s salesperson or other investment professional if such individual
receives similar payments from a financial intermediary.
The
assets purchased by shareholders through financial intermediaries to which the
Adviser makes payments are not as profitable to the Adviser as those purchased
in direct shareholder accounts. A significant majority of shareholders invest in
the Funds through such financial intermediaries.
PORTFOLIO
MANAGERS
The
sole investment adviser to the Funds is Parnassus Investments. The portfolio
managers to the Funds may have responsibility for the day-to-day management of
accounts other than the Funds. Information regarding these other accounts is set
forth below. The number of accounts and assets is shown as of September 30,
2022. None of the other accounts identified below have advisory fees that are
performance based. Some of the portfolio managers may from time to time manage
portfolios used in model portfolio arrangements offered by various sponsors. In
connection with these model portfolios, such portfolio managers provide
investment recommendations in the form of model portfolios to a third party, who
is responsible for executing trades for participating client
accounts.
B-32
Number
of Other Accounts Managed
and Total Assets by Account Type
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Portfolio Manager |
|
Registered Investment Companies |
|
|
Other Pooled Investment Vehicles |
|
|
Other Accounts |
|
Todd
C. Ahlsten* |
|
|
0 |
|
|
|
|
|
|
|
16 |
|
|
|
$ |
0 |
|
|
|
None |
|
|
$ |
5,293,078,384 |
|
Benjamin
E. Allen* |
|
|
0 |
|
|
|
|
|
|
|
16 |
|
|
|
$ |
0 |
|
|
|
None |
|
|
$ |
5,293,078,384 |
|
Andrew
S. Choi* |
|
|
1 |
|
|
|
|
|
|
|
16 |
|
|
|
$ |
0 |
|
|
|
None |
|
|
$ |
5,293,078,384 |
|
Matthew
D. Gershuny |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
Lori
A. Keith |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
Billy
J. Hwan |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
Krishna
S. Chintalapalli |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
Ian
E. Sexsmith |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
Robert
J. Klaber |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
Samantha
D. Palm |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
Minh
T. Bui |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
Shivani
R. Vohra |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0 |
|
|
|
None |
|
|
|
None |
|
* |
Todd
C. Ahlsten, Benjamin E. Allen and Andrew S. Choi co-manage 16 other
accounts. |
The
Adviser typically assigns accounts with similar investment strategies to its
portfolio managers to mitigate the potentially conflicting investment strategies
of accounts. Other than potential conflicts between investment strategies, the
side-by-side management of mutual funds and other accounts may raise potential
conflicts of interest due to the interest held by the Adviser or one of its
affiliates in an account and certain trading practices used by the portfolio
managers (for example, cross trades between a mutual fund and another account
and allocation of aggregated trades). The Adviser has developed policies and
procedures reasonably designed to mitigate those conflicts. In particular, the
Adviser has adopted policies limiting the ability of portfolio managers to cross
securities between mutual funds and policies designed to ensure the fair
allocation of securities purchased on an aggregated basis.
The
portfolio managers are compensated in various forms. The following table
outlines the forms of compensation paid to each portfolio manager as of
December 31, 2022.
B-33
|
|
|
|
|
|
|
Name
of Portfolio Managers |
|
Form of
Compensation |
|
Source of
Compensation |
|
Method Used to Determine Compensation
(Including Any Differences in Method Between Account Types) |
Todd
C. Ahlsten |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments, which includes Todd C. Ahlsten, determines his salary on an
annual basis, and it is a fixed amount throughout the year. It is not
based on the performance of the Funds or on the value of the assets held
in the Funds’ portfolios. Todd C. Ahlsten may also earn compensation based
on the profitability of Parnassus Investments through his ownership
interest in Parnassus Investments. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Todd C. Ahlsten’s compensation,
he may receive a bonus based on the pre-tax performance of the Parnassus
Core Equity Fund over multiple years versus the S&P 500 Index. |
|
|
|
|
Benjamin
E. Allen |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments, which includes Benjamin E. Allen, determines his salary on an
annual basis, and it is a fixed amount throughout the year. It is not
based on the performance of the Funds or on the value of the assets held
in the Funds’ portfolios. Benjamin E. Allen may also earn compensation
based on the profitability of Parnassus Investments through his ownership
interest in Parnassus Investments. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Benjamin E. Allen’s
compensation, he may receive a bonus based on the pre-tax performance of
the Parnassus Core Equity Fund over multiple years versus the S&P 500
Index. |
|
|
|
|
Andrew
S. Choi |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Andrew S. Choi’s salary on an annual basis, and it
is a fixed amount throughout the year. It is not based on the performance
of the Funds or on the value of the assets held in the Funds’
portfolios. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Andrew S. Choi’s compensation,
he may receive a bonus based on the pre-tax performance of the Parnassus
Core Equity Fund over multiple years versus the S&P 500 Index. |
|
|
|
|
Matthew
D. Gershuny |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Matthew D. Gershuny’s salary on an annual basis,
and it is a fixed amount throughout the year. It is not based on the
performance of the Funds or on the value of the assets held in the Funds’
portfolios. Matthew D. Gershuny may also earn compensation based on the
profitability of Parnassus Investments through his ownership interest in
Parnassus Investments. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Matthew D. Gershuny’s
compensation, he may receive a bonus based on the pre-tax performance of
the Parnassus Mid Cap Fund over multiple years versus the Russell Midcap
Index. |
|
|
|
|
Lori
A. Keith |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Lori A. Keith’s salary on an annual basis, and it
is a fixed amount throughout the year. It is not based on the performance
of the Funds or on the value of the assets held in the Funds’ portfolios.
Lori A. Keith may also earn compensation based on the profitability of
Parnassus Investments through her ownership interest in Parnassus
Investments. |
B-34
|
|
|
|
|
|
|
Name
of Portfolio Managers |
|
Form of
Compensation |
|
Source of
Compensation |
|
Method Used to Determine Compensation
(Including Any Differences in Method Between Account Types) |
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Lori A. Keith’s compensation,
she may receive a bonus based on the pre-tax performance of the Parnassus
Mid Cap Fund over multiple years versus the Russell Midcap Index. |
|
|
|
|
Billy
J. Hwan |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Billy J. Hwan’s salary on an annual basis, and it
is a fixed amount throughout the year. It is not based on the performance
of the Funds or on the value of the assets held in the Funds’ portfolios.
Billy J. Hwan may also earn compensation based on the profitability of
Parnassus Investments through his ownership interest in Parnassus
Investments. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Billy J. Hwan’s compensation,
he may receive a bonus based on the pre-tax performance of the Parnassus
Value Equity Fund over multiple years versus the Russell 1000® Value Index. |
|
|
|
|
Krishna
S. Chintalapalli |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Krishna S. Chintalapalli’s salary on an annual
basis, and it is a fixed amount throughout the year. It is not based on
the performance of the Funds or on the value of the assets held in the
Funds’ portfolios. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Krishna S. Chintalapalli’s
compensation, he may receive a bonus based on the pre-tax performance of
the Parnassus Value Equity Fund over multiple years versus the Russell
1000® Value
Index. |
|
|
|
|
Ian
E. Sexsmith |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Ian E. Sexsmith’s salary on an annual basis, and it
is a fixed amount throughout the year. It is not based on the performance
of the Funds or on the value of the assets held in the Funds’ portfolios.
Ian E. Sexsmith may also earn compensation based on the profitability of
Parnassus Investments through his ownership interest in Parnassus
Investments. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Ian E. Sexsmith’s compensation,
he may receive a bonus based on the pre-tax performance of the Parnassus
Mid Cap Growth Fund over multiple years versus the Russell Midcap Growth
Index. |
|
|
|
|
Robert
J. Klaber |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Robert J. Klaber’s salary on an annual basis, and
it is a fixed amount throughout the year. It is not based on the
performance of the Funds or on the value of the assets held in the Funds’
portfolios. Robert J. Klaber may also earn compensation based on the
profitability of Parnassus Investments through his ownership interest in
Parnassus Investments. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Robert J. Klaber’s
compensation, he may receive a bonus based on the pre-tax performance of
the Parnassus Mid Cap Growth Fund over multiple years versus the Russell
Midcap Growth Index. |
B-35
|
|
|
|
|
|
|
Name
of Portfolio Managers |
|
Form of
Compensation |
|
Source of
Compensation |
|
Method Used to Determine Compensation
(Including Any Differences in Method Between Account Types) |
Samantha
D. Palm |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Samantha D. Palm’s salary on an annual basis, and
it is a fixed amount throughout the year. It is not based on the
performance of the Funds or on the value of the assets held in the Funds’
portfolios. Samantha D. Palm may also earn compensation based on the
profitability of Parnassus Investments through her ownership interest in
Parnassus Investments. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Samantha D. Palm’s
compensation, she may receive a bonus based on the pre-tax performance of
the Parnassus Fixed Income Fund over multiple years versus the Bloomberg
U.S. Aggregate Bond Index. |
|
|
|
|
Minh
T. Bui |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Minh T. Bui’s salary on an annual basis, and it is
a fixed amount throughout the year. It is not based on the performance of
the Funds or on the value of the assets held in the Funds’ portfolios.
Minh T. Bui may also earn compensation based on the profitability of
Parnassus Investments through his ownership interest in Parnassus
Investments. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Minh T. Bui’s compensation, he
may receive a bonus based on the pre-tax performance of the Parnassus
Fixed Income Fund over multiple years versus the Bloomberg U.S. Aggregate
Bond Index. |
|
|
|
|
Shivani
Vohra |
|
Salary |
|
Parnassus
Investments |
|
The management committee of Parnassus
Investments determines Shivani Vohra’s salary on an annual basis, and it
is a fixed amount throughout the year. It is not based on the performance
of the Fund or on the value of the assets held in the Fund’s
portfolios. |
|
|
|
|
|
|
Performance
Bonus |
|
Parnassus
Investments |
|
As part of Shivani Vohra’s compensation,
she may receive a bonus based on the pre-tax performance of the Parnassus
Growth Equity Fund over multiple years versus the Russell 1000® Growth
Index. |
The
dollar range of shares of the Funds beneficially owned by the Funds’ portfolio
managers, as of September 30, 2022 (which is also the valuation date), is
set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
Range of Shares
of |
|
Parnassus Core Equity
Fund |
|
|
Parnassus Mid
Cap Fund |
|
|
Parnassus
Endeavor Fund |
|
|
Parnassus Mid Cap Growth
Fund |
|
|
Parnassus Fixed Income
Fund |
|
Todd C. Ahlsten |
|
|
Over $1,000,000 |
|
|
|
Over $1,000,000 |
|
|
|
Over
$1,000,000 |
|
|
|
Over $1,000,000 |
|
|
|
Over $1,000,000 |
|
Benjamin
E. Allen |
|
|
Over $1,000,000 |
|
|
|
$500,001‑$1,000,000 |
|
|
|
$500,001‑$1,000,000 |
|
|
|
Over
$1,000,000 |
|
|
|
$100,001‑$500,000 |
|
Matthew D. Gershuny |
|
|
$50,001‑$100,000 |
|
|
|
Over $1,000,000 |
|
|
|
$50,001‑$100,000 |
|
|
|
$50,001‑$100,000 |
|
|
|
None |
|
Lori
A. Keith |
|
|
$10,001‑$50,000 |
|
|
|
$500,001‑$1,000,000 |
|
|
|
$50,001‑$100,000 |
|
|
|
$10,001‑$50,000 |
|
|
|
$1‑$10,000 |
|
Billy
J. Hwan |
|
|
$100,001‑$500,000 |
|
|
|
$10,001‑$50,000 |
|
|
|
Over $1,000,000 |
|
|
|
$1‑$10,000 |
|
|
|
None |
|
Ian
E. Sexsmith |
|
|
$50,001‑$100,000 |
|
|
|
None |
|
|
|
None |
|
|
|
$500,001‑$1,000,000 |
|
|
|
None |
|
Robert
J. Klaber |
|
|
$100,001‑$500,000 |
|
|
|
$50,001‑$100,000 |
|
|
|
$10,001‑$50,000 |
|
|
|
$500,001‑$1,000,000 |
|
|
|
$1‑$10,000 |
|
Samantha
D. Palm |
|
|
$500,001‑$1,000,000 |
|
|
|
$50,001‑$100,000 |
|
|
|
$50,001‑$100,000 |
|
|
|
$1‑$10,000 |
|
|
|
$100,001‑$500,000 |
|
Minh
T. Bui |
|
|
$500,001‑$1,000,000 |
|
|
|
$1‑$10,000 |
|
|
|
$10,001‑$50,000 |
|
|
|
$10,001‑$50,000 |
|
|
|
$100,001‑$500,000 |
|
Andrew
S. Choi |
|
|
$100,001‑$500,000 |
|
|
|
$10,001‑$50,000 |
|
|
|
$10,001‑$50,000 |
|
|
|
$10,001‑$50,000 |
|
|
|
None |
|
Krishna
S. Chintalapalli |
|
|
None |
|
|
|
None |
|
|
|
$10,001‑$50,000 |
|
|
|
None |
|
|
|
None |
|
Shivani
Vohra |
|
|
$100,001‑$500,000 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
B-36
NET
ASSET VALUE
The
net asset values of the Funds’ shares are computed once each day as of the close
of trading on the New York Stock Exchange (“NYSE”), usually 4:00 p.m. Eastern
Time, on each day that the NYSE is open for trading and on any other day that
there is a sufficient degree of trading in investments held by the Funds to
affect their net asset values. The NYSE is generally closed on the following
holidays: New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday,
Good Friday, Memorial Day, Juneteenth National Independence Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. If any of the aforementioned
holidays falls on a Saturday, the NYSE will not be open for trading on the
preceding Friday, and when any such holiday falls on a Sunday, the NYSE will not
be open for trading on the succeeding Monday, unless unusual business conditions
exist, such as the ending of a monthly or the yearly accounting period. The NYSE
also may be closed on national days of mourning or due to natural disasters or
other extraordinary events or emergencies. In the event the NYSE closes early on
a particular day, the net asset value of a Fund will normally be determined as
of the close of the NYSE on such day.
In
determining the net asset values of the Funds’ shares, the Trustees have adopted
a set of policies and procedures to value the securities held in the Funds’
portfolios. Short-term securities are generally money-market instruments and are
valued at amortized cost, which approximates market value. A market-value
adjustment is applied to certain short-term securities to reflect penalties for
early withdrawal. Equity securities that are listed or traded on a national
securities exchange are stated at market value based on recorded closing sales
on the exchange or on the Nasdaq’s National Market System official closing
price. In the absence of a recorded sale, and for over-the-counter securities,
equity securities are stated at the mean between the last recorded bid and asked
prices (unless the spread between the bid and ask is so large that the Adviser
believes using the mean would overstate the value of the security, in which case
the security will be “fair valued” as described below). Long-term, fixed income
securities are valued each business day using prices based on procedures
established by independent pricing services and approved by the Trustees. Fixed
income securities with an active market are valued at the “bid” price where such
quotes are readily available from brokers and dealers and are representative of
the actual market for such securities. Other fixed income securities
experiencing a less active market are valued by the pricing services based on
methods that include consideration of trading in securities of comparable yield,
quality, coupon, maturity and type, as well as indications as to values from
dealers and other market data without exclusive reliance upon quoted prices or
over-the-counter prices, since such valuations are believed to reflect more
accurately the value of such securities.
Equity
and fixed income securities for which market quotations are not readily
available are priced at their fair value, in accordance with procedures
established and overseen by the Trustees. In determining fair value, the
Trustees may consider a variety of information including, but not limited to,
the following: price based upon a multiple of earnings or sales, a discount from
the market value of a similar security, fundamental analytical data, and an
evaluation of market conditions. Types of securities that the Funds may hold for
which fair-value pricing might be required include, but are not limited to:
(a) illiquid securities, including “restricted” securities and private
placements for which there is no public market; (b) securities of an issuer
that has entered into a restructuring; and (c) securities whose trading has
been halted or suspended. The fair value of a security is the amount the Funds
might reasonably expect to receive upon a current sale. The fair value of a
security may differ from the last quoted price, and the Funds may not be able to
sell a security at the fair value determined, as valuing securities at fair
value involves greater reliance on judgment than valuing securities that have
readily available market quotations.
Fair
valuing of foreign securities may be determined with the assistance of a pricing
service using correlations between the movement of prices of such securities and
indices of domestic securities and other appropriate indicators, such as closing
market prices of relevant ADRs or futures contracts. The effect of using fair
value pricing is that the Funds’ NAV will reflect the affected portfolio
securities’ value as determined in the judgment of the Board or its designee
instead of being determined by the market.
The
SEC has adopted Rule 2a-5 under the Investment Company Act of 1940, which, among
other things, establishes an updated regulatory framework for registered
investment company valuation practices. The Funds were required to comply with
Rule 2a-5 in September 2022, and the Funds updated their fair value policies and
procedures and valuation practices and are in compliance with Rule
2a-5.
REDEMPTION
OF SHARES
The
Funds expect to use a variety of resources to honor requests to redeem shares of
the Funds, including available cash; short-term investments; interest, dividend
income and other monies earned on portfolio investments; the proceeds from the
sale or maturity of portfolio holdings; and various other techniques.
Subject
to the Funds’ compliance with applicable regulations and their policies and
procedures, each Fund has reserved the right to pay the redemption prices of
shares redeemed, either totally or partially, by a distribution in-kind of
securities (instead of cash) from the Fund’s portfolio. The securities so
distributed would be valued at the same amount as that assigned to them in
calculating the NAV for the shares redeemed. If a Fund makes an in-kind
distribution, the Fund may do so in the form of pro-rata slices of the Fund’s
portfolio, individual securities or a representative basket of securities;
provided that the Fund will not distribute depository receipts representing
foreign securities. It is not expected that a Fund would make in-kind
distributions except in unusual circumstances.
B-37
If
a holder of Fund shares receives a distribution in-kind, the holder of Fund
shares would incur brokerage charges when subsequently converting the securities
to cash. For federal income tax purposes, redemption in-kind are taxed in the
same manner as redemptions made in cash. In addition, sales of in-kind
securities may generate taxable gains.
A
shareholder’s right to redeem shares of the Funds will be suspended and the
right to payment postponed for more than seven days for any period during which
the NYSE is closed because of financial conditions or any other extraordinary
reason and may be suspended for any period during which (a) trading on the
NYSE is restricted pursuant to rules and regulations of the SEC, (b) the
SEC has by order permitted such suspension, or (c) such emergency, as
defined by rules and regulations of the SEC, exists as a result of which it is
not reasonably practicable for a Fund to dispose of its securities or fairly to
determine the value of its net assets.
ABANDONED
PROPERTY
It
is the responsibility of a shareholder to ensure that the shareholder maintains
a correct address for the shareholder’s account(s), as a shareholder’s
account(s) may be transferred to the shareholder’s state of residence if no
activity occurs within the shareholder’s account during the “inactivity period”
specified in the applicable state’s abandoned property laws. Specifically, an
incorrect address may cause a shareholder’s account statements and other
mailings to be returned to the Funds. Upon receiving returned mail, the Funds
will attempt to locate the shareholder or rightful owner of the account. If the
Funds are unable to locate the shareholder, then it will determine whether the
shareholder’s account has legally been abandoned. The Funds are legally
obligated to escheat (or transfer) abandoned property to the appropriate state’s
unclaimed property administrator in accordance with statutory requirements. The
shareholder’s last known address of record determines which state has
jurisdiction. Interest or income is not earned on redemption or distribution
checks sent to you during the time the check remained uncashed.
Shareholders
that reside in the state of Texas may designate a representative to receive
escheatment notifications by completing and submitting a designation form that
can be found on the website of the Texas Comptroller. While the designated
representative does not have any rights to claim or access the shareholder’s
account or assets, the escheatment period will cease if the representative
communicates knowledge of the shareholder’s location and confirms that the
shareholder has not abandoned his or her property. If a shareholder designates a
representative to receive escheatment notifications, any escheatment notices
will be delivered both to the shareholder and the designated representative. A
completed designation form may be mailed to the Funds (if shares are held
directly with the Funds) or to the shareholder’s financial intermediary (if
shares are not held directly with the Funds).
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
IN
VIEW OF THE COMPLEXITIES OF U.S. FEDERAL AND OTHER INCOME TAX LAWS APPLICABLE TO
REGULATED INVESTMENT COMPANIES, A PROSPECTIVE SHAREHOLDER IS URGED TO CONSULT
WITH AND RELY SOLELY UPON ITS TAX ADVISORS TO UNDERSTAND FULLY THE U.S. FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THAT INVESTOR OF SUCH AN INVESTMENT
BASED ON THAT INVESTOR’S PARTICULAR FACTS AND CIRCUMSTANCES. THIS SUMMARY IS NOT
INTENDED TO BE, AND SHOULD NOT BE CONSTRUED AS, LEGAL OR TAX ADVICE TO ANY
PROSPECTIVE SHAREHOLDER.
The
following information supplements and should be read in conjunction with the
section in each prospectus entitled “Distributions and Taxes.” Each prospectus
generally describes the U.S. federal income tax treatment of distributions by
the Funds. This section of the SAI provides additional information concerning
U.S. federal income taxes. It is based on the Internal Revenue Code of 1986, as
amended (the “Code”), applicable Treasury regulations, judicial authority and
administrative rulings and practice, all as of the date of this SAI and all of
which are subject to change, including changes with retroactive effect. Except
as specifically set forth below, the following discussion does not address any
state, local or foreign tax matters.
A
shareholder’s tax treatment may vary depending upon the shareholder’s particular
situation. This discussion applies only to shareholders holding Fund shares as
capital assets within the meaning of the Code. A shareholder may also be subject
to special rules not discussed below if they are a certain kind of shareholder,
including, but not limited to: an insurance company; a tax-exempt organization;
a financial institution or broker-dealer; a person who is neither a citizen nor
resident of the United States or entity that is not organized under the laws of
the United States or political subdivision thereof; a shareholder who holds Fund
shares as part of a hedge, straddle or conversion transaction; a shareholder who
does not hold Fund shares as a capital asset; or an entity taxable as a
partnership for U.S. federal income tax purposes and investors in such an
entity.
The
Trusts have not requested and will not request an advance ruling from the
Internal Revenue Service (the “IRS”) as to the U.S. federal income tax matters
described below. The IRS could adopt positions contrary to those discussed below
and such positions could be sustained. In addition, the following discussion and
the discussions in each prospectus applicable to each shareholder address only
some of the U.S. federal income tax considerations generally affecting
investments in the Funds. Prospective shareholders are urged to consult their
own tax advisers and financial planners regarding the U.S. federal tax
consequences of an investment in a Fund, the application of state, local or
foreign laws, and the effect of any possible changes in applicable tax laws on
their investment in the Funds.
B-38
Qualification as a Regulated Investment
Company
It
is intended that each Fund qualify for treatment as a regulated investment
company (a “RIC”) under Subchapter M of Subtitle A, Chapter 1 of the Code. Each
Fund will be treated as a separate entity for U.S. federal income tax purposes.
Thus, the provisions of the Code applicable to RICs generally will apply
separately to each Fund even though each Fund is a series of the Trust.
Furthermore, each Fund will separately determine its income, gains, losses and
expenses for U.S. federal income tax purposes.
In
order to qualify as a RIC under the Code, each Fund must, among other things,
derive at least 90% of its gross income each taxable year generally from
(i) dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income attributable to its business of investing in such
stock, securities or foreign currencies (including, but not limited to, gains
from options, futures or forward contracts) and (ii) net income derived
from an interest in a qualified publicly traded partnership, as defined in the
Code. Future U.S. Treasury regulations may (possibly retroactively) exclude from
qualifying income foreign currency gains that are not directly related to a
Fund’s principal business of investing in stock, securities or options and
futures with respect to stock or securities. In general, for purposes of this
90% gross income requirement, income derived from a partnership, except a
qualified publicly traded partnership, will be treated as qualifying income only
to the extent such income is attributable to items of income of the partnership
that would be qualifying income if realized by the RIC.
In
general, gold and other precious metals do not constitute qualifying assets, and
gain derived from the sale of gold or other precious metals does not constitute
qualifying income. To reduce the risk that the Funds’ investments in gold,
silver, platinum and palladium bullion, whether held directly or indirectly, may
result in the Funds’ failure to satisfy the requirements of Subchapter M, the
Adviser will endeavor to manage the Funds’ portfolio so that (i) less than
10% of the Funds’ gross income each year will be derived from its investments in
gold, silver, platinum and palladium bullion, and (ii) less than 50% of the
value of the Funds’ assets, at the end of each quarter, will be invested in
gold, silver, platinum and palladium bullion or other non-qualifying
assets.
Each
Fund must also diversify its holdings so that, at the end of each quarter of the
Fund’s taxable year: (i) at least 50% of the fair market value of its gross
assets consists of (A) cash and cash items (including receivables), U.S.
government securities and securities of other RICs, and (B) securities of
any one issuer (other than those described in clause (A)) to the extent such
securities do not exceed 5% of the value of the Fund’s total assets and do not
exceed 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of the Fund’s total assets consists of
the securities of any one issuer (other than those described in clause (i)(A)),
the securities of two or more issuers the Fund controls and that are engaged in
the same, similar or related trades or businesses, or the securities of one or
more qualified publicly traded partnerships. In addition, for purposes of
meeting the diversification requirement of clause (i)(B), the term “outstanding
voting securities of such issuer” includes the equity securities of a qualified
publicly traded partnership. The qualifying income and diversification
requirements applicable to a Fund may limit the extent to which it can engage in
transactions in options, futures contracts, forward contracts and swap
agreements.
If
a Fund fails to satisfy any of the qualifying income or diversification
requirements in any taxable year, such Fund may be eligible for relief
provisions if the failures are due to reasonable cause and not willful neglect
and if a penalty tax is paid with respect to each failure to satisfy the
applicable requirement. Additionally, relief is provided for certain de minimis failures of the diversification
requirements where the Fund corrects the failure within a specified period. If
the applicable relief provisions are not available or cannot be met, such Fund
will be taxed in the same manner as an ordinary corporation, described
below.
In
addition, with respect to each taxable year, each Fund generally must distribute
to its shareholders at least 90% of its investment company taxable income, which
generally includes its ordinary income and the excess of any net short-term
capital gain over net long-term capital loss, and at least 90% of its net
tax-exempt interest income earned for the taxable year. If a Fund meets all of
the RIC qualification requirements, it generally will not be subject to U.S.
federal income tax on any of the investment company taxable income and net
capital gain (i.e., the excess of net long-term capital gain over net short-term
capital loss) it distributes to its shareholders. For this purpose, a Fund
generally must make the distributions in the same year that it realizes the
income and gain, although in certain circumstances, a Fund may make the
distributions in the following taxable year. Shareholders generally are taxed on
any distributions from a Fund in the year they are actually distributed.
However, if a Fund declares a distribution to shareholders of record in October,
November or December of one year and pays the distribution by January 31 of
the following year, the Fund and its shareholders will be treated as if the Fund
paid the distribution on December 31 of the first year. Each Fund intends
to distribute its net income and gain in a timely manner to maintain its status
as a RIC and eliminate fund-level U.S. federal income taxation of such income
and gain. However, no assurance can be given that a Fund will not be subject to
U.S. federal income taxation.
B-39
Moreover,
a Fund may retain for investment all or a portion of their net capital gain. If
a Fund retains any net capital gain, it will be subject to a tax at regular
corporate rates on the amount retained, but may report the retained amount as
undistributed capital gain in a written statement furnished to its shareholders,
who (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax
paid by the Fund on such undistributed amount against their U.S. federal income
tax liabilities, if any, and to claim refunds to the extent the credit exceeds
such liabilities. For U.S. federal income tax purposes, the tax basis of shares
owned by a shareholder of the Fund will be increased by an amount equal to the
difference between the amount of undistributed capital gain included in the
shareholder’s gross income and the tax deemed paid by the shareholder under
clause (ii) of the preceding sentence. A Fund is not required to, and there
can be no assurance that it will, make this designation if it retains all or a
portion of its net capital gain in a taxable year.
If,
for any taxable year, a Fund fails to qualify as a RIC and is not eligible for
relief as described above, it will be taxed in the same manner as an ordinary
corporation without any deduction for its distributions to shareholders, and all
distributions from the Fund’s current and accumulated earnings and profits
(including any distributions of its net tax-exempt income and net long-term
capital gain) to its shareholders will be taxable as dividend income. To
re-qualify to be taxed as a RIC in a subsequent year, the Fund may be required
to distribute to its shareholders its earnings and profits attributable to
non-RIC years reduced by an interest charge on 50% of such earnings and profits
payable by the Fund to the IRS. In addition, if a Fund initially qualifies as a
RIC but subsequently fails to qualify as a RIC for a period greater than two
taxable years, the Fund generally would be required to recognize and pay tax on
any net unrealized gain (the excess of aggregate gain, including items of
income, over aggregate loss that would have been realized if the Fund had been
liquidated) or, alternatively, to be subject to tax on such unrealized gain
recognized for a period of ten years, in order to re-qualify as a RIC in a
subsequent year.
Equalization Accounting
Each
Fund may use the so-called “equalization method” of accounting to allocate a
portion of its “earnings and profits,” which generally equals a Fund’s
undistributed investment company taxable income and net capital gain, with
certain adjustments, to redemption proceeds. This method permits a Fund to
achieve more balanced distributions for both continuing and redeeming
shareholders. Although using this method generally will not affect a Fund’s
total returns, it may reduce the amount that the Fund would otherwise distribute
to continuing shareholders by reducing the effect of redemptions of Fund shares
on Fund distributions to shareholders. However, the IRS may not have expressly
sanctioned the particular equalization methods that may be used by a Fund, and
thus a Fund’s use of these methods may be subject to IRS scrutiny.
Capital Loss Carry-Forwards
For
net capital losses realized in taxable years beginning before January 1,
2011, a Fund is permitted to carry forward a net capital loss to offset its
capital gain, if any, realized during the eight years following the year of the
loss, and such capital loss carry-forward is treated as a short-term capital
loss in the year to which it is carried. For net capital losses realized in
taxable years beginning on or after January 1, 2011, a Fund is permitted to
carry forward a net capital loss to offset its capital gain indefinitely. For
capital losses realized in taxable years beginning after January 1, 2011,
the excess of a Fund’s net short-term capital loss over its net long-term
capital gain is treated as a short-term capital loss arising on the first day of
the Fund’s next taxable year, and the excess of a Fund’s net long-term capital
loss over its net short-term capital gain is treated as a long-term capital loss
arising on the first day of the Fund’s next taxable year. If future capital gain
is offset by carried-forward capital losses, such future capital gain is not
subject to fund-level U.S. federal income tax, regardless of whether it is
distributed to shareholders. Accordingly, the Funds do not expect to distribute
any such offsetting capital gain. The Funds cannot carry back or carry forward
any net operating losses.
If
a Fund engages in a reorganization, either as an acquiring fund or acquired
fund, its capital loss carry-forwards (if any), its unrealized losses (if any),
and any such losses of other funds participating in the reorganization may be
subject to severe limitations that could make such losses, in particular losses
realized in taxable years beginning before January 1, 2011, substantially
unusable. The Funds have engaged in reorganizations in the past and/or may
engage in reorganizations in the future.
Excise Tax
If
a Fund fails to distribute by December 31 of each calendar year at least
the sum of 98% of its ordinary income for that year (excluding capital gains and
losses), 98.2% of its capital gain net income (adjusted for certain net ordinary
losses) for the 12-month period ending on October 31 of that year, and any
of its ordinary income and capital gain net income from previous years that was
not distributed during such years, the Fund will be subject to a nondeductible
4% U.S. federal excise tax on the undistributed amounts (other than to the
extent of its tax-exempt interest income, if any). For these purposes, a Fund
will be treated as having distributed any amount on which it is subject to
corporate-level U.S. federal income tax for the taxable year ending within the
calendar year. Each Fund generally intends to actually, or be deemed to,
distribute substantially all of its ordinary income and capital gain net income,
if any, by the end of each calendar year and thus expects not to be subject to
the excise tax. However, no assurance can be given that a Fund will not be
subject to the excise tax. Moreover, each Fund reserves the right to pay an
excise tax rather than make an additional distribution when circumstances
warrant (for example, the amount of excise tax to be paid by a Fund is
determined to be de minimis).
B-40
Taxation of Investments
In
general, realized gains or losses on the sale of securities held by a Fund will
be treated as capital gains or losses, and long-term capital gains or losses if
the Fund has held the disposed securities for more than one year at the time of
disposition.
If
a Fund purchases a debt obligation with original issue discount (“OID”)
(generally, a debt obligation with a purchase price at original issuance less
than its principal amount, such as a zero-coupon bond), which generally includes
“payment-in-kind” or “PIK” bonds, the Fund generally is required to annually
include in its taxable income a portion of the OID as ordinary income, even
though the Fund may not receive cash payments attributable to the OID until a
later date, potentially until maturity or disposition of the obligation. A
portion of the OID includible in income with respect to certain high-yield
corporate discount obligations may be treated as a dividend for U.S. federal
income tax purposes. Similarly, if a Fund purchases a debt obligation with
market discount (generally a debt obligation with a purchase price after
original issuance less than its principal amount [reduced by any OID]), the Fund
generally is required to annually include in its taxable income a portion of the
market discount as ordinary income, even though the Fund may not receive cash
payments attributable to the market discount until a later date, potentially
until maturity or disposition of the obligation. A Fund generally will be
required to make distributions to shareholders representing the OID or market
discount income on debt obligations that is currently includible in income, even
though the cash representing such income may not have been received by a Fund.
Cash to pay such distributions may be obtained from sales proceeds of securities
held by the Fund which a Fund otherwise might have continued to hold; obtaining
such cash might be disadvantageous for the Fund.
If
a Fund invests in debt obligations that are in the lowest rating categories or
are unrated, including debt obligations of issuers not currently paying interest
or who are in default, special tax issues may exist for the Fund. U.S. federal
income tax rules are not entirely clear about issues such as when a Fund may
cease to accrue interest, OID, or market discount, when and to what extent
deductions may be taken for bad debts or worthless securities, and how payments
received on obligations in default should be allocated between principal and
income. These and other related issues will be addressed by a Fund when, as, and
if it invests in such securities, in order to seek to ensure that it distributes
sufficient income to preserve its status as a RIC and does not become subject to
U.S. federal income or excise tax.
If
an option granted by a Fund is sold, lapses or is otherwise terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. Some capital losses realized by a Fund in the sale,
exchange, exercise or other disposition of an option may be deferred if they
result from a position that is part of a “straddle,” discussed below. If
securities are sold by a Fund pursuant to the exercise of a covered call option
granted by it, the Fund generally will add the premium received to the sale
price of the securities delivered in determining the amount of gain or loss on
the sale. If securities are purchased by a Fund pursuant to the exercise of a
put option granted by it, the Fund generally will subtract the premium received
from its cost basis in the securities purchased.
Some
regulated futures contracts, certain foreign currency contracts and non-equity,
listed options used by a Fund will be deemed “Section 1256 contracts.” A
Fund will be required to “mark-to-market” any such contracts held at the end of
the taxable year by treating them as if they had been sold on the last day of
that year at market value. Sixty percent of any net gain or loss realized on all
dispositions of Section 1256 contracts, including deemed dispositions under
the “mark-to-market” rule, generally will be treated as long-term capital gain
or loss, and the remaining 40% will be treated as short-term capital gain or
loss, although certain foreign currency gains and losses from such contracts may
be treated as ordinary income or loss (as described below). These provisions may
require a Fund to recognize income or gains without a concurrent receipt of
cash. Transactions that qualify as designated hedges are exempt from the
mark-to-market rule and the “60%/40%” rule and may require the Fund to defer the
recognition of losses on certain futures contracts, foreign currency contracts
and non-equity options.
Foreign
currency gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt obligations, certain
options, futures contracts, forward contracts and similar instruments relating
to foreign currency, foreign currencies, or payables or receivables denominated
in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income or loss
and may affect the amount and timing of recognition of the Fund’s income. Under
future U.S. Treasury regulations, any such transactions that are not directly
related to a Fund’s investments in stock or securities (or its options contracts
or futures contracts with respect to stock or securities) may have to be limited
in order to enable the Fund to satisfy the 90% income test described above. If
the net foreign currency loss exceeds a Fund’s net investment company taxable
income (computed without regard to such loss) for a taxable year, the resulting
ordinary loss for such year will not be deductible by the Fund or its
shareholders in future years.
Offsetting
positions held by a Fund involving certain derivative instruments, such as
financial forward, futures, and options contracts, may be considered, for U.S.
federal income tax purposes, to constitute “straddles.” “Straddles” are defined
to include “offsetting positions” in actively traded personal property. The tax
treatment of “straddles” is governed by Section 1092 of the Code
B-41
which,
in certain circumstances, overrides or modifies the provisions of
Section 1256 of the Code, described above. If a Fund is treated as entering
into a “straddle” and at least one (but not all) of the Fund’s positions in
derivative contracts comprising a part of such straddle is governed by
Section 1256 of the Code, then such straddle could be characterized as a
“mixed straddle.” A Fund may make one or more elections with respect to “mixed
straddles.” Depending upon which election is made, if any, the results with
respect to a Fund may differ. Generally, to the extent the straddle rules apply
to positions established by a Fund, losses realized by the Fund may be deferred
to the extent of unrealized gain in any offsetting positions. Moreover, as a
result of the straddle rules, short-term capital loss on straddle positions may
be recharacterized as long-term capital loss, and long-term capital gain may be
characterized as short-term capital gain. In addition, the existence of a
straddle may affect the holding period of the offsetting positions. As a result,
the straddle rules could cause distributions that would otherwise constitute
qualified dividend income (defined below) to fail to satisfy the applicable
holding period requirements (described below) and therefore to be taxed as
ordinary income. Furthermore, the Fund may be required to capitalize, rather
than deduct currently, any interest expense and carrying charges applicable to a
position that is part of a straddle, including any interest expense on
indebtedness incurred or continued to purchase or carry any positions that are
part of a straddle. Because the application of the straddle rules may affect the
character and timing of gains and losses from affected straddle positions, the
amount which must be distributed to shareholders, and which will be taxed to
shareholders as ordinary income or long-term capital gain, may be increased or
decreased substantially as compared to the situation where a Fund had not
engaged in such transactions.
If
a Fund enters into a “constructive sale” of any appreciated financial position
in stock, a partnership interest or certain debt instruments, the Fund will be
treated as if it had sold and immediately repurchased the property and must
recognize gain (but not loss) with respect to that position. A constructive sale
of an appreciated financial position occurs when a Fund enters into certain
offsetting transactions with respect to the same or substantially identical
property, including: (i) a short sale; (ii) an offsetting notional
principal contract; (iii) a futures or forward contract; or (iv) other
transactions identified in future U.S. Treasury regulations. The character of
the gain from constructive sales will depend upon a Fund’s holding period in the
appreciated financial position. Losses realized from a sale of a position that
was previously the subject of a constructive sale will be recognized when the
position is subsequently disposed of. The character of such losses will depend
upon a Fund’s holding period in the position and the application of various loss
deferral provisions in the Code. Constructive sale treatment does not apply to
certain closed transactions, including if such a transaction is closed on or
before the 30th day after the close of the Fund’s taxable year and the Fund
holds the appreciated financial position unhedged throughout the 60-day period
beginning with the day such transaction was closed.
The
amount of long-term capital gain a Fund may recognize from certain derivative
transactions with respect to interests in certain pass-through entities is
limited under the Code’s constructive ownership rules. The amount of long-term
capital gain is limited to the amount of such gain a Fund would have had if the
Fund directly invested in the pass-through entity during the term of the
derivative contract. Any gain in excess of this amount is treated as ordinary
income. An interest charge is imposed on the amount of gain that is treated as
ordinary income.
In
addition, a Fund’s transactions in securities and certain types of derivatives
(e.g., options, futures contracts, forward contracts, and swap agreements) may
be subject to other special tax rules, such as the wash sale rules or the short
sale rules, the effect of which may be to accelerate income to the Fund, defer
losses to the Fund, cause adjustments to the holding periods of the Fund’s
securities, convert long-term capital gains into short-term capital gains,
and/or convert short-term capital losses into long-term capital losses. These
rules could therefore affect the amount, timing, and character of distributions
to shareholders.
Rules
governing the U.S. federal income tax aspects of derivatives, including swap
agreements, are in a developing stage and are not entirely clear in certain
respects. Accordingly, while each Fund intends to account for such transactions
in a manner it deems to be appropriate, the IRS might not accept such treatment.
If it did not, the status of a Fund as a RIC might be jeopardized. Certain
requirements that must be met under the Code in order for a Fund to qualify as a
RIC may limit the extent to which a Fund will be able to engage in derivatives
transactions.
A
Fund may invest in real estate investment trusts (“REITs”). Investments in REIT
equity securities may require a Fund to accrue and distribute income not yet
received. To generate sufficient cash to make the requisite distributions, the
Fund may be required to sell securities in its portfolio (including when it is
not advantageous to do so) that it otherwise would have continued to hold. A
Fund’s investments in REIT equity securities may at other times result in the
Fund’s receipt of cash in excess of the REIT’s earnings if the Fund distributes
these amounts, and these distributions could constitute a return of capital to
Fund shareholders for U.S. federal income tax purposes. Dividends received by
the Fund from a REIT generally will not constitute qualified dividend income and
will not qualify for the dividends-received deduction. Under recent legislation,
certain income distributed by pass-through entities is allowed up to a 20%
deduction; however, it is unclear at this time whether a RIC (such as the Fund)
can pass on such deduction on REIT distributions to shareholders. Individuals
must satisfy holding period and other requirements in order to be eligible for
this deduction. Without further legislation, the deduction would sunset after
2025. Shareholders should consult their own tax professionals concerning their
eligibility for this deduction.
A
Fund may invest directly or indirectly in residual interests in real estate
mortgage investment conduits (“REMICs”) or in other interests that may be
treated as taxable mortgage pools (“TMPs”) for U.S. federal income tax purposes.
Under IRS guidance, a Fund
B-42
must
allocate “excess inclusion income” received directly or indirectly from REMIC
residual interests or TMPs to its shareholders in proportion to dividends paid
to such shareholders, with the same consequences as if the shareholders had
invested in the REMIC residual interests or TMPs directly.
In
general, excess inclusion income allocated to shareholders (i) cannot be
offset by net operating losses (subject to a limited exception for certain
thrift institutions), (ii) constitutes unrelated business taxable income to
Keogh, 401(k) and qualified pension plans, as well as individual retirement
accounts and certain other tax-exempt entities, thereby potentially requiring
such an entity, that otherwise might not be required to file a tax return, to
file a tax return and pay tax on such income, and (iii) in the case of a
foreign shareholder, does not qualify for any reduction, by treaty or otherwise,
in the 30% U.S. federal withholding tax. In addition, if at any time during any
taxable year a “disqualified organization” (as defined in the Code) is a record
holder of a share in a Fund, then the Fund will be subject to a tax equal to
that portion of its excess inclusion income for the taxable year that is
allocable to the disqualified organization, multiplied by the highest federal
corporate income tax rate. To the extent permitted under the 1940 Act, a Fund
may elect to specially allocate any such tax to the applicable disqualified
organization, and thus reduce such shareholder’s distributions for the year by
the amount of the tax that relates to such shareholder’s interest in the Fund. A
Fund may or may not make such an election.
“Passive
foreign investment companies” (“PFICs”) are generally defined as foreign
corporations with respect to which at least 75% of their gross income for their
taxable year is income from passive sources (such as interest, dividends,
certain rents and royalties, or capital gains) or at least 50% of their assets
on average produce, or are held for the production of, such passive income. If a
Fund acquires any equity interest in a PFIC, the Fund could be subject to U.S.
federal income tax and interest charges on “excess distributions” received from
the PFIC or on gain from the sale of such equity interest in the PFIC, even if
all income or gain actually received by the Fund is timely distributed to its
shareholders. Excess distributions will be characterized as ordinary income even
though, absent the application of PFIC rules, some excess distributions may have
been classified as capital gain.
A
Fund will not be permitted to pass through to its shareholders any credit or
deduction for taxes and interest charges incurred with respect to PFICs.
Elections may be available that would ameliorate these adverse tax consequences,
but such elections could require a Fund to recognize taxable income or gain
without the concurrent receipt of cash. Investments in PFICs could also result
in the treatment of associated capital gains as ordinary income. The Funds may
attempt to limit and/or manage their holdings in PFICs to minimize their tax
liability or maximize their returns from these investments but there can be no
assurance that they will be able to do so. Moreover, because it is not always
possible to identify a foreign corporation as a PFIC in advance of acquiring
shares in the corporation, a Fund may incur the tax and interest charges
described above in some instances. Dividends paid by a Fund attributable to
income and gains derived from PFICs will not be eligible to be treated as
qualified dividend income.
If
a Fund owns 10% or more of either the voting power or value of the stock of a
“controlled foreign corporation” (a “CFC”), such corporation will not be treated
as a PFIC with respect to the Fund. In general, a Fund may be required to
recognize dividends from a CFC before actually receiving any dividends. There
may also be a tax imposed on a U.S. shareholder’s aggregate net CFC income that
is treated as global intangible low-taxed income. As a result of the foregoing,
a Fund may be required to recognize income sooner than it otherwise would.
In
addition to the investments described above, prospective shareholders should be
aware that other investments made by a Fund may involve complex tax rules that
may result in income or gain recognition by a Fund without corresponding current
cash receipts. Although a Fund seeks to avoid significant non-cash income, such
non-cash income could be recognized by a Fund, in which case a Fund may
distribute cash derived from other sources in order to meet the minimum
distribution requirements described above. In this regard, a Fund could be
required at times to liquidate investments prematurely in order to satisfy their
minimum distribution requirements.
Notwithstanding
the foregoing, under recently enacted tax legislation, accrual method taxpayers
are required to recognize gross income under the “all events test” no later than
when such income is recognized as revenue in an applicable financial statement
(e.g., an audited financial statement that is used for reporting to partners).
This new rule may require the Fund to recognize income earlier than as described
above.
Taxation of Distributions
Distributions
paid out of a Fund’s current and accumulated earnings and profits (as determined
at the end of the year), whether paid in cash or reinvested in the Fund,
generally are deemed to be taxable distributions and must be reported by each
shareholder who is required to file a U.S. federal income tax return. Dividends
and other distributions on a Fund’s shares are generally subject to U.S. federal
income tax as described herein to the extent they do not exceed the Fund’s
realized income and gains, even though such dividends and distributions may
economically represent a return of a particular shareholder’s investment. Such
distributions are likely to occur in respect of shares acquired at a time when
the Fund’s net asset value reflects gains that are either unrealized, or
realized but not distributed. For U.S. federal income tax purposes, a Fund’s
earnings and profits, described above, are determined at the end of the
B-43
Fund’s
taxable year and are allocated pro rata to distributions paid over the entire
year. Distributions in excess of a Fund’s current and accumulated earnings and
profits will first be treated as a return of capital up to the amount of a
shareholder’s tax basis in the shareholder’s Fund shares and then as capital
gain. A Fund may, from time to time, make distributions in excess of its
earnings and profits.
For
U.S. federal income tax purposes, distributions of investment income are
generally taxable as ordinary income, and distributions of gains from the sale
of investments that a Fund owned for one year or less will be taxable as
ordinary income. Distributions properly reported in writing by a Fund as capital
gain dividends will be taxable to shareholders as long-term capital gain (to the
extent such distributions do not exceed the Fund’s net capital gain for the
taxable year), regardless of how long a shareholder has held Fund shares, and do
not qualify as dividends for purposes of the dividends-received deduction or as
qualified dividend income. Each Fund will report capital gain dividends, if any,
in a written statement furnished to its shareholders after the close of the
Fund’s taxable year.
Fluctuations
in foreign currency exchange rates may result in foreign exchange gain or loss
on transactions in foreign currencies, foreign currency-denominated debt
obligations, and certain foreign currency options, futures contracts and forward
contracts. Such gains or losses are generally characterized as ordinary income
or loss for tax purposes. A Fund must make certain distributions in order to
qualify as a RIC, and the timing of and character of transactions such as
foreign currency-related gains and losses may result in the fund paying a
distribution treated as a return of capital. Such distribution is nontaxable to
the extent of the recipient’s basis in its shares.
Some
states will not tax distributions made to individual shareholders that are
attributable to the interest a Fund earned on direct obligations of the U.S.
government if the Fund meets the state’s minimum investment or reporting
requirements, if any. Investments in GNMA or FNMA securities, bankers’
acceptances, commercial paper and repurchase agreements collateralized by U.S.
government securities generally do not qualify for state tax-free treatment.
This exemption may not apply to corporate shareholders.
Sales and Exchanges of Fund Shares
If
a shareholder sells, pursuant to a cash or in-kind redemption, or exchanges the
shareholder’s Fund shares, subject to the discussion below, the shareholder
generally will recognize a taxable capital gain or loss on the difference
between the amount received for the shares (or deemed received in the case of an
exchange) and the shareholder’s tax basis in the shares. This gain or loss will
be long-term capital gain or loss if the shareholder has held such Fund shares
for more than one year at the time of the sale or exchange, and short-term
otherwise.
If
a shareholder sells or exchanges Fund shares within 90 days of having acquired
such shares and if, before January 31 of the calendar year following the
calendar year of the sale or exchange, as a result of having initially acquired
those shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different RIC, the sales charge previously
incurred in acquiring the Fund’s shares generally shall not be taken into
account (to the extent the previous sales charges do not exceed the reduction in
sales charges on the new purchase) for the purpose of determining the amount of
gain or loss on the disposition, but generally will be treated as having been
incurred in the new purchase. Also, if a shareholder recognizes a loss on a
disposition of Fund shares, the loss will be disallowed under the “wash sale”
rules to the extent the shareholder purchases substantially identical shares
within the 61-day period beginning 30 days before and ending 30 days after the
disposition. Any disallowed loss generally will be reflected in an adjustment to
the tax basis of the purchased shares.
If
a shareholder receives a capital gain dividend with respect to any Fund share
and such Fund share is held for six months or less, then (unless otherwise
disallowed) any loss on the sale or exchange of that Fund share will be treated
as a long-term capital loss to the extent of the capital gain dividend. If such
loss is incurred from the redemption of shares pursuant to a periodic redemption
plan then U.S. Treasury regulations may permit an exception to this six-month
rule. No such regulations have been issued as of the date of this SAI.
U.S. Federal Income Tax Rates
Noncorporate
Fund shareholders (i.e., individuals, trusts and estates) are taxed at a maximum
rate of 37% on ordinary income and 20% on net capital gain.
In
general, “qualified dividend income” realized by noncorporate Fund shareholders
is taxable at the same rate as net capital gain. Generally, qualified dividend
income is dividend income attributable to certain U.S. and foreign corporations,
as long as certain holding period requirements are met. In general, if less than
95% of a Fund’s income is attributable to qualified dividend income, then only
the portion of the Fund’s distributions that are attributable to qualified
dividend income and reported in writing as such in a timely manner will be so
treated in the hands of individual shareholders. Payments received by a Fund
from securities lending, repurchase, and other derivative transactions
ordinarily will not qualify. The rules attributable to the qualification of Fund
distributions as qualified dividend income are complex, including the holding
period requirements. Individual Fund shareholders therefore are urged to consult
their own tax advisers and financial planners.
B-44
The
maximum stated corporate U.S. federal income tax rate applicable to ordinary
income and net capital gain is 21%. Actual marginal tax rates may be higher for
some shareholders, for example, through reductions in deductions. Distributions
from a Fund may qualify for the “dividends-received deduction” applicable to
corporate shareholders with respect to certain dividends. Naturally, the amount
of tax payable by any taxpayer will be affected by a combination of tax laws
covering, for example, deductions, credits, deferrals, exemptions, sources of
income and other matters.
In
addition, a noncorporate Fund shareholder generally will be subject to an
additional 3.8% tax on its “net investment income,” which ordinarily includes
taxable distributions received from the corresponding Fund and taxable gains on
the disposition of Fund shares if the shareholder meets a taxable income
test.
Under
the Foreign Account Tax Compliance Act, or “FATCA,” U.S. federal income tax
withholding at a 30% rate will be imposed on dividends in respect of Fund shares
received by Fund shareholders who own their shares through foreign accounts or
foreign intermediaries if certain disclosure requirements related to U.S.
accounts or ownership are not satisfied. The Funds will not pay any additional
amounts in respect to any amounts withheld.
Backup Withholding
A
Fund is generally required to withhold and remit to the U.S. Treasury, subject
to certain exemptions (such as for certain corporate or foreign shareholders),
an amount equal to 24% of all distributions and redemption proceeds (including
proceeds from exchanges and redemptions in-kind) paid or credited to a Fund
shareholder if (i) the shareholder fails to furnish the Fund with a correct
“taxpayer identification number” (“TIN”), (ii) the shareholder fails to
certify under penalties of perjury that the TIN provided is correct,
(iii) the shareholder fails to make certain other certifications, or
(iv) the IRS notifies the Fund that the shareholder’s TIN is incorrect or
that the shareholder is otherwise subject to backup withholding. Backup
withholding is not an additional tax imposed on the shareholder. The shareholder
may apply amounts withheld as a credit against the shareholder’s U.S. federal
income tax liability and may obtain a refund of any excess amounts withheld,
provided that the required information is furnished to the IRS. If a shareholder
fails to furnish a valid TIN upon request, the shareholder can also be subject
to IRS penalties. A shareholder may generally avoid backup withholding by
furnishing a properly completed IRS Form W-9. State backup withholding may also
be required to be withheld by the Funds under certain circumstances.
Tax-Deferred Plans
Shares
of the Funds may be available for a variety of tax-deferred retirement and other
tax-advantaged plans and accounts. Prospective investors should contact their
tax advisers and financial planners regarding the tax consequences to them of
holding Fund shares through such plans and/or accounts.
A
1.4% excise tax is imposed on the net investment income of certain private
colleges and universities. This tax would only apply to private institutions
with endowment valued at $500,000 per full-time student or more, subject to
other limitations. Tax-exempt shareholders should contact their tax advisers and
financial planners regarding the tax consequences to them of an investment in
the Funds.
Any
investment in residual interests of a collateralized mortgage obligation that
has elected to be treated as a REMIC can create complex U.S. federal income tax
consequences, especially if a Fund has state or local governments or other
tax-exempt organizations as shareholders.
Special
tax consequences apply to charitable remainder trusts (“CRTs”) (as defined in
Section 664 of the Code) that invest in RICs that invest directly or
indirectly in residual interests in REMICs or equity interests in TMPs. CRTs are
urged to consult their own tax advisers and financial planners concerning these
special tax consequences.
Tax Shelter Reporting Regulations
Generally,
under U.S. Treasury regulations, if an individual shareholder recognizes a loss
of $2 million or more, or if a corporate shareholder recognizes a loss of
$10 million or more, with respect to Fund shares, the shareholder must file
with the IRS a disclosure statement on Form 8886. Direct shareholders of
securities are in many cases exempt from this reporting requirement, but under
current guidance, shareholders of a RIC are not exempt. Future guidance may
extend the current exemption from this reporting requirement to shareholders of
most or all RICs. The fact that a loss is reportable under these regulations
does not affect the legal determination of whether the taxpayer’s treatment of
the loss is proper. Shareholders should consult their own tax advisers to
determine the applicability of these regulations in light of their individual
circumstances.
B-45
Cost Basis Reporting
In
general, each Fund must report “cost basis” information to its shareholders and
the IRS for redemptions of “covered shares.” Fund shares purchased on or after
January 1, 2012 are generally treated as covered shares. By contrast, Fund
shares purchased before January 1, 2012 or shares without complete cost
basis information are generally treated as noncovered shares. Fund shareholders
should consult their tax advisors to obtain more information about how these
cost basis rules apply to them and determine which cost basis method allowed by
the IRS is best for them.
Recently Enacted Tax Legislation
The
full effects of recently enacted tax legislation are not certain and may cause a
Fund and its shareholders to be taxed in a manner different than as described
above. Prospective shareholders also should recognize that the present U.S.
federal income tax treatment of the Fund and their shareholders may be modified
by legislative, judicial or administrative actions at any time, which may be
retroactive in effect. The rules dealing with U.S. federal income taxation are
constantly under review by Congress, the IRS and the Treasury Department, and
statutory changes as well as promulgation of new regulations, revisions to
existing statutes, and revised interpretations of established concepts occur
frequently. You should consult your advisors concerning the status of
legislative proposals that may pertain to holding Fund shares.
The
foregoing summary should not be considered to describe fully the income and
other tax consequences of an investment in a Fund. Fund investors are strongly
urged to consult with their tax advisors, with specific reference to their own
situations, with respect to the potential tax consequences of an investment in a
Fund.
GENERAL
The
Parnassus Funds trust is an open-end management investment company that was
organized as a Massachusetts business trust on April 4, 1984. The Parnassus
Income Funds trust is an open-end management investment company that was
organized as a Massachusetts business trust on August 8, 1990.
Each
Declaration of Trust permits the applicable Trust to issue an unlimited number
of full and fractional shares of beneficial interest and to divide or combine
the shares to a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in a Fund. Each share represents an interest
in a Fund proportionately equal to the interest of another individual share.
Certificates representing shares will not be issued. Instead, each shareholder
will receive a quarterly statement, as well as an additional statement each time
there is a transaction in the account. These statements will be evidence of
ownership. Upon a Fund’s liquidation, all shareholders would share pro rata in
the net assets available for distribution to shareholders. If they deem it
advisable and in the best interests of shareholders, the Boards of Trustees may
create additional series of shares or classes thereof that may have separate
assets and liabilities, and which may differ from each other as to dividends and
other features. Shares of each series or class thereof would be entitled to vote
separately as a series or class only to the extent required by the 1940 Act or
as permitted by the Trustees. Trust operating expenses will be allocated fairly
among the Funds, generally on the basis of their relative net asset value.
The
Declarations of Trust provide that the Trustees will not be liable for errors of
judgment or mistakes of fact or law, but nothing in the Declarations of Trust
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her
office.
Shareholders
of the Funds of each Trust are entitled to one vote for each full share held
(and fractional votes for fractional shares), and may vote in the election of
Trustees and on other matters submitted to meetings of shareholders. It is not
contemplated that regular annual meetings of shareholders will be held. Both
Declarations of Trust and Restated By-Laws provide that the Funds’ shareholders
have the right to remove a Trustee, with or without cause, upon the affirmative
vote of the holders of a majority of its outstanding shares represented at a
meeting with respect thereto (assuming a quorum is present, which is one-third
of the outstanding shares). The Funds are required to call a meeting of
shareholders to vote on the removal of a Trustee (as well as on any other proper
matter) upon the written request of shareholders holding not less than one-third
of its outstanding shares and entitled to vote at such meeting. In addition, ten
shareholders holding the lesser of $25,000 worth or one percent of Fund shares
may advise the Trustees in writing that they wish to communicate with other
shareholders for the purpose of requesting a meeting to remove a Trustee. The
Trustees will then, if requested by the applicants and at their own expense,
mail the applicants’ communication to all other shareholders. The holders of
shares have no pre-emptive or conversion rights. Shares when issued are fully
paid and nonassessable. No amendment that would have a material adverse impact
upon the rights of the shareholders may be made to a Declaration of Trust
without the affirmative vote of the holders of more than 50% of the applicable
Trust’s outstanding shares.
B-46
Each
Fund offers two classes of shares, Investor Shares and Institutional Shares,
which differ only in their ongoing fees and investment eligibility
requirements.
The
Investor Shares and Institutional Shares represent an interest in the same
assets of the Fund, have the same rights and are identical in all material
respects, except that (i) Investor Shares bear annual service fees pursuant
to the Servicing Plan, while Institutional Shares are not subject to such fees;
(ii) Institutional Shares are available only to shareholders who invest
directly in the Fund or who invest through a broker-dealer, financial
institution or servicing agent that does not receive a service fee from the Fund
or the Adviser; and (iii) that the Board of Trustees may elect to have
certain expenses specific to the Investor Shares or Institutional Shares be
borne solely by the class to which such expenses are attributable, but any
expenses not specifically allocated to the Investor Shares or Institutional
Shares shall be allocated to each such class on the basis of the net asset value
of that class in relation to the net asset value of the applicable Fund.
The
Declarations of Trust each contain an express disclaimer of shareholder
liability for Trust acts or obligations, and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trusts or their Trustees. The Declarations of Trust provide for
indemnification and reimbursement of expenses out of a Trust’s property for any
shareholder held personally liable for its obligations. The Declarations of
Trust also provide that each Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trusts
and satisfy any judgment thereon. Thus, while Massachusetts law permits a
shareholder of a trust such as the Trusts to be held personally liable as a
partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trusts would be
unable to meet their obligations.
PricewaterhouseCoopers
LLP, with principal offices at 405 Howard Street, Suite 600, San Francisco,
California 94105, has been selected to serve as the Funds’ independent
registered public accounting firm. Previously, Deloitte & Touche LLP,
555 West 5th Street, Suite 2700, Los Angeles, California, 90013, served as the
Funds’ independent registered public accounting firm. The independent auditor of
the Funds audits the annual financial statements for each Fund, assists and
consults in connection with SEC filings and reviews of the annual federal income
tax return filed for each Fund.
At
a meeting held on September 22, 2021, following a recommendation from the
Audit Committee, a majority of the Trustees who are not “interested persons” of
the Funds (as defined in the 1940 Act) selected PricewaterhouseCoopers LLP
(“PwC”) as independent auditors
for the Funds for the fiscal year ending December 31, 2021, subject to
consummation of the Transaction with AMG. Deloitte & Touche LLP (“Deloitte”) was the independent auditor
for the Funds for the fiscal years ended December 31, 2019 and 2020, and
resigned effective as of October 1, 2021. Deloitte’s report on each of the
Fund’s financial statements for the past two years did not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. During the fiscal years ended
December 31, 2019 and December 31, 2020, (1) there were no
disagreements with Deloitte on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Deloitte, would have
caused them to make reference to the subject matter of the disagreements in
connection with their reports on the Funds’ financial statements for such years,
and (2) there were no “reportable events” of the kind described in
Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange Act
of 1934, as amended. The selection of PwC does not reflect any disagreements
with or dissatisfaction by either Trust or the relevant Board with the
performance of the Funds’ prior independent registered public accounting firm,
Deloitte. During the Funds’ fiscal years ended December 31, 2019 and
December 31, 2020, neither the Funds, nor anyone on their behalf, consulted
with Deloitte on items that: (1) concerned the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Funds’ financial statements; or
(2) concerned the subject of a disagreement (as defined in paragraph
(a)(1)(iv) of Item 304 of Regulation S-K) or reportable events (as
described in paragraph (a)(1)(v) of said Item 304). It is anticipated
that PwC will provide the same level of service to the Funds as was provided by
Deloitte.
Brown
Brothers Harriman & Co., 50 Post Office Square, Boston, Massachusetts
02110, is sub-administrator, fund accounting agent and the custodian of the
Funds’ assets. Shareholder inquiries should be directed to the Funds. As such,
Brown Brothers Harriman & Co. calculates the daily NAV and also holds
all securities and cash of the Funds, delivers and receives payment for
securities sold, receives and pays for securities purchased, collects income
from investments and performs other duties, all as directed by officers of the
Funds. Brown Brothers Harriman & Co. does not exercise any supervisory
function over the management of the Funds, the purchase and sale of securities
or the payment of distributions to shareholders.
Brown
Brothers Harriman & Co. is the designated Foreign Custody Manager (as
the term is defined in Rule 17f-5 under the 1940 Act) of the Funds’ securities
and cash held outside the United States. The Trustees have delegated to Brown
Brothers Harriman & Co. certain responsibilities for such assets, as
permitted by Rule 17f-5. Brown Brothers Harriman & Co. and the foreign
subcustodians selected by it hold the Funds’ assets in safekeeping and collect
and remit the income thereon, subject to the instructions of the Funds.
B-47
Parnassus
Investments, 1 Market Street, Suite 1600, San Francisco, California 94105, is
the Funds’ administrator.
Effective
April 26, 2021, Parnassus Funds retained Ultimus Fund Solutions, LLC
(“Ultimus”) to serve as transfer agent, pursuant to that certain Master Services
Agreement, for which Ultimus receives a fixed annual fee and per-account fees
for its services as transfer agent. Ultimus has its principal place of business
at 225 Pictoria Drive, Suite 450, Cincinnati, Ohio 45246. Prior to
April 26, 2021, Parnassus Investments served as transfer agent.
The
Adviser has entered into an Administrative Agency Agreement with Brown Brothers
Harriman & Co. to provide certain fund accounting services, including
transaction processing and review, custodial reconciliation, securities pricing,
and investment accounting. The Adviser pays Brown Brothers Harriman &
Co. a monthly fee as compensation for these services that is based on the total
net assets of accounts in the Parnassus Funds. While the Adviser continues to
serve as the administrator of the Parnassus Funds, Brown Brothers
Harriman & Co. provides sub-administrative services that were
previously undertaken by the Adviser. The Adviser supervises and monitors the
fund accounting services provided by Brown Brothers Harriman & Co.
Their services are also subject to the supervision of the officers and Boards of
Trustees of the Trusts.
Parnassus
Funds Distributor, LLC, Three Canal Plaza, Suite 100, Portland, Maine 04101,
serves as the distributor (“Distributor”) in connection with the continuous
offering of the Funds’ shares. The Distributor and participating dealers with
whom it has entered into dealer agreements offer shares of the Funds as agents
on a best-efforts basis and are not obligated to sell any specific amount of
shares.
FINANCIAL
STATEMENTS
Other
than the Parnassus Growth Equity Fund, the Funds’ audited financial statements
for the fiscal year ended December 31, 2021 are incorporated in this
statement of additional information by reference to the Funds’Annual Report to shareholders dated
December 31, 2021, as filed with the SEC on February 4, 2022. A
copy of the Annual Report, which contains the Funds’ audited financial
statements for the year ended December 31, 2021, and Semiannual Report may
be obtained free of charge by writing or calling the Funds, or by visiting the
Funds’ website (www.parnassus.com). Prior to
December 28, 2022, the Parnassus Growth Equity Fund had not commenced
operations and, therefore, does not have financial statements available. When
issued, the Parnassus Growth Equity Fund’s Annual Report will contain the Fund’s
audited financial statements. The Fund’s Annual Report and Semiannual Report,
when available, may be obtained free of charge by writing or calling the Fund,
or by visiting the Fund’s website (www.parnassus.com).
B-48
ANNEX A
CORPORATE BOND RATINGS
Moody’s Investors Service, Inc. (“Moody’s”)
Aaa
Bonds, which are rated Aaa, are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as “gilt
edged.” Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds, which are rated Aa, are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because the margins
of protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make the long-term risk appear somewhat larger than with the Aaa
securities.
A
Bonds, which are rated A, possess many favorable investment attributes and are
considered upper-medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest
some susceptibility to future impairment.
Baa
Bonds, which are rated Baa, are considered medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Note:
Moody’s applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Standard & Poor’s Corporation, a
division of The McGraw-Hill Companies, Inc. (“Standard & Poor’s”)
AAA
An
obligation rated “AAA” has the highest rating assigned by Standard &
Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong.
AA
An
obligation rated “AA” differs from the highest-rated obligations only in 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. Obligations rated “BB”, “B”, “CCC”, “CC” and “C” are regarded as
having significant speculative characteristics. “BB” indicates the least degree
of speculation and “C” the greatest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposure to adverse conditions.
AA-1
ANNEX B
PARNASSUS INVESTMENTS, LLC PROXY VOTING
POLICIES AND PROCEDURES
Parnassus
Investments, LLC (“Parnassus”) manages the portfolios of the series of the
Parnassus Funds trust and the Parnassus Income Funds trust (collectively, the
“Funds”) and may serve as a sub-adviser to other investment companies and may
also manage portfolios for separate account clients. Parnassus takes
environmental, social and governance (“ESG”) factors as well as financial
factors into account in making investment decisions and voting proxies.
These
Proxy Voting Policies and Procedures apply to the voting of equity securities as
well as the voting and/or consent rights of fixed income securities, including
but not limited to plans of reorganization and waivers and consents under
applicable indentures. These Proxy Voting Policies and Procedures do not apply,
however, to consent rights that primarily entail decisions to buy or sell
investments, such as tender or exchange offers, conversions, put options,
redemptions, and Dutch auctions. These Proxy Voting Policies and Procedures are
designed and implemented in a manner reasonably expected to ensure that voting
and consent rights (collectively, “proxies”) are exercised in the best interests
of the Funds.
Parnassus
maintains a Proxy Voting Committee, comprised of senior members of the
investment team, and other company functions, that oversees and maintains the
Proxy Voting Policies and Procedures and reviews our vote history at least
annually. Occasionally, this review process results in updates to our Policies
and Procedures.
Parnassus’
voting history is public on our website, www.parnassus.com. We generally will
not disclose our voting intentions prior to meetings. See section VIII,
“Disclosure to Clients,” below for additional information regarding how we may
disclose our votes.
Parnassus
retains Institutional Shareholder Services (“ISS”), a firm with expertise in
proxy voting and corporate governance, to assist in the proxy voting process.
ISS acts as our voting agent (processing the proxies), advises us on current and
emerging proxy voting and governance items and trends, and interprets and
applies our Policies to individual proxy items, subject to our review and
oversight. We may also utilize Glass Lewis research or other sources to inform
our proxy voting decisions.
III. |
Proxy
Voting Policies |
The
following policies indicate our general positions on proxy ballot issues and how
we vote shares held by the Funds and other clients. We do not delegate our proxy
voting authority or rely solely on third-party recommendations to vote our
shares. We will consider the views of portfolio companies’ management but will
vote in a manner that we believe is consistent with the firm’s Principles and in
the best interest of clients and shareholders of the Funds. These policies may
not address all potential voting issues but describe our views on most topics
that arise in proxy voting. There may be unique circumstances that cause us to
deviate from our policy from time to time, in our discretion, to ensure we vote
shares in the best interests of the Funds and our other clients.
Management Proposals
Parnassus
believes that companies are best managed by leadership that is aligned with the
interests of key stakeholders, including customers, employees, affected
communities, and shareholders. Indicators of strong governance structures
include boards and management teams with diverse backgrounds, tenures, skill
sets, and experience, strong protection of shareholder rights, and alignment of
management compensation with company performance, the interests of long-term
shareholders, and material ESG factors.
Board
and Director Elections
Parnassus
believes that a company’s board should be independent of management, elected
annually, represent diverse skills, experiences, and backgrounds that are
relevant to the long-term strategy of the company, mixed-tenured, and act in a
way that is aligned with the interests of shareholders.
We
will generally vote against or withhold votes from:
|
• |
|
Non-independent
members of key committees, including the audit, governance, and
compensation committees; |
|
• |
|
The
Chair and/or incumbent members of the nominating committee if the CEO and
Chair role is combined and there is no Lead Independent
Director; |
|
• |
|
Directors
who have attended fewer than 75% of board
meetings; |
AB-1
|
• |
|
Directors
who are overboarded, defined as non-executive directors who sit on more
than four corporate boards or executive officers of public companies who
sit on more than one public company board besides their own. We will not
vote against executives on their own boards for this reason
alone; |
|
• |
|
Non-independent
directors if more than half of the board is not independent;
and |
|
• |
|
Incumbent
members of the compensation committee if the board fails to respond
adequately to an executive compensation plan that received support from
less than 70% of votes cast in the previous
year. |
As
it pertains to board diversity, we will generally:
|
• |
|
Vote
against incumbent members of the
nominating committee of boards that do not have at least three women and
at least two people who self-identify as a racial or ethnic minority, and
collectively, are not composed of at least 50% underrepresented
identities. Exceptions may be made for companies with smaller boards,
boards with extenuating circumstances, or boards that have recently shown
significant progress in increasing board
diversity; |
|
• |
|
Vote
against the board Chair (and Lead
Independent Director, if applicable) of boards that do not have at least
two women or racial/ethnic minority directors;
and |
|
• |
|
Vote
against the entire board if there
are zero women and zero ethnic or racial minority
directors. |
Circumstances
in which we will vote on a case-by-case
on directors individually, by committee, or across the entire board
include:
|
• |
|
Boards
in which one-third of directors have a tenure of more than 12 years and
less than one-third of directors were appointed within the past five
years; |
|
• |
|
Egregious
actions related to the director(s)’ service on other boards that raise
substantial doubt about their ability to effectively oversee management
and serve the best interests of shareholders at any
company; |
|
• |
|
Executive
compensation plans that receive recurring low votes, are excessive or
misaligned with company performance, or have problematic
features; |
|
• |
|
Failure
to replace the CEO as appropriate; |
|
• |
|
Material
failures on fiduciary responsibility, risk management, or governance,
including failure to manage and address salient ESG risks;
and |
|
• |
|
Failure
to act on a shareholder proposal that received the support of a majority
of the votes cast in the previous year. |
Board
Structure
|
• |
|
We
will vote for proposals to repeal
classified boards and to elect all directors annually. Similarly, we will
vote against proposals to classify
the board. |
Contested
Elections
In any case, when a director election has more
nominees than available board seats, we will determine our votes on a case-by-case basis, taking into consideration
the performance of the company, cases presented by management and dissident
nominees, the overall composition and performance of the board, and alignment
with Parnassus’ Principles and the long-term interests of shareholders in our
Funds.
Compensation
Parnassus
believes robust compensation policies are critical to attracting, retaining, and
engaging high-performing executives and encouraging sound decision-making and
risk management. Effective compensation plans are transparently communicated,
include clearly defined, rigorous quantitative financial, operational, and ESG
performance targets, and align management’s interest with those of long-term
shareholders.
Generally,
|
• |
|
We
will vote for compensation packages
that demonstrate pay-for-performance
alignment. |
AB-2
|
• |
|
We
will vote for annual advisory votes
on executive compensation (“say-when-on-pay”). |
|
• |
|
We
will vote against compensation
packages that are excessive relative to the company’s peer set or are
otherwise misaligned with company performance and/or long-term shareholder
interests. |
|
• |
|
We
will vote against compensation
packages with problematic pay features which may include: majority cash,
majority time- rather than performance-linked awards, insufficient
performance periods for long-term equity awards, use of similar metrics
for short- and long-term incentive plans, use of adjusted metrics without
sufficient justification, internal pay disparity, excessive perquisites or
severance provisions, excise tax gross-ups, lack of a rigorous clawback
policy, and/or inappropriate and/or excessive discretionary one-time
awards. |
|
• |
|
We
will otherwise vote on executive compensation on a case-by-case
basis. |
Severance
Packages
|
• |
|
We
will vote on a case-by-case basis
on proposals to ratify or cancel severance packages, also known as golden
parachutes. An acceptable parachute should at
least: |
|
• |
|
Have
a triggering mechanism that is beyond the control of
management; |
|
• |
|
Not
exceed three times the base amount, defined as the average annual taxable
W-2 compensation during the five years prior to the year in which the
change of control occurs; and |
|
• |
|
Have
change-in-control payments that are double-triggered, i.e., occurring only
after (1) a change in control has taken place, and (2) the
termination of the executive as a result of the change in control has
taken place. |
Stock
Options
Generally,
|
• |
|
We
will vote for the use of
performance-based stock options, which align executive compensation with
company performance. |
|
• |
|
We
will vote against the repricing of
out-of-the-money stock options and stock options with exercise prices set
below the stock’s market price on the day of the
grant. |
|
• |
|
We
will otherwise vote on stock option plans on a case-by-case basis, considering voting
and earnings dilution. |
Employee
Stock Ownership Plans
Generally,
|
• |
|
We
will vote for employee stock
ownership plans, so long as they are broad-based, do not cause excessive
dilution, and are not unduly weighted toward executive
management. |
Shareholder
Rights
Dual or
Multiple Classes of Stock
Generally,
|
• |
|
We
will vote against proposals that
seek to newly create dual or multiple classes of stock with uneven voting
rights. |
|
• |
|
We
will vote against proposals at
companies with more than one class of common stock that seek to increase
the number of authorized shares of the class of common stock that has
superior voting rights. |
|
• |
|
For
newly public companies, we will generally vote against incumbent members of the board
if, prior to or in connection with the company’s public offering, the
company or its board implemented a multi-class capital structure in which
the classes have unequal voting rights without subjecting the multi-class
capital structure to a reasonable time-based
sunset. |
Equal
Access to Proxies
|
• |
|
We
will generally vote for proposals
for proxy access with the following provisions: |
|
• |
|
Ownership
threshold: maximum requirement not more than three percent (3%) of
the voting power; |
AB-3
|
• |
|
Ownership
duration: maximum requirement not longer than three (3) years of
continuous ownership for each member of the nominating
group; |
|
• |
|
Aggregation:
minimal or no limits on the number of shareholders permitted to form a
nominating group; and |
|
• |
|
Cap:
cap on nominees of generally twenty-five percent (25%) of the
board. |
|
• |
|
We
will generally vote against proxy
access proposals that are more restrictive than these
guidelines. |
Written
Consent and Special Meetings
|
• |
|
We
will generally vote for proposals
to allow shareholders with a minimum ownership threshold of 10% the
ability to act by written consent. |
|
• |
|
We
will generally vote for proposals
to allow shareholders with a minimum ownership threshold of 10% the
ability to call special meetings. |
|
• |
|
We
will consider written consent and special meeting proposals with
thresholds other than 10% on a case-by-case
basis. |
Virtual
Shareholder Meetings
|
• |
|
We
will generally vote for proposals
allowing for the convening of shareholder meetings by electronic means, so
long as they do not preclude in-person meetings and are offered with the
goal of broadening shareholder participation rather than restricting
it. |
Cumulative
Voting
|
• |
|
We
will generally vote for proposals
for cumulative voting at controlled companies. |
|
• |
|
We
will generally vote against
proposals to eliminate cumulative voting unless the company has
proxy access, has adopted a majority vote standard with a carve-out for
plurality voting in situations where there are more nominees than seats,
and has adopted a director resignation policy to address failed
elections. |
Confidential
Voting
|
• |
|
We
will vote for confidential voting
to prevent management from identifying dissenting shareholders before the
final vote count. |
Independent
Accountants
|
• |
|
We
will generally vote against
ratification of the company’s auditor when non-audit fees represent more
than 25% of total fees. |
|
• |
|
We
will otherwise generally vote for
the ratification of the company’s auditor unless we have reason to believe
that the independence of the auditor may be
compromised. |
Changes
in Capital Structure
Common
Stock Authorization
Generally,
|
• |
|
We
will vote for the authorization of
additional common stock necessary to facilitate a stock
split. |
|
• |
|
We
will consider all other proposals for the authorization of additional
common stock on a case-by-case
basis, considering company-specific factors including past performance and
the current request. |
Reverse
Stock Split
|
• |
|
We
will generally vote for proposals
to implement a reverse stock split when the number of authorized shares
will be proportionately reduced. |
AB-4
Share
Repurchase Programs
|
• |
|
We
will generally vote for proposals
to institute open-market share repurchase plans in which all shareholders
may participate on equal terms, and in the absence of company-specific
concerns such as greenmail, the use of buybacks to manipulate incentive
compensation metrics, or threats to the company’s long-term
viability. |
Preferred
Stock Authorization
Generally,
|
• |
|
We
will vote against proposals seeking
to create blank check preferred stock to be used as a takeover defense or
those that carry superior voting rights. |
|
• |
|
We
will vote against proposals at
companies with more than one class or series of preferred stock that seek
to increase the number of authorized shares of the class or series of
preferred stock that has superior voting rights. |
|
• |
|
We
will otherwise consider the issuance of preferred stock on a case-by-case basis, taking into account
company-specific factors that include past board performance and the
current request. |
Preemptive
Rights
|
• |
|
We
will consider on a case-by-case
basis proposals to create or abolish preemptive rights which allow
shareholders to participate proportionately in any new issues of stock of
the same class. In doing so, we will consider the size of a company,
characteristics of its shareholder base, and liquidity of the
stock. |
Reincorporation
|
• |
|
We
will vote on a case-by-case basis
on proposals to allow U.S.-based corporations to reincorporate overseas,
taking into account the economic benefits of and business reasons for
reincorporation, as well as any tax and ethical
considerations. |
Mergers,
Acquisitions and Other Corporate Restructurings
|
• |
|
We
will consider mergers and acquisitions on a case-by-case basis. In doing so, we will
evaluate the terms of each proposal, the potential long-term value of the
investment, and the financial, strategic, and operational
benefits. |
|
• |
|
We
will consider other corporate restructuring proposals, such as leveraged
buyouts, spin-offs, liquidations, and asset sales, on a case-by-case
basis. |
Anti-Takeover
Provisions
|
• |
|
We
will generally vote against poison
pills and authorization to issue stock to avoid a takeover, taking into
account the rationale for adopting the pill, the company’s existing
governance structure, and extraordinary
circumstances. |
|
• |
|
We
will generally vote against
supermajority provisions, which generally require at least a two-thirds
affirmative vote for passage of issues. |
Shareholder Proposals
We
believe that companies best create value for shareholders when they consider
stakeholder impacts alongside financial metrics in business planning and
strategic decision making. We expect companies to respect human, worker and
community rights; invest in an engaged, diverse and inclusive workforce; provide
safe, healthy and equitable products and services; operate ethically and
transparently; minimize and mitigate environmental impacts; and hold their
suppliers to similar standards. We believe that investors, companies and society
prosper best when these conditions are met. We aim to vote in alignment with our
Principles and in pursuit of long-term value for our shareholders as it relates
to shareholder proposals.
Environment
and Climate
We
will generally vote for reasonable
proposals that promote:
|
• |
|
Increased
disclosure of environmental practices, policies, and
performance; |
|
• |
|
Climate
action aligned with the goal of limiting global temperature rise to 1.5
degrees Celsius above pre-industrial levels, including setting
science-based emission reduction targets; |
|
• |
|
Assessment
and mitigation of physical and transition climate
risks; |
AB-5
|
• |
|
Water
stewardship, including actions that address water use, quality, and
access; |
|
• |
|
Strong
management of waste, hazardous substances, and pollutants resulting from
operations and supply chains; and |
|
• |
|
Conservation
of natural resources. |
Human
and Labor Rights
We
will generally vote for proposals that
promote:
|
• |
|
Adoption,
implementation, and disclosure of policies and practices to protect human
rights, including digital rights, and identify and mitigate related risks
within a company’s operations and supply chains; |
|
• |
|
Strong
labor practices, including those that promote fair wages and benefits,
employee health and safety, freedom of association and right to collective
bargaining, nonretaliation and whistleblower protection, and responsible
outsourcing; |
|
• |
|
Strong
corporate action in support of civil rights and racial equity across all
business activities; and |
|
• |
|
Abolition
of forced labor, child labor, and workplace discrimination and
harassment. |
Diversity,
Equity, and Inclusion
We
will generally vote for proposals that
support:
|
• |
|
Increased
disclosure of a company’s performance and practices related to workforce
diversity, pay and promotion equity, and nondiscrimination
policies; |
|
• |
|
Improving
diversity, equity and inclusion efforts in the workforce and management;
and |
|
• |
|
Improving
board diversity. |
Impacts
on Customers and Communities
We
will generally vote for proposals that
support:
|
• |
|
Respect
for individuals’ rights, as laid out in the International Bill of Human
Rights; |
|
• |
|
Responsible,
fair, and ethical marketing practices; |
|
• |
|
Equitable
access to basic needs such as healthcare, nutrition, and financial
services; |
|
• |
|
Environmental
justice principles; |
|
• |
|
Respect
for Indigenous Peoples’ rights; |
|
• |
|
Consumer
protection through actions such as reducing the use of chemicals of
concern in products, eliminating discriminatory lending practices, and
strengthening product safety oversight; |
|
• |
|
Preservation
of human rights in conflict-affected or high-risk areas;
and |
|
• |
|
Animal
welfare, including disclosure on, reduction of, and use of alternatives to
animal testing. |
Political
Involvement and Lobbying
Parnassus
believes that companies’ political involvement and lobbying activities should be
transparent and align with their publicly stated goals and principles.
We
will generally vote for proposals that
support:
|
• |
|
Comprehensive
disclosure and review of a company’s political activity, including
governing policies and procedures, political contributions and donations,
lobbying activity, and memberships in politically active trade
associations; |
|
• |
|
Alignment
between a company’s political involvement and lobbying and its publicly
stated goals and principles; and |
AB-6
|
• |
|
Alignment
between a company’s political involvement and lobbying and climate
science. |
Corporate
Governance
Parnassus
believes that companies benefit from having leadership that acts in the best
interests of its stakeholders and that incentivizes proactive action on material
ESG risks and opportunities.
We
will generally vote for shareholder
proposals that support:
|
• |
|
Separation
of CEO and board Chair; |
|
• |
|
Appointment
of a board Chair who is independent of
management; |
|
• |
|
Boards
that are majority comprised of directors who are independent from
management; |
|
• |
|
Increasing
board diversity; |
|
• |
|
Restoration
of or creation of cumulative voting structures; |
|
• |
|
Incorporation
of performance metrics on material ESG factors into executive
compensation; |
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• |
|
Increasing
disclosure on CEO succession planning; |
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• |
|
Board-level
oversight of material ESG risks, including the addition of directors with
ESG expertise and formal responsibility through committee charters;
and |
|
• |
|
Submission
of golden parachutes or executive severance agreements for shareholder
ratification unless the proposal requires shareholder approval prior to
entering into employment contracts. |
Other
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• |
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We
will generally vote against
shareholder proposals that are not consistent with the firm’s ESG
Principles or that aim to limit reasonable disclosure on ESG-related
topics. |
IV. |
Conflicts
of Interest |
There
may be instances where our interests conflict, or appear to conflict, with
client interests. For example, we may manage a pension plan for a company whose
management is soliciting proxies. There may be a concern that we would vote in
favor of management because of our relationship with the company. Or, for
example, we (or our senior executive officers) may have business or personal
relationships with corporate directors or candidates for directorship.
Our
duty is to vote proxies in the best interests of our clients and Fund
shareholders. Therefore, in situations where there is a conflict of interest, we
will take one of the following steps to resolve the conflict:
|
• |
|
Vote
the securities based on a pre-determined voting policy if the application
of the policy to the matter presented involves little discretion on our
part; |
|
• |
|
Refer
the proxy to the client or to a fiduciary of the client for voting
purposes; |
|
• |
|
Suggest
that the client engage another party to determine how the proxy should be
voted; or |
|
• |
|
Disclose
the conflict to the client or, with respect to a Fund, the Funds’
Independent Trustees and obtain the client’s or Trustees’ direction to
vote the proxies. |
V. |
Voting
of Foreign Shares |
Voting
on shareholder matters in foreign countries, particularly in emerging markets,
may be subject to restrictions and limitations that impede or make impractical
the exercise of shareholder rights. Such limitations may include:
|
• |
|
Untimely
or inadequate notice of shareholder meetings; |
|
• |
|
Restrictions
on the ability of holders outside the issuer’s jurisdiction of
organization to exercise votes; |
|
• |
|
In
person voting requirements; |
|
• |
|
Restrictions
on the sale of securities for periods surrounding the shareholder meeting
(“share blocking”); |
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|
• |
|
Granting
local agents powers of attorney to facilitate voting instructions;
and |
|
• |
|
Proxy
materials or ballots not being readily available or ballots not being
available in English. |
The
costs of voting (e.g., custodian fees, vote agency fees) in foreign markets may
be substantially higher than for U.S. holdings. As such, Parnassus may limit its
voting of foreign holdings in instances where the issues presented are unlikely
to have a material impact on shareholder value. We make our best efforts to vote
proxies of foreign securities in accordance with our policies and procedures;
however, in certain circumstances, it may be impractical or impossible to do so.
Our service provider ISS assists us in this process.
From
time to time, certain Parnassus Funds may participate in a securities
lending program. In the event the Funds or its agent receives timely
notice of a shareholder meeting for a U.S. security, the Funds and its agent
will attempt to recall any securities on loan before the meeting’s
record date so that the Funds will be entitled to vote these
shares. However, there may be instances in which the Funds is unable to
timely recall securities on loan for a U.S. security, in which cases
the Adviser will not be able to vote these shares. Parnassus Funds will report
to the boards of trustees those instances in which the Funds is not able to
timely recall the loaned securities. The Funds generally do not
recall non-U.S. securities on loan because there may be insufficient
advance notice of proxy materials, record dates, or vote cut-off dates to allow
the Funds to timely recall the shares in certain markets on an automated basis.
As a result, non-U.S. securities that are on loan will not generally be
voted. If the Adviser receives timely notice of what it determines to be an
unusual, significant vote for a non-U.S. security whereas Parnassus Funds shares
are on loan, and determines that voting is in the best long-term economic
interest of shareholders, then the Funds will attempt to timely recall the
loaned shares.
VII. |
Annual
Review by Compliance |
We
conduct required annual compliance testing, during which our Proxy Voting
Policies and Procedures are tested. This process entails a review of the Policy
and testing by the Compliance Department to assess whether the Policies were
followed during the year. The testing results are reviewed by the Chief
Compliance Officer (CCO). Policies will be amended periodically to ensure they
accurately reflect the procedures of Parnassus.
We
will maintain the following records with respect to proxy voting:
|
• |
|
A
copy of our proxy voting policies and
procedures; |
|
• |
|
A
copy of all proxy statements received (Parnassus may rely on a third party
or the SEC’s EDGAR system to satisfy this
requirement); |
|
• |
|
A
record of each vote cast on behalf of a client (Parnassus may rely on a
third party to satisfy this requirement); |
|
• |
|
A
copy of any document prepared by Parnassus that was material to making a
voting decision or that memorializes the basis for that decision;
and |
|
• |
|
A
copy of each written client request for information on how we voted
proxies on the client’s behalf and a copy of any written response to any
(written or oral) client request for information on how we voted proxies
on behalf of the requesting client. |
These
books and records shall be made and maintained in accordance with the
requirements and time periods provided in Rule 204-2 of the Investment Advisers
Act of 1940.
IX. |
Disclosure
to Clients |
We
publicly disclose how the Funds’ securities were voted at shareholder meetings
on our website, www.parnassus.com, and via an annual filing with the SEC. We
generally do not disclose to clients how we intend to vote at shareholder
meetings beyond the provisions of our proxy voting guidelines or required
disclosure in regulatory filings.
X. |
Disclosure
of Proxy Voting Intentions to Issuers |
Our
investment professionals may disclose to an issuer how we intend to vote with
regard to any matter to be presented at such issuer’s annual or special
shareholders meetings. With regard to a third party other than the issuer, our
investment professionals may disclose how we intend to vote with regard to any
matter to be presented at an annual or special shareholders meeting;
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provided
that if the voting intention involves a shareholder’s proposal, whether under
Rule 14a-8 of Securities Exchange Act of 1934, as amended, or under the issuer’s
charter documents (a “Shareholder Proposal”), or a contested meeting, then our
investment professionals will notify our CCO of the disclosure they made, unless
our voting intention is made clear through these Policies and Procedures.
Our
investment professionals will ensure that we do not act in concert with a third
party with regard to a Shareholder Proposal, a contested meeting, or other proxy
matter unless otherwise approved by the CCO. If our investment professionals
want to take a public stance with regard to a proxy, the investment
professionals must consult with our CCO before making or issuing a public
statement.
AB-9